Peregrine shares drop on dilutive $15M financing

Shares in Peregrine Diamonds (TSX: PGD) fell by more than 20% on news of a $15.1-million rights offering that could dilute the stock by 100%.

Under the rights offering, shareholders of record as of Sept. 9 will receive one right for each Peregrine share held. Two rights will allow the holder to buy one unit, consisting of one share and one warrant, at 21¢ per unit.

Each warrant will be exercisable into one share at a price of 21¢ for six months following the closing of the offering.

Peregrine expects to issue 71.9 million shares under the offering, which is about half its total existing share count. It will also issue the same number of warrants, and if they’re all exercised, another 71.9 million shares will be issued.

The company needs the cash to continue to advance its Chidliak diamond project in Nunavut, and to make a final $2.5-million payment to BHP Billiton (NYSE: BHP; LSE: BLT), its former partner at Chidliak.

Rights holders who exercise their full rights can also subscribe for more units, if available.

In case all rights are not exercised, Peregrine has a standby purchase agreement with its chairman and CEO Eric Friedland; Robert Friedland-owned Newstar Securities; and Goodman Merchant Capital, managed by Ned Goodman, to take up any unwanted units.

Robert Friedland currently owns 18.6% of the junior’s outstanding shares, Eric Friedland 13.6%, and Goodman 3.3%.

The rights will expire on Oct 6.

Peregrine has reached a number of milestones this year.

In May, it released its first resource estimate for the project: 7.5 million inferred carats in 2.89 million tonnes of kimberlite grading 2.58 carats per tonne at the CH-6 kimberlite.

Earlier, in February, an independent diamond valuation of a 1,013-carat parcel of CH-6 diamonds returned an impressive average market price of US$213 per carat.

This year, Peregrine has been preparing for a 2015 bulk-sampling program at Chidliak that will test at least three kimberlites, add resources and lay the groundwork for economic studies.

Eight of the 67 kimberlites so far discovered at Chidliak have economic potential.

Ray Goldie, a mining analyst with Salman Partners, continues to rate Peregrine as a “speculative buy”. However, because of the share dilution that will occur with the rights financing, Goldie has lowered his 12-month share price target to 60¢ from $1.

Goldie says the principal point of speculation is “Peregrine’s ability to bring in a partner to develop CH-6 through production.”

Peregrine lost its original partner at Chidliak, BHP Billiton, when the mining behemoth sold its diamond ventures in 2011. Peregrine took the opportunity to buy BHP’s 51% in Chidliak for $9 million and a 2% production royalty.

In 2012, De Beers signed an option to earn 50.1% of Chidliak for $58.5 million in spending, including a $5-million upfront payment, but decided in 2013 not to exercise its option.

Peregrine shares were off as much as 9¢ to 29.5¢ on the latest rights-offering news, before settling at 31.5¢ in late afternoon trading on volume of more than 800,000 shares. The company has 143.8 million shares outstanding and has traded in a 52-week window of 27.5-84¢.