Shares of silver miner Gatos Silver (NYSE:GATO) fell sharply on Tuesday, losing as much as 23.5% of their value at one point. As of 3:15 p.m. EDT, the shares were down by 20.8%. The reason was some news sent out after the bell on Monday. It wasn’t all bad, but it clearly wasn’t all good, either.
Shortly after the end of trading Monday, Gatos put out two news releases. One was an announcement that the company would be retiring debt related to a joint venture. The miner’s cost to do that is expected to be around $155 million. On the surface, debt reduction is usually a good thing. However, in order to raise the cash it needs for this, Gatos also announced plans to sell some stock. This is most likely the point from which Wall Street’s concerns arose.
Gatos is selling 6.5 million shares, and the underwriter will be given an option to increase that total by 975,000. The cash raised will largely be used for the debt reduction effort noted above. Stock offerings result in the dilution of current shareholders, so investors might see this in a negative light. However, there’s a good reason for raising the cash, so the two points combined are probably — business-wise anyway — a net neutral.
The real issue is that “certain” shareholders are selling another 1.82 million shares, with the underwriter potentially adding 273,000 to that total. Gatos won’t see any of the cash from the shares its current stakeholders are selling. So this bit of news means that the market will have to absorb another couple million or so shares of Gatos stock, which isn’t a good thing. Gatos, meanwhile, made sure to highlight that The Electrum Group will remain a large and involved investor despite being involved in this sale. But some on Wall Street, reading between the lines, might view this as an indication that Gatos won’t see as much support from The Electrum Group as it has in the past. That would go a long way toward explaining Tuesday’s steep price drop.
Gatos Silver is a relatively small precious metals miner. It is the type of stock that can see huge price swings based on company news, industry news, the ups and downs in silver prices, or just the whims of mercurial traders. Most investors will probably want to avoid it unless they are willing to really dig in and follow the company closely. Otherwise, they’d be better served to look at some of the larger and more diversified companies that offer exposure to precious metals, like streaming company Royal Gold.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.
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