First Uranium – Raising equity financing

First Uranium (TSX: FIU) announced they closed a $52 million equity financing at $1/share. They had originally had $46 million subscribed with a $6M greenshoe embedded.

This is about a 22% dilution of equity interests in the company, but they need this money to bridge their future operations and implement their capital plan:

FIU CONSOLIDATED                 end       end       end       end       end
(000's)                      Mar '11  June '11  Sept '11   Dec '11   Mar '12
MWS: Cash generated from                                                    
 operations                   12,032    16,295     7,444     8,619    13,873
MWS capital expenditures    (17,816)  (12,649)   (7,093)     (337)     (143)
Ezulwini: Cash (utilized                                                    
 in) generated from                                                         
 operations(1)               (9,449)   (3,823)     (411)     4,964    10,098
Ezulwini capital                                                            
 expenditures                (5,236)   (6,580)   (6,677)   (5,938)   (4,927)
FIU corporate expenditures   (2,875)   (2,726)   (3,726)   (2,726)   (2,726)
Interest on convertible                                                     
 debentures                  (7,301)   (3,156)   (7,301)   (3,156)   (7,147)
Cash movement for the                                                       
 quarter                    (30,646)  (12,639)  (17,765)     1,427     9,027
Minimum proceeds from                                                       
 financing raise(2)           46,000                                        
Less: estimated financing                                                   
 transaction costs           (2,675)                                        
Opening balance               29,979    42,658    30,019    12,254    13,681
Closing Balance               42,658    30,019    12,254    13,681    22,708

COMMODITY AND EXCHANGE RATE                                                 
Gold price US$/oz               1380      1390      1390      1390      1390
Uranium price US$/lb              65        65        65        65        65
Gold price ZAR/kg            301,703   303,889   303,889   303,889   303,889
ZAR/US$ exchange rate           6.80      6.80      6.80      6.80      6.80

What this means is that if the company did not raise money by the end of the month, they would be out of cash – but they need about $42M in capital expenditures in order to buy themselves enough time to build the Ezulwini mine to the point where it can start generating free cash flow.

Assuming they have the operational side covered (which is never a given considering the sketchy history of the company), their next looming financial issue is how to pay off the subordinated convertible debentures, of which $150M is outstanding and due to mature on June 30, 2012. It is low cost debt (4.25% coupon), but if the company is generating free cash flow at this time, it is likely they will be able to rollover the debt at a higher coupon and extend the term out another five years. This will not happen until the first half of 2012.

If the company gets to this point of being free cash flow positive, the equity will be worth well more than a dollar a share. But this is a very risky play – if it works, investors will likely get a very handsome return on investment over a two year period. If it blows up, the common shares will go to zero.

The other embedded risk is commodity pricing – both currency and gold pricing.

The subordinated debt has traded at around 82-83 cents today, which is the highest it has been since early 2008. Disclosure: I do have a position in First Uranium’s notes.