Share Capital Structure

Taranis Share Capital Structure

* - 5,000,000 Warrants expire April 15, 2012

** - Expire April 15th, 2012

Maintaining Shareholder Value - What is the "Share Capital" of a Junior Exploration Company?

Quite simply - "Share Capital" refers to the number of shares outstanding, shares fully diluted, major shareholders, insider ownership, resource value per share and capital investment efficiency are windows into the souls of natural resource companies. While stock traders, who rely on technical analysis - generally ignore share structure, it is an important consideration for fundamental analysis and value-oriented investors. If quality and value are paramount, share structure cannot be ignored.

The Biggest Risk in Mineral Exploration: Dilution

Equity issues invariably form an integral component of a corporation’s growth cycle. But they also result in dilution for existing shareholders, and too much dilution often turns a carefully crafted investment profile upside down. Take hundreds of junior mining companies as a classic example: exploration exercises, triggering repeated issuance of shares, have caused so much dilution that shareholders can only look forward to nominal returns (if any) even if a resource is eventually identified in accordance with industry standards.

The dilution rate is an expression of the ratio of new shares issued for each existing share on a corporate transfer book at any given point in time. In theory, dilution should be accompanied by substantive enhancement in shareholder value along a pre-determined timeline. In practice, however, proceeds from shares sold are spent on useless experimentation and head office costs; particularly in the case of an exceptionally large number of juniors, also rather presumptuously called growth corporations.

As history proves, exploration can lead to windfall profits for shareholders. The trick is to discover operations which can find the balance between new equity and sensible, fact-driven exploration; a European asset pool advisor highlighted in a recent client circular. Our benchmark is to work with managements who are willing to walk away from an exploration target if the facts so warrant, and then to quickly move on to greener pastures;

It is indeed rare to find a mining junior acknowledging publicly that an exploration program has failed. On the contrary, geologists keep providing fodder for press releases which are conditioned by highly technical information and which, in most instances, essentially hide more than they disclose. And, given the low market capitalization of the bulk of junior companies, fresh equity can only be placed at prices which significantly dilute shareholders on record.

Therefore, to justify dilution in an exploration context, there are some fundamental thresholds which must influence the quest for value. For one, investors should remember that, in general, any well-structured exploration plan will suggest the presence of one mineral or another in a large underlying property; but will the potential resource ever lead to profitable mining? Another criterion is the use of budgetary ceiling; at what stage, and under what conditions, will the money-tap be turned off? Juniors must also confront the challenge of diversifying risk on a continuous basis, without creating dilution scenarios. Should on-ground joint ventures be actively encouraged in the early stages of the exploration process?

Finally, exploration need only be undertaken in regions with a proven past of generating sizable mineral reserves, with above-average concentration levels. There is little point in being a pioneer, at least not with other peoples money--in a situation where there are any numbers of safer bets, relatively speaking.

Prior to investing in a mining junior, investors owe it to themselves to be aware of one critical piece of information: the dilution ratio. Without access to that information, you are better advised to keep your money in the bank.

DEFINITIONS

Shares Outstanding:

Micro-cap resource stocks, and Canadian junior mining companies in particular, are thinly traded. If a company has too many shares outstanding, the share price does not necessarily move as the company progresses through its developmental milestones. In other words, supply and demand can prevent the share price from moving up if there's excess supply.
If the company needs to raise money, it may have to issue a very large number of shares and investors can be racheted down in terms of percent ownership as the company moves forward. Ideally, a company's share price would rise significantly as the company moves forward so that the company issues fewer shares in successive financings, rather than more.

Shares Fully Diluted:

The number of shares fully diluted, including options and warrants, is also a factor when evaluating junior resource companies. The number of shares fully diluted can be anywhere from 5% to 25%; of the number of shares outstanding. If options and warrants are exercised, the company will receive cash based on the strike price and the number of shares outstanding will increase. The ownership stake of some shareholders will decrease while that of investors exercising options or warrants will increase. If the number of shares fully diluted is unusually large, the risk of shareholder dilution for ordinary (outside, passive, minority) investors is higher.

Expiring warrants or options can result in selling activity putting downward pressure on a company's stock price. If a particular stock's price has risen following a private placement, warrant or option holders may take profits. The exercise of large numbers of options or warrants can move the share price down as investors liquidate their holdings. Savvy investors who did not participate in a particular financing often wait to buy a stock until after warrants or options have expired, looking for a dip in the share price, but large numbers of warrants or options can backfire if the result is an excessive number of shares outstanding.

Insider Ownership:

Significant insider ownership is generally a positive consideration because the management is incentivized to make the business successful, but management incentives are insignificant compared to the quality and experience of the management team. Insider ownership can come about in different ways. Company founders may hold a significant percentage of the company as a result of having founded the business, or members of the management team may themselves be large investors. The best case is where senior management, e.g., the CEO, is a major investor, thus has proverbial skin in the game, and also has a track record of success in similar companies. Conversely, an inexperienced CEO or management team with a controlling interest in a company represents an additional risk.

Major Shareholders:

Major shareholders in a company, such as institutional investors, are a key indicator of quality and investment horizon. One way to approach major shareholders is to look at their other investments, track records and particular strategies. If a company's major shareholders have consistently picked winning companies, there could be a higher probability of success. The involvement of large companies with a strategic interest in a given resource, such as gold or rare earth elements (REEs), can be a validation of the company. Of course, every value investor should do their own fundamental research.