Cobra Resources PLC (LON: COBR) shares are volatile in London as a result of the company issuing new shares. This does happen, in two senses. Firstly, junior miners – those not producing as yet – do need a continuing source of funds. Secondly, the share price can move either way when this happens. There’s the effect of there simply being more shares around, that tends to make things cheaper, that increase in supply. But shares can also rise on an issue as well, given consideration about what the money is going to be spent upon.
Cobra Resources issued 63 million new shares to raise that £800k to £950k. That is of course dilution of current shareholders but whether that’s a bad thing or not depends upon the market reaction. One thing that limited the downside here is that the discount to the prevailing market price was small – 15%. This wasn’t an emergency capital raise or anything that is. The capital markets being just like our own bankers – the more desperately we need the money the more we’ve got to pay for getting it.
We’ve also got the results of the placing, which is what is buoying up that Cobra Resources share price. The cash raise was £945k, at the very top end of expectations. So, the general view of the market is that yes, putting more money into Cobra Resources is a good idea.
This is bolstered by the recent announcements from Cobra Resources about their exploration and drilling programme at Wudina. The announcements of the gold mineralisation are interesting, of course, they are. It is, after all, the first stage that any junior miner has to go through, finding something worth going mining for. But what’s sparking interest is the associated layer of rare earths mineralisation associated with the gold deposits.
We would say that we’re not wholly enthusiastic about rare earths given what has happened before. Previous shortages have led to overinvestment in new mines and then crashed prices some years later. As with all minor metals how many others are chasing the same mineralisations matters. However, the calculation changes somewhat when rare earths are found in combination with other finds that are worthwhile to mine on their own.
That is, byproduct revenues can be more valuable than prime mineral ones. Because the risk of exploitation is reduced. Here. the rare earths are in a layer above the gold mineralisation. So, to extract it is not necessary to do any more mining than was originally being considered for the gold alone. The rare earth revenue – whatever it is of course – can be considered to almost be a freebie on top of the gold. No, it doesn’t quite work that way but that’s a good enough pencil sketch at least.
In the short term what happens next to Cobra Resources’ share price will depend upon how securely those new shares have been placed. If they’re securely tucked away with long-term investors then we might see a significant revaluation. If they’re in the hands of short-term speculators then any price rises could be met with selling to cash in.
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Tim Worstall is a freelance writer specialising in economics and the financial markets.