Nonrenounceable Entitlement Issue

Interesting things are happening in Deep Yellow Limited (DYL.ASX)

Yesterday afternoon, DYL announced that it has resolved to undertake a 1:12 non-renounceable entitlement issue at 50c per share, to raise up to approximately A$40 million.

Another dip in share price after my IBA shares, or perhaps we could draw something positive from the announcement? The result from Namibia's drilling is still pending. Can we read between the line that the drilling result is very good and thus it needs more money to continue the operation? The announcement didn't really affect DYL share price so far.. at this stage I will be content to wait and see.

Entitlement Issue.

For those who are not familiar with it, is similar to a rights issue except that an entitlement issue is non-renounceable, ie, the issue cannot be traded on to someone else. The shareholder being offered shares through an entitlement issue has the option of taking up the offer or allowing it to lapse. Small mining companies (as DYL) usually make entitlement, rather than rights, issues.

An entitlement issue, also known as an open offer, is an offer made by a quoted company to its shareholders inviting them to buy new shares in the company at a set price, which is normally lower than the current market price.

The purpose, as with a rights issue, is to raise new capital for the company.

The other way that entitlement issues differ from rights issues is that sometimes you will be allowed to apply for more than your strict entitlement under what is known as 'excess application'. Shareholders tell the company (or its registrar) how many shares they want to buy, including any excess shares, and pay over money to cover their application.

The company, before announcing the offer, will have determined how much capital it wants to raise, and the number of shares it needs to sell in order to raise the amount. When it has received all applications, it will either scale them back (if more shares have been applied for than it wants to sell) or it will issue all the shares requested (including any excess applications). If a shareholder's application is scaled back, he or she will be repaid funds for the shares not actually issued.

It is awfully easy for investors to get tempted by the prospect of buying discounted shares with an entitlement issue. But it is not always a certainty that you are getting a bargain.