While the resources sector is traditionally pretty dynamic, the latest fall in the iron ore price has really got some companies hopping.
Junior miner Western Desert Resources Ltd (ASX: WDR) entered voluntary administration last week after falling iron prices made its mines unprofitable.
While other junior miners are no doubt feeling the heat as prices move ever closer to their break-even point, Rio Tinto Limited (ASX: RIO) and BHP Billiton Ltd (ASX: BHP) are still sitting pretty thanks to super low-cost resources in the first instance and healthy diversification in the second.
Steel maker Arrium Ltd (ASX: ARI) is the latest company to be affected, today announcing a major share issue to shore up its balance sheet.
In another part of the resources world, MetroCoal Ltd (ASX: MTE) looks set to go ahead with its acquisition of Cape Alumina Ltd (ASX: CBX) after the board of that company approved the takeover offer this morning.
Arrium announced a 1-for-1 renounceable entitlement offer at $0.48c per share, hoping to raise $656 million from retail shareholders and at least $98 million from an institutional placement to its underwriters.
At a 26% discount to its current price, the share offer might look appealing but I would counsel shareholders to take the time to think before subscribing.
Although it is a sound strategic move by the company, investors should remember that it is has been undertaken because action now reduces the risk of bigger problems later should prices and demand fall further.
Further I believe that the rights issue may seriously dilute earnings and reduce shareholder value if shares at large drop to the issue price.
Despite the ‘theoretical ex-rights price’ value of 56.5 cents a share, the risk of shares dropping to their issue price and staying there is very real – the same thing happened to mining services company Ausenco Limited (ASX: AAX) not so long ago.
While I wouldn’t give an outright ‘No’ recommendation to the offer, investors should consider very carefully whether it is the right financial move for them.
Cape Alumina Ltd
In an announcement looking something like the intro story for a Star Wars movie, Cape Alumina’s board today recommend
ed that investors accept MetroCoal’s off-market takeover bid for the company.
With a 19.85 million tonne Direct Shipping Ore resource on the tip of Cape York, Cape Alumina is well positioned to benefit from high bauxite prices and may even enjoy advantages in shipping costs – though setup costs are likely to be high – over competitors like Australian Bauxite Ltd (ASX: ABX).
As I have discussed previously I think the merger is great news for investors and looks to be the best way to successfully develop the Cape York bauxite deposits.
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Motley Fool contributor Sean O'Neill owns shares in Rio Tinto, Ausenco, and Australian Bauxite.
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