No need for apologies
@morganman, I'm always happy to help with sensible questions.
If you're looking at it from that perspective, your shares aren't worth any less if they get to 20c, obviously. 20c is 20c.
The issue is that the market cap should reflect the overall assets and current/potential earnings of the company.
If more shares have been issued, but the value of the assets and earnings hasn't increased, then the market cap is likely to remain the same, thus there will be a lower share price.
So if we have a theoretical company with a $50m market cap and 100m shares outstanding, it will have a share price of 50c. If that company issues a 50m new shares at 50c, raises $25m in cash and then flushes it down the toilet, it will end up back as a $50m market cap, but with 150m shares outstanding.
That would mean a share price of 33c, even if the company still had all of the same assets it had back when it was at 50c.
This is why it is important for companies to use the money wisely. As
@Wack has pointed out, as long as they are using it to grow their assets and potential future earnings more by more than they are diluting the shareholders, it's fine. If they're having to issue more shares to deliver on what they had already promised, then shareholders will be flushing their investment return down the toilet.
Hence my point about the future earning valuations. It's fine if you want to sit there and make calculations like the following:
In a few years, I think this company will be producing 100,000 oz's per annum, making a profit of $800/oz.
After tax, that will be $560m of annual profit.
Give that a 10x multiple (reasonable for a mining company) and we're talking about a $560m company.
Sweet, that's fine.
Where people get into trouble is they then go:
There's 417m shares currently outstanding, so $560m/417m = share price of $1.34. Sweet! I'll make 10 bags from here!
No.
The problem is that assumes that the company has magically transitioned from explorer to producer without issuing a single share. There will easily be $100m needed to build a plant, and I guarantee that won't happen without issuing a hell of a lot of shares.
How many we won't know for quite a while, but it could easily be another 50% again. Could be 100% of shares currently outstanding are issued again before construction begins on a plant.
If you double the number of shares on issue to 834m, your future share price has dropped from $1.34 to 67c.
That's still a tidy return from 13c, don't get me wrong. It's just not the 10x you might have been expecting.
Going back to
@Wack's point earlier, what you're looking for is management to be making the most of the money they can get. The first is to sell the story well, so that they can raise money at a premium to the market, which means it is dilutive to existing shareholders (such as getting DGO to pay 20c to buy in...) and the second is that they're using the money to keep growing those assets and earnings.
So it might be that the company starts out at 100,000 oz per annum, but if they were sensible in laying the ground work earlier, they might be able to quickly expand to 150,000 oz or 200,000 oz once they get to positive cash flow. Then you might find you do get to that $1.34 share price after all, if the opportunity for the bigger growth is there.
I hope that makes sense. I tried to keep it concise, but it isn't the simplest concept to explain quickly.
Let me know if it is still unclear and I will have another go.
Cheers
(20min delay)
