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Re: [sharechat] Dorchester Pacific's Warrants

From: "" <>
Date: Sun, 28 Sep 2003 13:13:26 +1200

Hi Hoop,

>Don't worry about the red ink. I like red to distinguish the
>different  dialogue.

It isn't red at this end Hoop.   That makes your post very difficult to 
follow.  I will have to go through and manually edit it to make it 

A request if you don't mind.   Please don't run your text on the same 
line as the text you are replying to.   It makes it difficult to distinguish 
your remarks from mine.

You could use the '>' at the start of each line to denote text you are 
replying to.   That way you don't have to worry about the colour not 
carrying through.

>>>Dorchester Pacific shareholders got bonus issue warrants 
>>>(ex19th Sept) 1:4 DPCWA and 1:4 DPCWB. 
>> To understand what might happen to the prices of these three
>> Dorchester listings now that they are all 'in play', there are no
>> simple rules, unless you make simplifying assumptions.
>> We might start, for example, by assuming the underlying business 
>> does not change and DPC are simply issuing more shares to back 
>> the existing  business. 
>yes good assumption
>>A person wanting to get into DPC today can choose to buy into DPC 
>>in three ways
>>1/ Buy straight DPC shares on market at $2
>> 2/ Buy DPCWA at 35c and stump up $1.70 in two years time, a total 
>>of $2.05 
>>3/ Buy DPCWB at 40c and stump up $1.70 in three
>> years time, making a total of $2.10.
>> $2, $2.5 and $2.10 means not a lot of difference in my eyes. 
>Big difference in my eyes because the day before DPC went Ex 
>warrant they were trading at $2 .10 or around that figure

I looked it up on 'bigcharts' for the trading history of DPC on 19th 
September.   The figures they gave there were:

Open $2.15
Low $2.05
Close $2.05

> ...The day after Ex DPC
> were trading $2.05. 

Bigcharts says no trades at all on 22nd and $2.03 on the next day for 

Close of trade prices of DPCWA was 28c and DPCWB 32.5c.  We will 
use your $2.05 as the nominal trading price for DPC on 22nd 

Based on this price the theoretical cum price on September 19th was:

$2.05 + (0.28+0.325)/4= $2.20

The DPC share did trade at $2.18 on the day it went ex the warrants.  
So that means the price went up 2c on the Monday or 15c if you use 
the closing Friday price of $2.05.    That is a significant rise, but it is 
not unprecedented.

>With the possible dilution factor the head shares
> increased in value dramatically. I assume the reasons why the DPC
> shares are staying high are.. . the dividend yield rate, the dilution
> factor is 2 years away, uncertainty as to how many warrants will be
> exercised, and the scarcity of the shares at present (demand
> outstripping supply) 

I go along with all of that.  The other thing that may be affecting the 
head share price is that our assumption that the business will remain 
substantially unchanged after the warrants are issued is false.   The 
mere fact that the warrants exist may mean that DPC has the 
confidence to 'grow the business' much more than if they didn't exist. 

>>But generally a warrant will not be eligible for
>>dividends until it becomes a share, so that fact must be taken into
>>account when valuing the warrant. 
>>>By Sept 2006 there will be another 10 million ( 5m Sept 2005 + 5m
>>>Sept 2006) to add to the 20million shares on issue, so effectively
>>>with both warrants all successfully converted @ $1.70, in theory at
>>>present day price the DPC share is worth $2.55 (if the warrants are
>>>worth zero).
>> But the warrants are not worth zero. 
>DPC shareholders got these
>warrants at zero price (Bonus issue), so I am using this
> figure as a baseline.

Cost does not equal value.   The value of a share or a warrant is 
always what the market is willing to pay for it.  On September 22nd 
DPCWA was 28c and DPCWB 32.5c.    This is the value of these 
warrants on the date of September 22nd.  Not zero.  The fact that
*you* got them for nothing doesn't change their market value.

> Also zero is a good baseline as the price can't fall below
> zero, just in case Dorchester gets itself in the crap between now and
> 2005. 

You can't 'protect' your investment by arbitrarily setting the value at 
zero.     If you do that you are effectively writing it off for no good 

>>> However the market is seeing this differently at present with the
>>> warrants worth around say 35c.......35c + $1.70 = $2.05 is what 
>>> investor (s) is seeing at present. If this becomes reality, this
>>> values DPC at present day price at $3.07.
>.I know I have not explained this
> evaluation technque very well. I will try to explain again...The DPC
> share before ex is a different animal to that of the future 2006 DPC
> share. Therefore my analysis was to compare side by side the
> difference using present day price and correcting known change of 
> factors, to obtain ....oh shit......Look!....  I will give a simple
> example..
>.XYZ yesterday pre-ex price $1.00 ex $0.60 (they gave
> 1:1 bonus issue).  Yesterdays XYZ is a different animal to todays XYZ,
> relating back one day to the pre-ex that share was obviously worth not
> $1.00 but $1.20. ....

OK, with you so far.

>Now relate this example to DPC, add warrant price,

That means adding the amount  (0.28+0.325)/4

>amount of possible extra shares ( dilution factor) and relate
>back from 2005-2006 to 2003 (present day). This will give you an
>insight to the price DPC would have to be under the expectations of
>the management if the warrants never existed. If the warrants never
>existed the market+ management expect the shareprice to be $3.07 
>sept 2006. 

