The Arrium Ltd (ASX: ARI) share price jumped as much as 40% in early trading today, but is now up 27% at 1.9 cents, reversing some of the huge falls the company's shares experienced on Thursday last week.
The iron ore miner, steel and mining products producer warned last week that there was a risk of the company falling into administration unless it could refinance its debt and restructure itself.
Today, Arrium announced that it may have a lifeline with GSO Capital Partners LP (GSO) offering up to US$927 million (~A$1.3 billion) in funding for the company, allowing the company to pay down some of its $2.4 billion in debt.
Restructure plans
Arrium also says that it will then have funding to use towards turning around or restructuring its steel and mining businesses to make them more sustainable. Shareholders will also be invited to participate in a renounceable rights issue underwritten by GSO.
The funding is comprised of a 6-year secured loan of US$665 million (with an interest rate of , and a rights issue to raise US$262 million (A$369 million) from shareholders fully underwritten by GSO or a professional underwriter. In other words, if shareholders fail to kick in the full US$262 million amount, GSO will cover the gap.
Rights issue
With a current market cap of just $55.8 million, Arrium is looking to raise 5 times its current market cap. Enticing shareholders to stump up more cash might be a major problem, given the company's performance and the share price losing 91% of its value in just the past 12 months. That could mean a substantially discounted price might need to be offered to today's 1.9 cents share price.
While investors might think the deal is good news, it's unlikely to be the case for shareholders. The recapitalisation plan is more than likely going to cede control of Arrium to GSO – if it even goes ahead that is, with plenty of hurdles yet to clear.
With two businesses worth, at best, not very much (steel and iron ore mining) and at worst, nothing, the company would be left with its sole remaining profitable business, mining consumables.
Same old, same old
Frankly, Arrium should have been allowed to die a quick death years ago, rather than suffer this lingering death, for its employees', shareholders' and Australian taxpayers' sake. Its steel business has been uncompetitive for many years, and the decision to jump into iron ore mining was a ridiculous decision – which we panned at the time.
Foolish takeaway
Unfortunately, shareholders and the Australian government have been trying to prop the company up through constant injections of capital.
History has shown that over the long-term, tariffs, handouts and subsidies don't work out all that well – not preventing but just delaying the inevitable. There's no better example of that than Australia's car industry – and unfortunately, Arrium is likely headed the same way.
