Module 6: Capital Structure, Dilution & The Share Register

Why this matters

A great deposit owned by a company with a broken capital structure will not make you money. A mediocre deposit owned by a company with a tight register, aligned management, and disciplined capital management can.

Most retail focus on the project. The professionals focus on the cap table first, then the project. This module is the difference between those two approaches.

What you actually own

When you buy 10,000 shares of a junior with 500m shares on issue (SOI), you own 0.002% of the company. If the company issues another 200m shares to fund a study, you now own 10,000 / 700,000,000 = 0.00143% — a 28% reduction in your ownership share even though you still hold the same number of shares.

That's dilution. Mining juniors live by capital raises. Understanding the structure tells you how much dilution is coming and on what terms.

The components of the cap table

1. Shares on issue (SOI)

Market cap = Share price × SOI

2. Options

The right to buy a share at a set price (strike) by a set date.

Listed options: trade on ASX (e.g., XYZO). Can be exercised by anyone holding them.
Unlisted options: held by directors, employees, advisors, or seed investors. Same dilution effect when exercised.

Key information for each tranche:

Number of options
Strike price
Expiry date
Vesting conditions (immediate, time-based, or performance-based)

If options are deep in the money (current SP well above strike), assume they will be exercised. That's pending dilution.

3. Performance Rights / Performance Shares

Zero-strike (or near-zero) options that vest on milestones — e.g., reaching maiden resource, completing DFS, first production, share price targets.

These are pure dilution (no cash comes in when they vest, unlike options at strike). Always check the vesting conditions in the latest annual report.

4. Convertible notes / loans

Debt that converts to equity at a set price (often a discount to market). Common in distressed financing situations. Each conversion adds shares to SOI.

Watch for:

Floor conversion price (or absence of one — "ratchet" or "death spiral" structures)
Interest paid in shares (ongoing dilution)

5. Escrowed shares

Shares held in escrow (cannot be sold) for a defined period. Required by ASX for certain seed and promoter shares post-IPO — typically 12–24 months.

Watch for escrow expiry dates. When large parcels come out of escrow, supply often hits the market, especially if early backers want to exit.

Fully diluted SOI

The number that actually matters:

Fully diluted SOI = SOI + all unexercised options + performance rights + convertible note conversion shares

Use fully diluted MC as your real valuation metric, not headline MC.

A company with 200m SOI at 10c (MC = $20m) but 100m unexercised options at 5c, 50m performance rights, and a $5m convertible at 8c is actually:

200m + 100m + 50m + 62.5m = 412.5m fully diluted
Fully diluted MC at 10c = $41.25m
Real ownership share is half what the headline suggests

Pull the Top 20 shareholders list (in the annual report and quarterly NSX/Computershare updates).

What to look for:

Top 20 holding %. Above 60% = concentrated. Above 80% = very concentrated. Concentration can be good (aligned long-term holders) or bad (one big seller can crater the price).
Identifiable institutions. Acadian, Regal, Tribeca, Lowell, Paradice, L1 Capital, Tribeca, Collins St — names like these on the register suggest professional money has done DD and bought.
Nominee accounts. HSBC Nominees, Citicorp Nominees, JP Morgan Nominees — these obscure real ownership. Substantial holder notices (below) are how you find out who's behind them.
Director holdings. From the annual report. Directors with meaningful skin in the game (millions of shares acquired with their own money, not granted) are aligned.
Vendor / promoter shares. Original founders or vendors who took shares as consideration for the asset. Often in escrow at IPO; watch for expiry.

Substantial holder notices

Required disclosure when a holder reaches 5% of SOI, and again on every 1% change up or down (Chapter 6C of Corporations Act).

These are gold:

Track which institutions are accumulating
Track which are exiting
Director on-market buying is one of the strongest aligned-management signals
Director participation in placements is not the same — they put money in at a discount alongside other placement participants, often to maintain holding %

How juniors raise capital — the mechanisms

Placement (most common)

Issue of shares to "sophisticated investors" under section 708 of the Corporations Act. No prospectus required. No shareholder approval required if within 7.1 capacity.

