Petra Research, page-4

Hi mlives,

Sorry, I was trying to be sarcastic with that last post. The analyst's price target was assuming 100% equity raised by share issue when I am hoping for little or no share issues into a cap raise. I was hinting through my sarcasm that we are not doomed to waiting around to get whacked by a large, dilute cap raise although it is still possible. The analyst was also hinting at a better outcome with comments like "alternative funding sources such as offtake or a project sell-down" and  "strong interest in quality base metal projects as both copper and zinc prices lift in response to tight supply/demand fundamentals".

Yes, analysts always put up CR at around current share price because higher is usually unrealistic and lower is usually offensive to management and therefore that analysts' brokerage from participating in the next CR. Yes, any CR is going to be dictated by the pre-raise SP, discounted depending on various VWAPs the market's demand and appetite to participate etc. That said, the recent share price history acts as anchor to the market's expectation of a future CR price , just as the recent price anchors analyst's prediction of a likely CR price. Both are grounded in the reality that the current share price reflects the markets fear of the future discounted CR, which becomes self-fulfilling as nobody wants to lose money buying shares up higher shortly before they then become available cheaper. Soros coined the term 'reflexivity'  to describe this feedback loop that creates it's own reality.

In my experience, companies that are cum CR get sold down with falling markets but not bought up so much in rising markets. The underlying drivers of SP value (eg NPV, Cu price, market conditions) are largely ignored because everyone is so scared of over paying before the discounted CR smacks the price back down. The brokerages likely to get the nod for the next CR are happy enough to push and keep the SP down so they and their clients can make out like bandits. Even a small SPP for VXR in Nov helped the SP down the the CR price the day after announcement. The fundamental value soared with a great DFS but CR's just cruel any momentum and usually make fools of those who bought up the good news before said CR.

The point here is that despite my sarcasm, everyone knows that VXR is close to raising a large lick of equity, almost twice what it's market cap was before the Galena deal was announced. Without the hope of an alternative project level equity raise I believe the share price would 20c not sitting at 12 month highs, the analyst would have made his report with a 20c CR model, and nobody would be buying the shares up strongly ahead of the discounted CR everyone knows is coming. In short, analyst CR predictions are optimistic but related to the current share price, which in turn is anchored by the historical share price and the lack buyers silly enough to run out in front of a CR bulldozer. 

The best thing management can hope for is to convince the market that the CR will be done at a higher price and that the shares are so woefully undervalued that one should buy in now instead of waiting for a lowball CR that doesn't eventuate. Good exploration results, better feasibility results, optimisations, potential corporate action. The Galena deal is both a reminder that there are alternatives to discounted and diluting CR's, but also an opportunity to get the share price up higher on the market now more focussed on a sell-down model. If AJ cannot get a sell-down deal done that makes sense he will at least be able to take advantage of the excitement around such a value accretive proposition to get a CR away in the mid 20's after talking it up to the high 20's. I personally cannot see the share price moving too much further because of the CR overhang unless a good JV deal looks likely and insiders leak it to the market.  Of course I happy to be proved wrong.

Cheers