Miner and steelmaker Arrium is asking its shareholders to cough up more than $750 million to pay down its debt pile in the face of sliding iron ore prices.
The company, formerly known as OneSteel, is offering new shares to investors at a 26 per cent discount as part of a $754 million capital raising.
OptionsXpress market analyst Ben Le Brun said the company had been forced to offer the massive discount to get investors on board given the current pessimism surrounding high-cost iron ore miners like Arrium.
“Basically they did that because they knew no one would be interested in it if it wasn’t extremely attractive,” he said.
The capital raising is on a large scale for a company with a market capitalisation of less than $900 million.
Arrium will use the money to pay back some of its $1.7 billion in debt, which has become a priority in light of the sliding iron ore price.
Iron ore prices have dropped to around $US82 a tonne, below Arrium’s estimated production costs of $US89 a tonne.
“Debt reduction is a key priority for the company, and today’s announced capital raising reduces our debt significantly in a single step,” acting chairman Peter Smedley said.
Mr Le Brun said the price slide meant the company had little choice but to raise money.
“The company’s hands really were tied,” he said.
“They did have to address this debt pile and, given that their mining operations are going to struggle to be cash flow positive in the short term, they didn’t really have a choice.”
The low iron ore price has hit higher-cost miners hard and resulted in the collapse of two producers so far.
But Mr Le Brun said the capital raising could hardly have come at a worse time and would result in significant dilution of investors’ holdings if they didn’t take part.
“Shareholders are damned if they do and damned if they don’t take up the capital raising because it’s so heavily dilutive,” he said.
Arrium hopes to raise $656 million through an entitlement offer, and will allow investors to buy one new share for every share they own, at the heavily discounted price of 48 cents each.
The company’s shares, which were placed in a trading halt on Monday, last traded at 65 cents.
Arrium also hopes to raise at least $98 million from institutional investors.
Arrium shares are not expected to resume trading until the capital raising is complete later in the week.