Here’s the press release. I am very surprised that Altius chose to do a secondary offering of shares. Management initially said that they would sell convertible debt.
In general, secondary offerings scare me. Selling shares is an extremely expensive way of raising capital:
- Share dilution from issuing shares at a discount.
- Altius’ underwriters will collect a 5% fee and a call option.
- Various professional fees in handling the paperwork. I believe this usually costs hundreds of thousands of dollars.
Secondary offerings are generally a sign that management (A) is stupid or (B) believes that the stock is overvalued. Brian Dalton has a track record of selling high and buying low so it is almost certainly the latter. Perhaps I should have noticed the overvaluation earlier; my process may have been flawed.
Something weird is happening here because management quickly flipped from buying back shares to selling shares. The last batch of share repurchases were in Dec 2013 at an average price of $10.56 (this means that Altius was buying shares above $10.56). On April 25, 2014 the stock closed at $15.46 or 46% higher than the average price of buybacks in December. Something must have changed in the last five or so months. My guess is that Dalton figured out that Kami likely won’t be built. (Of course anything can happen. A lot of crazy projects were financed during the past several years.) The fall in iron ore prices is another possible explanation, though it doesn’t make sense to overreact to short-term fluctuations in iron ore pricing.
To circle back to what I said earlier, my process may have been flawed. I think I may be overestimating my ability to predict how mining projects will turn out. I’m at a huge disadvantage when virtually every management team in mining has tried to mislead shareholders at some point in history. Even Altius’ shareholder presentations have been misleading. While I have made a lot of money on mining, my gains likely have more to do with luck than skill.
*Disclosure: No position in Altius or Alderon. Three days ago I blogged about my reasons for closing my position.
**EDIT (4/29/2014): I happened to have made a good profit on this trade. I bought Altius shares below $10 and sold above $15. On May 1 2013 when I posted my writeup on Altius, the stock closed at $10.36. On April 25, 2014 the stock closed at $15.46 (+49%).