LFE.PR.B: Explanation of Diluted NAV

There’s something new going on with LFE.PR.B … this is the fact that the reported NAV per Unit as of 2012-6-29 of 11.83 carries the note:

Diluted NAV (assuming full exercise of 2013 warrants)

Huh? How come they’re reporting a Diluted NAV when the 2013 warrants have an exercise price of 12.00? I eMailed the company:

I see that you are reporting (http://www.lifesplit.com/valuations.html) a “Diluted NAV (assuming full exercise of 2013 warrants)” of 11.83 for 2012-6-29, although the exercise price of these warrants is 12.00 (http://www.lifesplit.com/pdf/LFE%20Jun%2025.12-Warrant%20Pricing.pdf).

i) what is the undiluted NAV?

ii) why did you decide to report an NAV assuming full exercise of the 2013 warrants when these warrants are currently out of the money?

… and they replied …

We are required to post a diluted NAV when the net asset value is above the 2013 warrant net-commission exercise price of $11.75 ($12 less 25 cents commission).

The undiluted NAV is $11.91.

Yes indeed, I find when I look at the information circular:

The Company will pay a subscription fee of $0.25 per Unit in respect of each subscription procured by a CDS Participant on behalf of their clients.

So yes, the warrants are out-of-the-money relative to NAV as far as the clients are concerned; but dilutive to the company as far as its net proceeds are concerned.

It is interesting to note that today:

  • LFE closed at 2.46-54
  • LFE.PR.B closed at 9.60-70
  • LFE.WT.A closed at 0.24-25

So that the warrants are slightly in-the-money from the clients’ perspective vis-a-vis market price, with an intrinsic value of (2.46 + 9.60 – 12.00) = 0.06 and time value of 0.18 … which seems quite low, considering the time value on LFE of (2.46 bid – 1.83 intrinsic value [diluted]) = 0.63 and the huge cash drag on the underlying portfolio.

One Response to “LFE.PR.B: Explanation of Diluted NAV”

  1. […] don’t understand this calculation, frankly, which echoes my previous bafflement at the dilution calculation. The Management Information Circular – posted on SEDAR, dated […]

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