Euro-Manganese (ASX: EMN) shares are up 40% today on the announcement of their financing package. This could well be a good deal. It certainly appears to be debt financing, which means no new issuance of shares. But to then say that this is non-dilutive is simply wrong. It’s in exchange for a royalty. That extracts cashflow at the top of the process, thereby diluting equity returns at the bottom of the capital stack. A royalty deal is dilutive that is.

The basic idea is just fine: “Euro Manganese Inc (EMN) is a battery materials company focused on becoming environmentally producer of high-purity manganese for the electric vehicle industry and other high-technology applications. The Company is advancing development of the Chvaletice Manganese Project in the Czech Republic, which is a waste-to-value recycling and remediation opportunity involving reprocessing old tailings from a decommissioned mine.” It may or may not work of course but those old Soviet era mines used pretty shoddy technology so their wastes and gangues often do contain heavy concentrations of useful materials.

But it’s still true that a royalty is dilutive.

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Euro-Manganese share price from Google Finance

Think through this deal for a moment: “Euro Manganese Inc. (TSX-V and ASX: EMN; OTCQX:EUMNF; Frankfurt: E06) (the “Company”) is pleased to announce that it has signed definitive agreementswith OMRF (BK) LLC (“Orion”), which is managed by the Orion Resource Partners Group, for US$100million in non-dilutive financing (the “Funding Package”) to advance the development of the Chvaletice Manganese Project (the “Project”) in the Czech Republic.” …”A US$50 million loan facility, convertible into a 1.29-1.65% royalty on Project revenues” ….”Receipt of US$50 million in exchange for a 1.93-2.47% royalty on Project revenues”

1. That means that upon conversion Orion will get from 1% to 5% or so off the top of the revenues. Revenues mind, not profits. So, EMN has to still pay all of the costs of extraction, sale and so on. Thus that royalty comes directly off the remainder – the profits. Effectively, they’ve signed away 5% of future revenue and yes, that is dilutive. In fact, it’s more dilutive than signing away 5% of the equity.

As we say, this might be a good deal, might not be. But the one thing it most certainly is is dilutive of returns to equity. Therefore it’s dilutive.