Key points:
- Cloudbreak Discovery value depends upon the deal pipeline
- Plus, of course, the cost of financing that deal pipeline
- Are we about to see a little conflict here?
It's possible that Cloudbreak Discovery (LON: CDL) shares have a little problem on the horizon. We'd need to be proper cynics to think they might, of course, but still it's something that might be worth thinking through. For what would matter is how the problem – if it even exists – is resolved. Any belief about what will be the turn out is what will determine any trading strategy.
So, to recap on what Cloudbreak actually is. It's, as it says, a “natural resources project generator”. The world of mineral exploration always starts small and there's definitely a place for organisations which aid in the formation of those starting experiments. We used to call such things “mining houses” or even investment banks before that all became about trading paper. Organising, financing, real-world activity to explore for and exploit natural resources.
That's what Cloudbreak Discovery says it is doing, and they've a number of such projects announced. In the long term, the value of Cloudbreak shares will depend upon how those projects actually work out and thus what is the value of the slice of each that Cloudbreak owns. It also matters how Cloudbreak has financed those projects and that's where there might be a little problem.
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A project generator will, before the varied projects actually mature, likely be valued on the frequency of projects being announced. And, quite possibly, their perceived value. It's possible that – say – financing a Namibian oil prospect is not quite as exciting as optioning out some BC mineral prospects. But the stream of news and projects is likely to bolster the price – the more activity there is the more we can imagine future profits for example.
So, we've two recent announcements. One is that the company of the CEO has bought more shares in Cloudbreak. OK, that's good, money where mouth is and all that – but it's also £75,000 worth so how much weight to put on that, well. Then today's announcement that some properties in British Columbia will have that very first portion of exploration done via aerial survey. Well, OK, but again it's not something to really set the market alight. Good thing to do and all that but not wholly exciting.
Which brings us to that possible worry about Cloudbreak. They financed themselves with a deal with Crescita. That's OK – they issue equity, Crescita buys it, that gains Cloudbreak the cash with which to do deals. But as we understand it there's something akin to a put option on that. The last tranche of shares were issued at 6p, if the price 6 months later is below that then Cloudbreak has to make up the loss to Crescita – possibly by issuing more stock to them. It's a put option in all but name. Given that the Cloudbreak price – 6 months is not up yet – is currently 3p that could make that last tranche of capital expensive through dilution.
What happens next depends. Do we see a concerted attempt – through announcements of deals, of course, not through any nefarity – to get the Cloudbreak share price up? Or will the dilution be accepted? That might be what trading decisions should be based upon.