Typically priced at a 10–25% discount to recent VWAP
Often includes free options (to "sweeten" the deal)
Funds typically arrive within days
Brokers take a 4–6% fee

ASX Listing Rule 7.1

Companies can issue up to 15% of their SOI without shareholder approval in any rolling 12-month period.

ASX Listing Rule 7.1A

Small/mid-cap companies (broadly, those with MC below ~$300m and not in the S&P/ASX 300) can seek shareholder approval at AGM for an additional 10% capacity, taking total to 25% in 12 months.

If you see 7.1A approval on the AGM agenda, that company is signalling "we expect to raise capital aggressively."

SPP (Share Purchase Plan)

A pro-rata offer to existing retail shareholders. Capped at $30,000 per holder. No prospectus required. Often attached to a placement (institutions get the placement, retail gets the SPP at the same price) to soften the optics of dilution.

Rights Issue

A pro-rata offer to all shareholders.

Renounceable: rights can be sold on-market if you don't want to participate. Better for non-participating holders.
Non-renounceable: rights expire worthless if not exercised. Forces you to either participate or be diluted.

Often deeply discounted (30%+ below SP) to ensure take-up.

Convertible note / loan

Debt-style instrument that converts to equity. Used when the company can't easily place at acceptable terms. Often a sign of distress.

Streaming / royalty financing

Sell future production at a discount, or sell a royalty on revenue, in exchange for upfront cash. Non-dilutive but encumbers the project. Wheaton Precious Metals, Franco-Nevada, Royal Gold are the major streamers.

Patterns of capital raising you'll see at every stage

Stage	Typical raise pattern
1 — Concept	$1–3m placements every 6–12 months
2 — Drilling	$3–8m to fund drilling, often before each program
3 — Discovery	Larger raise ($10–30m) immediately after the discovery hole, at premium to pre-discovery price
4 — Resource definition	$5–15m to fund infill drilling and metallurgy
5–6 — Studies	$5–20m to fund PFS/DFS work; SP often weak so dilution is heavy
7 — DFS complete	The big one: $50–500m+ project finance package (debt + equity + offtake/streaming)
8–9 — Construction	Cost overrun raises, often deeply dilutive at depressed SPs
10 — Production	Reserve replacement exploration funded from cash flow; minimal further dilution if managed well

The capital raise immediately after a positive announcement is a recurring pattern. The good news pumps the SP, the placement gets done at the higher price, dilution is "less bad" than it would have been. Watch for ASX trading halts within 1–3 days of major positive announcements.

The signals from how a company raises capital

Good signs:

Director participates with own cash, not just to maintain %
Strategic investor at premium to market (e.g., a major buying 5–15% as a cornerstone)
Funds raised align with stated next 12–18 month milestones (no excess "general working capital")
Tight pricing (small discount, no free attaching options)
Streaming/royalty financing for project finance instead of equity

Bad signs:

Repeated raises with no stated milestone progress between them
"Death spiral" convertibles with floating conversion prices
Heavy free options attached (signals demand was weak)
Insider participation suspiciously timed (raise before major positive announcement)
Capital raised vastly exceeds disclosed funding requirements (overcapitalisation = SP overhang)

Cash position and runway

Each quarterly (Appendix 5B) shows cash balance and quarterly burn.

Runway (quarters) = Cash balance / Quarterly cash outflows

If runway is below 4 quarters, the next capital raise is on the horizon. If below 2 quarters, it's imminent. Markets will price this in well before the announcement.

Practical exercise

For every junior you hold or are considering, build out:

Current SOI
Total options + performance rights = pending dilution
Fully diluted SOI and fully diluted MC
Top 20 holding % and identifiable institutions on register
Director holdings and recent on-market buying/selling
Cash balance and quarterly burn → runway
Last 3 capital raises: dates, amounts, prices, dilution %

If you can't reproduce this from memory for any holding, you don't actually understand what you own.

What I'm uncertain about

ASX Listing Rules 7.1 and 7.1A have been amended over time; I'm referring to the structure as I understand it but verify the current % thresholds and eligibility criteria on the ASX Listing Rules site if you need to be precise.
The retail SPP cap was increased from $15k to $30k some years ago; I believe $30k is current but worth confirming.
Substantial holder threshold is 5% under Corporations Act Chapter 6C; this is stable but the technical disclosure timing rules have been refined periodically.