Win us with honest trifles

Excellon’s (EXN) Death Spiral


…is not going to last much longer as, for odd reasons, on revisiting the EXN books last night and looking a little further into the numbers nasty things showed up. It turns out its financial obligations are worse than look at first light, even after considering its thin treasury and the U$22m provision it made to cover the Mexican court loss. The arrow marks the spot, as that U$8.9m financial debt isn’t all the story. That debt dates back to the July 2020 debenture emission for CAD$17.9m made by EXN (and all the money has gone byebyes) with a three year lifespan, 5.75% coupon and payback date 3q23. Thing is, at the time EXN only booked around half as financial debt and used Black/Scholes rules to file a large chunk of the convert as assumed equity. All inside the rules, but as the share price has since dropped well away from the convert price the likelihood of the debt being converted into shares is now between slim and none. That means the number you see above in the 3q21 balance sheet is going to grow in the next filings…and the filings after that.

But that’s not all! The other issue is its interest payments on those debentures, due every six months and payable either in cash or shares at the company’s discretion. As EXN was tight for cash, unsurprisingly it paid its recorded interest obligations via the emission of 228,000 shares on December 31st 2020, then 286,000 shares on June 30th 2021. Still desperately short of cahs now, as these payments are sized on the share price at period end it means the payment it made on December 31st 2021 was at the new, lower price (which may help explain the big share dump a few days later when the company announced its La Platosa problems). However, EXN now has a real date with danger on June 30th, when it needs to make its next payment on the U$13.3m debenture at the new share price, a date set to coincide with the next installment of the La Platosa saga.

In other words, come end 2q22 EXN will have to emit a stack of shares at a lower price and, if history is our guide, the debenture holders aren’t going to hold them as a long-term investment. The shares are dumped, the price is pushed down further, then if EXN makes it to end 2022 (and by that time the debt would be part of current liabilities) the next interest payment is likely more shares and the Death Spiral picks up speed. However, if what we expect to happen at La Platosa happens it’s not going to get much further than June 2022. If the mine goes on care&maintenance as signalled in the EXN NR of January, that would trigger the default clause on the CAD$17.9m debentures and the game would be up. There are questions on timing and whether any new shares emitted end June have time to get to market, but at this stage that looks like a minor technical detail. EXN is finished and the end is nigh.


    I couldn’t find a decent explanation for “assumed equity” – a short question:

    Basically, what they did is offset the cash from the loan on the asset side with financial debt + “assumed equity” on the liabilities side. “Assumed equity” temporarily gooses up equity, but it’s labeled as “equity that will probably need to be distributed”? Am I getting this right?

    Thank you for the post!


      Anna Ladd-Kruger is way better at Black/Scholes than I, but to stick my neck out: they used the percentage probability that the converts would be made into fully paid-up shares, assumed that would happen using the % and proportioned the liability accordingly between financial debt and equity.

      Therefore, as time elapses and the share price moves away from the strike, the % gets less and more cash debt appears on the balance sheet. Therefore, it will go up again considerably in the next filing.


    Oh no, this one of Sprott’s favs back in 2015. Oh well, here comes another nice donation to the Foundation.


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