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Will Cloudbreak Discovery, CDL, Have To Dilute Shareholders?

Trade Cloudbreak Discovery Shares Your Capital Is At Risk
Updated 18 May 2022

Key points:

Cloudbreak Discovery (LON: CDL) shares are at 3.65 pence. That’s not a particular problem although of course it will make those who bought in at 10p unhappy. Except there is a little problem here, which is that Cloudbreak has – effectively you understand – given a put option to their capital provider, Crescita. This could – again, note, could – lead to a dilution of current shareholders in CDL.

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We mentioned this about Cloudbreak Discovery shares back here. The full corporate announcement is here. To provide the background so that we can understand what is happening.

Cloudbreak describes itself as a natural resources project generator. The aim is that at the very start mining projects tend to be very small and require specialist services – including in financing. So, there’s a market in being the specialist in that field. In some ways, this is like being the old style of investment bank – before it all became about trading paper – or being a “mining house”. Both aid projects in getting going and also look for projects, even organise them, where the market will be receptive. Take a slice of each project for that organisation. As a strategy, it has worked in the past and there’s no particular reason why it won’t again. The proof will be in the actual projects organised and financed and the returns from the slices kept of them.

Also Read: The Best Lithium and Lithium Mining Stocks to Buy

To be able to do this does require that capital be available. At the very early stages, a project might need a hundred thousand, some small multiple of that (either £ or $, say) to gain a licence or exploration permit. So, there’s got to be a source of those sorts of sums. Cloudbreak has organised this by a capital drawdown programme with Crescita. Excellent capital is available.

It’s the terms upon which those drawdowns work though. The first was for £750k, at 6.25 pence per share. But if – note if – Crescita sells those shares within 6 months, at a loss to 110% of that issue price, then Cloudbreak must compensate in cash, or more shares at Cloudbreak’s choice, for the loss.

The share price is currently 3.65p. No, there’s no indication that Crescita is thinking of selling, it’s the possibility that might worry. The share price is about half that issuance price. So, if Crescita does decide to sell (again, IF) then Cloudbreak must compensate with cash or by more stock issuance. Which would be a further dilution of extant shareholders (on the assumption that more stock is the most likely).

This is not exactly a doom loop, although it could become one of the Cloudbreak share price truly falls to the floor. Even if the doom loop doesn’t occur, it can make that capital drawdown programme a very expensive source of capital.
Just to emphasise again, this is only triggered if Crescita does in fact sell within 6 months of the Equity Drawdown. Of which there is, currently, no sign. But it’s a risk that has to be considered. The big worry being that the lower the Cloudbreack Discovery share price gets, the more tempting triggering this provision will become from Crescita.