NMX.TO announced this morning (April 20, 2018) another element of its financing plan, which is the offering of US$300-350 million of senior secured callable bonds on a private placement basis. Clarksons Platou Securities and Pareto Securities are acting as managers of the bond offering on a best efforts basis.
The bonds have a five-year term (subject to earlier repurchase or redemption), and pay interest quarterly in arrears. They are secured by NMX.TO’s project and intangible assets. Proceeds are to be kept in trust and releases to the company are subject to conditions precedent including evidence that required equity proceeds and the Orion Streaming Agreement [see Nemaska Lithium (NMX.TO) – strategic timing] proceeds have been spent on the NMX.TO project. The bonds are to be listed for trading after the closing of the offering, expected on or around May 18, 2018.
While the various elements of NMX.TO’s financing are dependent upon each other for the total financing of the project to be successful, themoneynarrative has a high degree of confidence that the company and those working with it will achieve success.
themoneynarrative 
Our first advice to you is simply to stop worrying. One of the most difficult skills to acquire in investing is the ability not to fret over missed opportunities. The important thing is to evaluate the opportunities from this moment onwards. For you, the question is whether you have a good investment (NMX_t.TO) as far as its future performance is concerned in the period June 7, 2018 to July 8, 2019 (expiry), or whether you would be better off selling at a loss and looking elsewhere. We think that the better course of action is to have patience. Looking at historical performance of the stock and the warrants, when last the warrants were trading at your acquisition cost ($0.56) in mid-February 2018, the stock was trading in the $1.60 – $1.69 range. While it is unnerving that the financing (and resulting dilution) was done at as low a price as it was, we believe (and have said so on a number of prior occasions) that “production quantities will be raised after commissioning of the project, and that lithium supply, notwithstanding various global projects scheduled to come on line in the next several years, will be insufficient to meet what we believe will be much stronger lithium demand growth than analysts have been predicting to date. Ultimately, lithium pricing will drive shareholder value, which we believe has significant room for growth in the years ahead.” – see Nemaska Lithium (NMX.TO) – financing completed. In fact, our viewpoint was confirmed yesterday (June 6, 2018) by none other than NMX.TO CEO Guy Bourassa, who outlined in an interview with François Normand for les affaires (http://www.lesaffaires.com/secteurs-d-activite/ressources-naturelles/nemeska-lithium-pense-deja-a-une-phase-3/603179) that the company will have a phase 3 expansion. As we have noted in our comments, such an expansion will come after construction of the mine and electrochemical plant (phase 2), which Guy has confirmed. So, Patrick, watch the performance of your investment over the months ahead, and stop worrying.
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I am very happy that the funding is finally completed, it was a crucial step and requiring a lot of agility. Having all the details in hand, does your perception of the warrants remain the same as in our last conversation? For my part, I have an average cost of $ 0.56 (warrants) and I had already lowered my average at the beginning of the year in the decline in the sector, I have no more capacity reinjection. I had the opportunity to sell at the beginning of the year with gains of 100%, but I was so confident that the funding would be a positive element that I did not move. At the moment I feel frustrated to see all the new investors arrive with such a low price even though they did not know anything about the company until last week. I put myself in an uncomfortable position by the deadline of 2019.
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NMX_t.TO warrants are not a very “efficient” trading vehicle, since volumes can be low and the bid-ask spread can be relatively wide (much like many options). Thus, very short term traders may find that they are not a particularly good way to invest. On the other hand, they can be a great investment where a significant gain of the underlying stock (NMX.TO) causes their price to jump, resulting in a much higher return in percentage terms. These price movements can be sudden. Historically, NMX_t.TO has signalled imminent significant movement in NMX.TO stock, but investors have to be watching both securities closely to pick up the signs. As far as exercising the warrants is concerned, most investors will choose to sell them when their price target is reached. Exercise requires a significant additional outlay of capital to buy NMX.TO shares at $1.50.
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Do you recommend trading the warrants or buying and exercising for common shares?
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See our updated thoughts in Nemaska Lithium (NMX.TO) – issuance of bonds update published April 27, 2018, where we stated: “The response has been so good that we believe the company will be able to get a better rate on the bonds, perhaps in the 8.5% range.”
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Thanks for the info
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While you may not want to hold the warrants too close to expiry (see the explanation in the April 25, 2018 comments below), there is significant upside potential from here. As far as being able to sell them is concerned, apart from the eventual expiry date (July 8, 2019), you want to watch for the possibility of NMX.TO exercising its acceleration right on the warrants should the share price remain above $2.25 (at the TSX close) for twenty consecutive trading days. Have a look at the charts of both the stock and the warrants when the share price was higher in late 2017 and early 2018 for an idea as to the potential, and the leverage that the warrants afford. Our recommendation is to hold the warrants.
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Hi
Not quite sure how to proceed with nmx warrants that I hold. Is it better to hold them till expiry date once share price crosses the 1.50 or sell them before.
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Expiry dates for out of the money warrants are a big concern, but our view is that you don’t have anything to worry about with Nemaska’s warrants with more than a year to run (the expiry date is July 8, 2019), since we see the share price moving up sharply in the months ahead. We would add, though, that the time premium declines as the expiry date approaches, meaning that the value of each warrant will equal or be very close to the share price minus $1.50 (the exercise price) as we get very close to expiry (if the warrants are not previously accelerated, which is the right of the issuer to advance the expiry date of the warrants if the shares close on the Toronto exchange at or greater than $2.25 for a period of twenty consecutive trading days).
To understand what the potential is, pull up a 1-year NMX.TO chart and then superimpose (a “comparison” feature on some charting systems) the warrants. The area of the chart that you really want to focus on is the period when NMX.TO was over $1.50, which is October 19, 2017 to February 28, 2018, with a peak on January 9, 2018 of $2.44. During this period, the warrants ranged from $0.42 up to $0.91 on January 9, 2018, and back to $0.50. The stock appreciation to the peak was about 63%, whereas the warrants gained about 117% in the same time period, or nearly double.
If we look at the current warrant price of $0.40 (the stock is at $1.25), it is pretty clear what sort of leverage is possible once the shares move back into $1.50 plus territory. Themoneynarrative is of the view that a completed financing (this spring and summer), coupled with renewed positive sentiments about the whole lithium space, will drive the share price considerably higher. Warrant holders will profit nicely, but will want to watch the share price closely after that, for any prolonged retracement could mean that warrant holders will leave money on the table with time premium erosion as we move closer to July 8, 2019.
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Hello, I am an investor who aims for the long term in NMX. By cons, I opted for a position in the form of warrants and the strong depreciation of the value of the stock worries me. The expiry date being June 2019, I begin to wonder about my choice. From the beginning, I anticipate that my warrants will be exercised before their maturity dates.
The lithium sector has been heavily affected by the SQM deal and Morgan Stanley’s pessimistic report. However, I remain convinced that this sector will perform well in the next 5-10 years.
In one of your suggestions, you pointed out the advisability of obtaining warrants at a price below $ 0.53. Do your vision of things remain the same today?
If the stock markets remain depressed, it could make reaching the $ 2.25 difficult by June 2019.
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Some readers may have been wondering about the bonds’ interest rate. While it has not yet been finalized, themoneynarrative believes that it will be in the range of 10%.
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