As I wrote last month "PHYS and CEF offer new shares on start-up and then periodically, at their discretion, as secondary distributions...... Imagine if you were to buy PHYS at a 13-14% premium and awaken the next day to find that Sprott has signaled its intention to sell some new shares 10% lower. To be sure such a new share issue would be "non-dilutive" to NAV of the existing shares, but it certainly would be dilutive to your personal NAV. This happens several times a year to CEF owners, and it will doubtless happen to PHYS owners as well."
Since that blog post in April PHYS has traded at a premium as high as 30%+ and it carried a premium of 23.7% as of yesterday's closing New York price of 12.46. Overnight a secondary issuance of shares was announced for net proceeds of 10.69. You will be told with a straight face that this is not dilutive to net asset value, but it certainly is dilutive to the existing shareholder's net asset value! As I write this, Comex June gold futures are up $14.40 or 1.2% on the day and PHYS is down 7%.
I noticed that the original prospectus, dated February 25, 2010, for PHYS became unavailable at the Sprott website a few days ago. Fortunately I had saved a copy. There is no mention in the original prospectus about possible future stock issuance nor the policy to be followed with respect to shareholders. However, the Spicers at Central Fund of Canada (CEF) have abused their own shareholders in this way for decades, so I suspected Sprott would do the same.
It's scarcely necessary to list all the conflicts of interest and insider dealings which "could" arise due to this curious Canadian practice. I am assuming that the Sprott's and Spicer's are honorable people who wish only the very best for their shareholders, and that none of their employees nor the underwriters benefit in any way from this approach apart from paying normal underwriting fees and receiving new capital to invest. Be that as it may, this is not a new concern in the history of joint stock company or trust stock issuance. This problem for issuers and for shareholders has been dealt with for eons by "rights issues" . In this type of secondary issuance of stock the issuer gives to the existing shareholders a "right" to purchase new shares at the new public issue price. These rights may be used in whole or in part by the shareholder or the "rights" may be sold for value. Rights are often listed on the stock exchange.
A rights issue would be the "right" way to deal with this curious Canadian custom of dumping on their US-listed shareholders. What do you say, Spicer and Sprott? Shall we do it the "rights way"? Someone else is profiting now from this failure to issue rights. Why not have it be the existing shareholders? Bear in mind that many small shareholders do not have access to new or secondary issuance of stocks they own.
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