All About Private Placements - Part I

Why is it ideal? One, because they need the money most desperately at that time. So, they're in a position in which they want to negotiate. And then second, your competition has been cleared from the field. Very few people want to buy shares of anything in that context, let alone shares in a company that can be illiquid for a period of time, in that they have to commit a large amount of capital to a non-income-producing high-risk business.

So the two-part answer to the question is again, anytime is a good time to buy a private placement, provided that you have a high-quality management team, a high-quality basket of assets, at good terms—which is probably a separate question of, what are the good terms?

That's the first part of the answer. And then the second is market-clearing events can be wonderful opportunities to buy any assets, but certainly, buying assets via private placement.

Maurice Jackson: Maybe something we should have covered before is, in your experience, is it usually junior mining companies, or is it the mining industry as a whole, that offers private placements? And let's backtrack that question. What's the difference between a junior mining company and a mining company?

Tekoa Da Silva: There's a really smart gentleman who works here at Sprott and his name is Mr. Jeff Power. I once walked into his office and I asked him that very question, and he explained to me a conversation that he called the core asset classes of mining. And he explained it to me that you've got four asset classes. You've got your major producers, you've got your junior producers, your junior development-stage companies, and then your junior exploration-stage companies. Four categories. Majors at the top and then the juniors generally populate those three bottom categories.

You may have a mid-tier that populates that second category down, the junior producers. Let's say one, two or three producing mines. But if it's one producing mine, depending on the size of the mine, you'd probably want to consider it to be a junior.

Maurice Jackson: So the junior mining company is actually not extracting anything out of the ground, and like you referenced, it's a research and development exercise. So if they're not extracting anything out of the ground, they're not able to generate revenue. And that's where the terms come in, where you can really make it a lucrative endeavor for yourself here. So let's talk about some of the terms. What are private placement terms?

Tekoa Da Silva: The terms are what you get in exchange for your money. And if you're looking at a press release that a company has put out about a private placement, you always want to look at the first and second paragraph, where the terms are usually spelled out.

Private placements—again in the North American context of natural resource exploration, natural resource industries—in that first and second paragraph, they'll usually reference something that they call a unit. I would imagine a unit like an eggshell. You pop it open and there's usually something inside. On the inside, there could be one thing or sometimes two things. If you're buying shares, there should be one common share inside that shell. Sometimes they'll add something extra, a warrant of some kind. A warrant is similar to a stock option. It gives an individual the right to buy an additional piece of common stock at a specified price, during this specified duration of time, and then it expires afterward.

A set of private placement terms could be something like this. A unit, a shell priced at CA$0.10, and inside the shell you've got two pieces. One is a common share and the second piece is a full warrant. And I say full warrant because sometimes it can be a half warrant, or some other fractional kind of warrant. But we'll just say a full warrant.

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Disclosure: I or members of my family own shares of Novo Resources.

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