Disclosure: The author has a short position in one or more of the shares mentioned. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from ShareProphets). I have no business relationship with any company whose stock is mentioned in this article.
It is extremely rare for companies to resort to death spiral financing without serious damage to their share price (Gulf Keystone pulled it off a few years ago, but it really doesn’t happen often). Mongolian oil explorer Petro Matad (MATD) is unlikely to be an exception to this rule.
This follows its announcement that up to $45 million of death spiral funding has been agreed by the company with an outfit misnamed Bergen Asset Management.
As usual in these situations, the 'protections' the company stresses are pretty meaningless. The assertion that Bergen will not short sell the shares is a smokescreen. It does not have to short sell them. It has been issued 5.6 million to start with, so it simply has to sell them in the market and once it has issued a conversion notice it can sell more.
The idea that Bergen is a long-term investor is misleading and anyone expecting RNS disclosures of Bergen holdings is set to be sorely disappointed. I am no expert on the Mongolian oil industry, but, at 22.5p, Petro Matad’s market cap is £66 million, which is a lot of hope value for such a venture. The shares are a sell before Bergen gets into its stride.
The dangers of investing in exciting projects in faraway places was highlighted recently by the suspension of shares in Avocet Mining (AVM). I have warned about this one on a few occasions and it looks like it is the end of the road for its long-suffering shareholders. In any event, whatever its prospects, the type of financing selected by Petro Matad is virtually guaranteed to negatively impact the share price.
Lastly, I see that Great Elm Capital (NASDAQ - GECC) releases its first quarter numbers after hours at no-one’s watching o’clock. I will be watching and suspect the full horror of its disastrous investment in Avanti Communications (AVN) debt will have to be revealed.
This article first appeared on the Nifty Fifty website which Tom Winnifrith runs with Steve Moore & Lucian Miers. To access the website ahead of the next share tips from Tom & Steve and a new shorting piece from Lucian this week click HERE
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