Why the BC Iron Limited share price crashed 21% today

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Australian shares have fallen today, but few have fallen as sharply as junior iron ore miner BC Iron Limited (ASX: BCI). Its shares have fallen 20.9% to trade at 17 cents, although they did hit a low of 16 cents earlier.

By comparison, the ALL ORDINARIES (Index: ^AXAO) (ASX: XAO) is down 0.6%, while BC Iron’s larger rivals, including BHP Billiton Limited (ASX: BHP), Rio Tinto Limited (ASX: RIO) and Fortescue Metals Group Limited (ASX: FMG), are trading between 1.8% and 2.4% lower.

BC Iron’s shares were placed in a trading halt on Monday evening pending a proposed capital raising. BC Iron this morning announced it would issue $25.5 million worth of shares for just 13 cents per share – representing a nearly 40% discount to the previous closing price of 21.5 cents.

While major shareholder Wroxby Pty Ltd has already committed to take up its entitlement of $4.9 million, other eligible shareholders are being given the opportunity to purchase one new share for every share they currently own. As the offer is also renounceable, those shareholders who do not wish to participate in the offer can also sell part or all of their entitlement on the market.

BC Iron said it “is currently transitioning to a new phase, ‘resetting for growth’ and focusing activities on actively generating value from existing assets while also considering, in a disciplined manner, other new opportunities. The Company is seeking to raise funds to support this strategy and also strengthen its balance sheet.

While expenses of the offer will amount to $1.2 million, $10 million will be put towards strengthening BC Iron’s balance sheet by retiring existing debt and creating a buffer against adverse market conditions.

The remaining funds will be used to pursue strategies to develop a robust development case for the overall Buckland mining and infrastructure project, while positioning BC Iron to selectively evaluate and potentially transact on new opportunities with strong value propositions and near-term earnings potential. Notably, these opportunities are not necessarily limited to iron ore, but also non-iron ore opportunities as well.

Indeed, BC Iron has suffered greatly in recent years as a result of the sharp fall in iron ore prices. Its shares traded as low as 7.5 cents earlier this year. But iron ore prices have recovered somewhat, offering some relief to the business and its shareholders.

Despite the recovery experienced by the broader iron ore industry over the last eight months, it does remain a risky proposition for investors. The companies themselves cannot control the price at which iron ore is sold, and yet they remain completely at its mercy if prices do drop sharply. Investors should most certainly keep that in mind before making an investment in BC Iron.

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Motley Fool contributor Ryan Newman has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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