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As a general rule, we hate to see an
announcement of a share rollback, however, there exceptions which we cover
below. Investors should always be aware that if a company has, say over 150
million shares outstanding, in our opinion, it is a potential candidate for a
rollback and the announcement should not come as a surprise.
Weak markets, a low share price, a
large number of shares outstanding, little or no cash and you have a company
which is an idea candidate for a rollback.
The basic concept of a rollback or
consolidation in a company's shares is rather simple.
Objective
Companies will a large number of
shares outstanding (normally over 150 million) are striving for a higher
share price which may make it easier to sell more stock.
How it Works
Say XYZ Gold has a share price of
C$0.10 and outstanding shares of 200 million. Total capitalization is C$20
million. The company is seeking to raise more monies but in a very slow
market environment and a low share price finds this may be difficult.
The company then announces a rollback
of 1 for 4. So, what happens? After shareholder approval and the rollback
becomes effective, the share price would start trading at C$0.40 and now the
outstanding shares of the company are 50 million. Total capitalization is
still $20 million.
Effect on current
shareholders
Technically current shareholders own
¼ of the number of shares but the price is now 4 times higher so zero
net affect. So what's the big deal?
Reality of a
Rollback
In virtually all cases of a rollback
of shares the share price will tend to drift back down to a lower level. If
the overall market environment for resource shares stays weak, then there is
a high probability that the shares will still drift lower. Those shares above
at C$0.40 may drift back down to C$0.30 or much lower. The question always
is, 'how low can they go'?
Some of the juniors and exploration
companies seem to do nothing through the years except to sell stock. Those
monies are used for exploration and paying salaries of management but then it
is time to do it again, and again, and again. Investors must filter out those
companies which have a pattern of constant diluting the holdings of current
investors while management continues to earn, sometimes, large salaries.
Unfortunately, most of the time, additional shares are sold in a weak market
with a low share price. Many don't seem to have any sense to sell stock in a
rising market which is probably a good indicator of a management team you do
not want to follow.
Our Opinion on
Rollbacks
Normally, if we own shares in a
company and a rollback is announced we will choose to immediately sell our
position knowing that the share price will drift back down at which point we
may decide to repurchase the shares or just ignore them all together.
Remember, the reason for the rollback is normally to raise the price to make
it easier to sell more shares.
Current Exceptions
We are witnessing a few cases of
rollbacks not with the purpose of raising more money but rather to facilitate
the listing of the company's shares on the NYSE Amex.
Due to the requirements of listing on
some exchanges it is necessary to have a higher share price. The benefits of
this listing could be enormous in attracting more investors, individuals as
well as large investment groups and mutual funds in the U.S. The company
believes the increased visibility of this new listing will result in a higher
share price in the future and we agree.
Some of the companies which we follow
have or in the process of listing on the NYSE Amex and have rolled back their
shares in anticipation of this new listing. In these cases, we understand the
reasons for the rollback as all investors are looking for the possibility of
higher share prices as more investors become aware of these companies.
If you like the specific company
striving for a NYSE Amex listing, great, Hold your positions but do not buy
more shares in anticipation of the rollback, rather, wait for the completion
of the rollback and watch the market closely. These shares may also drift
lower providing investors an even better buying opportunity.
Investors in this case should continue
to be optimistic:
- You
like the company or you would not have bought it
- The
company is applying for a NYSE Amex listing giving them much increased
visibility and liquidity and ultimately, a higher share price.
- You
may have the opportunity to buy the shares at a lower price, shortly
after the consolidation.
Conclusion on Rollbacks
Immediately on the announcement of a
rollback decide the reasons therefore and whether you want to remain a
shareholder of this company.
As always, "It's your money, so
perform your own research and due diligence".
Dudley Baker
PreciousMetalsWarrants
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