Friday, July 29, 2005

Interesting Situation with SHNG Notes

Primer on my investment outlook

From a press release today,

In October 2004, Sherlock Bay Nickel issued 75 million Convertible Notes at a price of $0.20 per Note, earning interest at 12% pa and maturing on 1 September 2007. The Convertible Notes are listed on the ASX and, as at 28 July 2005,were trading (with minimal liquidity) at $0.10.

−There is currently no guarantee that the Project will proceed
−If the Project does proceed, there is uncertainty over the timing of its development and the commencement of project cash flows.
􀂃Given the uncertainty over the Project, the SBNC Board believes that it is prudent to refinance the Convertible Notes now.

On 1 August, cash per note is 9.3c. On 1 October cash per note is expected to be 6.7c per note.

At first glance, it looks like the existing noteholders are screwed. However, note a few things. SBNC does have fixed assets that will fetch a price - especially with this base metals bull market. I have averaged down my notes and now have them at a price of 13.9c per share. Clearly my gains will depend on the conversion terms on the noteholders meeting. I actually think that, if the notes fall to around 6c per share they are a terrific buy with a lot of value in them.
The notes are yielding 24% p.a. at a price of 0.20. They are priced for default, but this company has a substantial amount of cash and fixed assets. Clearly, the last management screwed up. However, I do believe that the company will avoid receivership and while the shares may not be beneficial, the notes will be of value...
At the moment I am holding my notes and waiting to see what happens!


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