When should a company finance?

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Cash is king, but financing is about timing. You want to over-finance when times are good so that you have cash on hand when times are bad. The company that finances in a bad market wipes out its shareholders.

Companies that minimize dilution always over-finance and finance early. Our view is shaped by two issues:

1.     Companies that keep a strong balance sheet can pick strong markets to finance in because they’re not strapped for cash.

2.     Brokers, institutional investors, IR firms, and all other stakeholders prey on companies’ balance sheets. A weak sheet increases the cost of raising money and the cost of doing exploration work.

Brokers play the telephone game between institutions and companies, and brokers and institutions can smell weakness. If a company does not raise money early enough, it can be forced to raise money on a hard money fund’s terms. They view companies with weak balance sheets as being riskier, and they’re putting the cash out and may never see it again.

Let’s theoretically say you have a helicopter and you lease it to mining companies. When you have two companies to choose from, one with two years’ cash on hand and one with three months’ cash, which company do you give better pricing to?

How early is too early?

We say it’s never too early. Companies have three stages of financing: grassroots, exploration, and mine development.

Grassroots: A good company builds a war chest and does not under-finance. The CEO stays at Super 8, eats from the hot dog vendor on Bay Street, and takes the trolley to the banks. When in the field, he also focuses on controlling costs and figuring out how to direct every possible dollar into the ground. A CFO we know said the key is to be frugal but not cheap; spend money, but spend it wisely. Luxuries can be very dilutive at this stage in the game.

Exploration: Assuming you find something—and you’ll know you found something because suddenly people who used to ignore you will friend you on LinkedIn—you’ll need a pimp. Look for a protector who can call up the big guns and get them to work for you. As we have learned, having a good promoter is often as important as having a good ore body.

A company wants to over-raise here because the first drill holes might not hit the ore body. Sometimes lady luck has a mad sense of humor. That killer sense of humor combined with a tight balance sheet can turn a decent project into a paper mill, where the company is printing shares instead of developing an ore body. Over-raising gives a company the freedom to have a hiccup or even a heart attack and still live to see another day.

Mine Development: For every dollar you spend on grassroots, you spend $10 on exploration and $100 on mine development. If you’re worried about dilution versus development, you’re in the wrong game. Building a mine on a weak balance sheet is painful, and we recommend over-raising and under-spending.

A company should always be looking for money. When it’s there on good terms, take it.

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