Silver miner actions 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, stocks were down 20.8%. The reason was that news was sent after the Monday bell. It wasn’t all bad, but it clearly wasn’t all good either.
Shortly after trading ended on Monday, Gatos issued two press releases. One of them was the announcement that the company would write off debt related to a joint venture. The miner’s cost to do this is expected to be around $ 155 million. At first glance, debt reduction is generally a good thing. However, in order to raise the cash he needs for this, Gatos has also announced his intention to sell shares. This is most likely the point from which Wall Street concerns arose.
Gatos sells 6.5 million shares and the underwriter will have the opportunity to increase this total to 975,000. The money raised will be widely used for the debt reduction effort mentioned above. Stock offers dilute current shareholders, so investors might view this in a negative light. However, there is a good reason to increase liquidity, so the two points combined are probably – from a business perspective anyway – a net neutral.
The real problem is that “some” shareholders are selling another 1.82 million shares, with the underwriter potentially adding 273,000 to this total. Gatos will not see the money from the shares that its current shareholders are selling. So this news means that the market will have to absorb a few million more Gatos shares, which is not a good thing. Gatos, meanwhile, made sure to point out that The Electrum Group will remain a significant and involved investor despite being involved in this sale. But some on Wall Street, reading between the lines, might see this as an indication that Gatos won’t see as much support from the Electrum Group as in the past. This would largely explain Tuesday’s sharp price drop.
Gatos Silver is a relatively small precious metal miner. This is the type of stock that can experience huge price swings based on business news, industry news, ups and downs in silver prices, or just the whims of mercurial traders. Most investors will probably want to avoid it, unless they’re prepared to really dig in and follow the business closely. Otherwise, they would be better served to watch some of the larger and more diverse companies that offer exposure to precious metals, like the streaming company Royal Gold.
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