How can you say both the market and the management assume the 
share price would hit $3.07 by 2006 if no warrants exist?   For a start 
you seem to be assuming that both the market and the management 
somehow agree.   That doesn't seem very likely.   

You said later on in this post that the
"Investment Statement For Warrants And Shares " leaflet posted out to 
all shareholders on the 22 Sept 2003 contained this figure.  So it 
seeems to be a management forecast.

>Now with this analysis, you have a basis to think it
>possible DPC shares (if the warrants never happened) be worth 
$3.07 by
>Sept 2006. If the answer you think is yes you buy the warrants at 35
> or 40 cents.......simple .

If you are resonably certain that the share price will be $3.07 in 2006, 
then it hardly matters if you buy the head shares or the warrants.   

$3.07-$2.05= $1.02 profit per share

DPCWB 32.5c plus $1.70 to exercise it.

$3.07-( $32.5+$1.70 )= $1.02

The profit is exactly the same if you buy either DPCWB or DPC (not 
taking dividends, nor the time value of money into account)

> $3.07 is the  past ex price before dilution 2006,

The way you have expressed the above line is confusing to me.
Do you mean the theoretical forecast ex-price assuming no warrants 
exist in DPC is  $3.07?  Or is this the price assuming all the warrants 
are exercised by 2006?

> and this is the comparison we can
> work with against the DPC price now 
>>If the three market prices immediately after the split are $2, 35c and
>>40c respectively that means the theoretical price before the split 
>>$2+0.35c+0.40c= $2.75. 
>Correct, so those investors who bought the day 
> pre ex and sold the next day post ex would have gained $0.75/share
> profit .. 37% profit in one day. If you look at the turnover between
> the days, there was bugger all ,so there weren't many astute investors
> around that day (me included unfortunately).

Actually what I wrote 

"theoretical price before the split was $2+0.35c+0.40c= $2.75. "

was not correct (my mistake).   The warrants were issued on a 1:4 
basis.  IOW you only get one quarter of a warrant for every share.   So 
the calculation to determine the pre-warrent price is as follows

$2.05 + (0.28+0.325)/4= $2.20

>>You have to front up with $1.70 in one two years time.
>>So you will be 'ahead' in holding your DPCWA
>>provided the head share price is at least
>>$1.70 + 35c= $2.05 by then.
> No & yes because of the dilution factor, yes if the dilution
> factor is already factored in by the market by that date.  How do you
> tell the difference ? Watch the price the next day post ex. It is
> either  or .

There are two factors to consider here.   One is the dilution factor as 
you mentioned Hoop.   If suddenly you have more shares representing 
the same business, and the value of the business overall has not 
changed, then after the warrants are exercised each share will be 
worth less.    The key rider here is:

'the value of the business overall has not changed'

This of course is likelty to be a false assumption as presumably the 
reasons the warrants were issued were for a good reason - to bolster 
the business in some significant way.  It is the use to which this new 
capital is put that will heavily influence the value of the overall 
business, and in turn the value of your shares after the warrants have 
been exercised.

>Mmmmmm  buying the head share has
>its advantages, The dividend  which I have mentioned looks likely to
>be increased and the warrants are a long way a way + unforeseen
>incentives to keep the head share popular...who knows... 

Yes.   The head shares will pay you dividends in the meantime and be 
less volatile.  The warrants OTOH, will mean you have to pay out less 
cash up front.  That means you can use the extra capital you would 
have tied up in the head shares elsewhere.   

I should mention that any measures to keep the price of the head 
share up should also boost the price of the warrant.

> Many investors do steer their financial car by looking in
> their rearview mirror, and as this company has very small quantity of
> tradable stock it does not attract bigger more knowledgeable
> investors...not yet anyway

No I disagree strongly.   Traders and speculative punters may think the 
fact that the DPC  share price was $1 in 2002  has some relevance in 

An investor is interested in earnings, cash flow and dividends, and the 
capital valuation of the business that these imply.   The business that 
produces these will be substantially different in 2006 than it was in 
2002.    The fact that the share price was $1 in 2002 has *no relevance 
at all* to this.  Any 'investor' who thinks it has relevence is not an 
investor.   They are a speculative share punter, and that discipline has 
nothing to do with investment.

>>>DPC management usually has a 40% dividend payout policy. 
>>> So, with status quo,
>>> I estimate, $2.6M /20M shares X 40% = Dividend of 5.2cents
>>>(2002..3 6cents).
>>>Therefore, on my estimated 10cents per year dividend payout on a
>>>growth share... $3 a share is not beyond belief, and this is after
>>>Nov 2003, 
>>>less alone at Sept 2005 or Sept 2006.
>>But by then there will be 10 million new shares - you just told us
>>that. So if the business has not changed significantly then whatever
>>earnings it has will have to be spread over 30million shares, not
>>20million. That means you can expect a dividend *cut* by then,
>>provided the business remains substantially unchanged. 
>True, the dilution factor at work after Sept 2005.
> However between Nov 2003 and
>June 2005 expect an increase in dividend yield.

Fair enough.


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