Soho Resources (SOH.V) - directors' financing and possible stock consolidation

Comment by Objective Capital , Nov 19, 2011
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Soho Resources is proposing to consolidate its stock. The ratio has not yet been set, but is not expected to exceed one new share for every eight old shares. Management has proposed this consolidation to enhance the ability of Soho to complete further equity financings to advance its advanced Tahuehueto project in Mexico. Shareholders have preapproved this proposed consolidation, but a formal decision to proceed will not be made until management holds further discussions with Soho’s key shareholders and its board of directors.

As well, the company has arranged a C$0.3m bridge loan from certain directors to provide short-term working capital. The one-year loan is unsecured and bears interest at 10 percent. The lenders will also receive a stock bonus valued at 20 percent of the value of the loan, at a deemed price of C$0.07 per share.

Objective's view:

In light of the deteriorating financial situation faced by all junior explorers, we view the proposed share consolidation as a necessary step to provide Soho better access to additional equity capital, despite its potentially dilutive impact on current shareholders.

For Soho to maintain its proposed timelines, the company will require access to increasing amounts of new capital, as evidenced by the company’s need for a short-term bridge loan.

We continue to believe the Tahuehueto project is an attractive investment if properly funded. Our previous valuation of the project and Soho Resources reflected the uncertainty of the company gaining access to sufficient capital for further development and accordingly our base-case valuation remains unchanged.

Should Soho face significant delays in completing a significant private placement to proceed with its development plan along existing timelines, a revision in our model would be warranted.