Stillwater Mining raises cash--and the dilution knocks the stock for a loop

10/12/2012 6:30 pm EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

I think it’s fair to say that management at Stillwater Mining (SWC) really, really botched its recent offering of convertible notes. The stock is down 15.4% (dropping another 6.99% today) since the October 10 notice that the company would sell $300 million in convertible notes due in 2032. (Stillwater Mining is a member of my Jubak’s Picks portfolio http://jubakam.com/portfolios/ )

The proceeds of the offering will be used to repay debt that matures in March 2013 and for general corporate purposes, so why is this such a big deal?

Well, because shareholders never like dilution and convertible offerings do dilute existing shareholders when they convert into stock somewhere down the road.

And because shareholders, especially in the current very nervous market, really hate dilution when they can’t figure out how much dilution they’re facing.

Which makes the way this deal has been structured and explained a big problem because the conversion rate in this offering is unknown.

To the degree that we know the terms now that the offering has priced we know that it says that the notes will be convertible, under certain circumstances and during certain periods into cash, shares of Stillwater’s common stock or a combination thereof—at the company’s election. Does that make you glow all over?

We also know that the conversion will be based on a rate that is equal to an initial conversion price of $16.53 a share. That’s a decent conversion premium to the $12.12 price of the shares before the news of this offer drove them downward.

But here’s the rub. The offering says "If the price of the Company's common stock exceeds the base conversion price during specified periods applicable to conversion, holders will receive additional shares of the Company's common stock upon conversion."

In other words, if the stock climbs above that $16.53 a share, purchasers of the convertible offering will get more shares. How many more? Well, we do know if will be based on the incremental share factor of 30.2481, but that still leaves me scratching my head trying to figure out how many more shares. And that’s important since the structure of this offering, as I understand it, works as a cap to gains in the stock. Now I certainly wouldn’t mind if shares of Stillwater climbed to $16.53 but I don’t like it that this current offering would then dilute my gains by issuing more shares.

I don’t think it’s worth selling now—after that 15% drop on the news—because the fundamentals of the platinum/palladium sector remain slanted in Stillwater’s favor. And I think those fundamentals will drive the stock price, eventually, toward my target price of $15 a share. But I sure don’t appreciate the added volatility in this ride or the likelihood that eventually will take a little longer.

Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/ , may or may not now own positions in any stock mentioned in this post. The fund did not own shares of any stock mentioned in this post as of the end of June. For a full list of the stocks in the fund as of the end of June see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/

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