Mines Management financing awaits approval

A Mines Management, Inc. shareholders meeting to approve what experts call a risky financing approach was postponed Tuesday after too few shareholders participated. The meeting asked owners of Mines Management stock to vote on approving a full ratchet anti-dilution provision that would net $3.6 million for the owner of the Montanore Mine.

Such a provision is unusual for publically traded companies, but with shares selling at 59 cents and a market cap at $17.71 million, Keith Jakob, a professor of finance at the University of Montana, said it was likely the company was in serious need of investors.

“A large company would never do this,” Jakob said. “It looks like they really needed to entice investors.”

According to a 2005 paper published by the Fordham University Law Review, an anti-dilution provision is designed to “protect shareholders of convertible securities against dilution from a large variety of corporate events including, among others, stock dividends and splits, cheap issuances of additional common stock and distributions of cash or property.”

Filings with the Securities and Exchange Commission show that Mines Management entered a purchase agreement with Alpha Capital Anstalt in late July. Pending approval, the deal will send 4,000 shares of convertible preferred stock to Alpha. Those shares may be converted into common stock at a price of 78.66 cents per share. Preferred stock entitles an owner to a higher level of access to a company’s assets. Should Mines Management become insolvent, holders of preferred stock will be paid before holders of common stock.

The fact that the conversion price can be adjusted makes full ratchet anti-dilution financing risky. Should Mines Management issue another round of shares, Alpha Capital Anstalt’s conversion price would drop, expanding its proportion of ownership without costing Alpha another dollar beyond its initial investment. At the current maximum conversion price, Alpha Capital Anstalt could own slightly more than five million shares of common stock, equating to an ownership stake of about 15 percent.

“When you do this, everybody except the guy at the top gets hurt when you get new investors,” Jakob said. “No one gets all too excited to be the second investor in a situation like that. It makes it difficult to go out and get more money.”

The investment maneuver comes at a litigious time for Mines Management. The group is involved in litigation in a state case concerning the legitimacy of claims on the Montanore Mines site held by a group of Idaho residents since the 1980s. Fourteen of those claims were sold this year to Optima Inc., a group that includes Brian Schweitzer, the former governor of Montana, and Frank Duval, the former president of Sterling Mining.

Optima and Mines Management are squaring off in a federal condemnation case. A judge has directed the two sides to enter into a compensation phase to determine a fair dollar value that Mines Management can pay Optima for the right of crossing their claims and accessing the adit, or underground tunnel, into the Montanore Mine.

According to a press release, 92 percent of votes cast at the Tuesday meeting were in favor of the financing. No information was provided on what percentage of shareholders voted. The number of votes did not form a quorum. The meeting will reconvene at 2 p.m. PDT Oct. 28 at Mines Management headquarters in Spokane, Wash.

A message requesting comment from Glenn Dobbs, CEO of Mines Management, went unreturned.