bzzzt, wrongo...
There’s been a lot of talk about “toxic” or “death spiral” financing in regard to SFMI’s recent announcement of their equity LOC, despite the statement in the announcement by their CFO that “At no time does this agreement have an endless floor or is deemed a 'TOXIC' financial facility to SFMI.”. Those who make statements as if the financing is toxic either don’t understand the concept, or don’t realize that SFMI’s financing doesn’t fit the definition. “Toxic” financing has at least two criteria that SFMI’s LOC doesn’t meet. First, the financing entity has to have assured access to a large or even unlimited number of shares at a low price. And second, the company getting the financing will need large amounts of financing for a very long time, preferably indefinitely. Neither criterion applies to SFMI. If a company knows they can get shares at a low price (such as by cashing in bonds or warrants at a significant discount, or by shorting the stock and then replacing the shorted shares with shares converted at a price lowered by shorting), then it pays them to short the stock and then cash in the convertibles. It also pays to short if the financier knows that more rounds of financing and endless dilution will follow, at a price lowered by both dilution and shorting. But Centurion doesn’t have any convertible notes that they can convert at any time they want. Read the PR:
* Silver Falcon Mining, Inc. may, at its discretion, periodically sell to Centurion shares of Silver Falcon's common stock at a price equal to 97% of the market price of Silver Falcon's common stock based on its last 15-day average closing price.
Silver Falcon controls when and how much it borrows and by being in charge of the timing, also knows exactly at what price the loan is “converted”. It’s very similar to a private placement, but done in smaller blocks of SFMI’s choice of size and timing, and at prevailing rates (OK, 3% discount) rather than at the usual pp discount of 30% or so. Criterion has no control over how much SFMI will borrow or how many shares Criterion will be able to buy. Without any assurance that they will be able to get cheaper shares later, there is no built-in incentive to short.
The other criterion, an indefinite need for financing, also does not apply to SFMI. Usually, death spiral financing applies to rank startups, that need potentially years and 10s if not 100s of millions of dollars in financing for exploration, permitting, construction, etc., before they reach production and can start generating revenue. SFMI is in production, is stockpiling concentrate from the high grade Oso ore, and will be generating enough revenue very soon that they will have no more need for financing (one of the many reasons they were able to negotiate financing on such favorable terms). How soon will this happen, and how much money will SFMI need to get them there? Well, read the 10K:
* Start-up mill salaries to the end of 2010 cost $425,238, and are estimated to be an additional $300,000 until June 2011 when our smelter is due to be completed and we begin receiving revenues from our production.
* We believe that we have sufficient capital to finance this phase of development.
In other words, SFMI will only be spending another $300k or so until they start generating enough revenue to more than fund everything they are going to do. And they probably have enough capital to do this without using the LOC at all. The LOC is an insurance policy, not a necessity, and SFMI will use only as much of it as necessary, if any. So Criterion may end up getting around $300k worth of stock, if that much. And there is no way that Criterion would ever think that shorting $300k worth of stock with no guarantee of getting $300k of shares from the LOC is a good idea- especially just before revenues start flowing in on a regular basis. Do you or Criterion really think that shares will be cheaper after SFMI starts generating large amounts of revenue?
This financing couldn’t be more favorable for SFMI, or less toxic and less likely to result in a “death spiral”.
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