Figuring out First Uranium’s trading

Over the past five days, First Uranium equity has gone up approximately 50%:

Nothing public has happened to the company in the past five days, and the last major piece of news coming out was on October 20th when they announced their Q2 production results (which one can extrapolate into a quarterly report). The only explanation here is that either there is some insider news that is leaking into the marketplace, or there is a technical factor, such as very short term covering of short positions, or institutional demand on the stock.

The stock trades an average of $500k-$1M/day in volume, while not Microsoft-style liquidity, it is sufficient for most investment funds that wish to accumulate a position.

Something interesting is the effect on the debentures – if the equity trades higher, then it is more likely the debentures will mature at par because the company can recapitalize the debt by doing an equity swap. The subordinated debentures have not moved too much – up from roughly 70 cents to about 73-75 cents, while the notes (where I was a little more fortunate on my timing) have moved up from about 90 cents to par value.

There is an embedded call option in the notes to buy equity at $1.30/share, expiring at maturity (March 31, 2013) that has to be priced into the valuation of the notes – obviously if the equity is trading above $1.30/share, then the notes will be trading above par.

With an equity value of $1.07/share at present, the notes at 90 cents are a very compelling value. This price is now gone.

Readers should be cautioned that I do own the notes and subordinated debentures of First Uranium, but not the equity.

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