A month ago, I was convinced that Finavera Wind Energy’s (TSX-V:FVR, OTC:FNVRF) stock was only temporarily trading at depressed levels in the low 20 cent range because investors were disappointed at the deal with Pattern Energy. Many shareholders had been hoping for an outright sale, and were selling into the thinly traded holiday markets. I predicted that Finavera stock would “quickly rebound to at least the C$0.30 range over the next few days or weeks, as liquidity returns to the market, and investors revalue the stock based on the agreement with Pattern.” (My valuation based on the Pattern deal put the present value of a Finavera share at C$0.375, and its value at the end of 2014 at C$0.75.)
My valuation has not changed significantly, but the stock has fallen, after an initial rally. Yesterday, I was able to add to my Finavera position for a mere $0.18 a share. What happened?
There have been only two news items over the last month.
First, Finavera held an investor conference call on January 9th to explain the Pattern deal. My takes from the conference were first, that the Pattern deal would definitely win shareholder support, since there was not going to be any buy-out offers forthcoming, and the consequences of rejecting the deal would be dire.
Second, I had misunderstood the Pattern deal originally. Finavera will be getting funds from Pattern in the form of $9M in debt forgiveness as soon as the deal is approved by shareholders, and many of Finavera’s development costs will be charged to the projects (and hence, effectively, to Pattern.) This increased my expected value of Finavera slightly.
Last week, Finavera cancelled all outstanding employee and director options (most of which had strike prices of C$1 or above), and re-issued them with new options exercisable at C$0.205 per share. The grant (1,783,800 options or 4.5% of outstanding shares) seemed large to me, and may have also turned off other shareholders, contributing to the heavy selling this week.
I asked Jason Bak, Finavera’s CEO, to give his justification of the option grants by email. He responded with the following points:
- Finavera is operating within its registered stock option plan, which was approved by shareholders in September of last year.
- There have been no significant option grants in three and a half years.
- Finavera’s directors have been working entirely without compensation since 2007, and have been significant investors in the company over that time.
- The option grants are in line with similar Toronto Venture listed companies.
I thought he made good points, especially regarding director compensation, and so my governance concerns were alleviated. The option grants do change my per diluted share valuation of the company marginally (see below.)
My new understanding of the Pattern deal means that a significant portion of the deal’s value will be realized sooner than expected. The debt forgiveness along with the expected $9.3 million payment for bringing the Cloosh wind farm to financial close should be sufficient to substantially eliminate all Finavera’s liabilities by the end of the year. This will give Finavera a book value per diluted share of C$0.45 after the receipt of the Cloosh payment.
If Finavera is then able to bring its Canadian projects to financial close by the end of 2014, as expected, the payments for those projects should give Finavera C$0.77 worth of net assets, most of which will be in the form of cash (the balance will be their remaining 10% stake in the Cloosh wind farm.)
Given these valuations, I continue to see Finavera stock as an easy double over the next year, with the potential to double again in 2014.
That is why I’m buying more. I still have no idea why anyone is selling.
Disclosure: Long Finavera
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