Why is the Arafura share price sinking 17% today?

It has been a tough session for this rare earths stock. But why?

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The market may be flying on Thursday but the same cannot be said for the Arafura Rare Earths Ltd (ASX: ARU) share price.

In morning trade, the rare earths developer's shares are down 17.5% to a 52-week low of 16.5 cents.

Why is the Arafura share price sinking?

Investors have been selling the company's shares today after it raised funds from institutional investors.

According to the release, Arafura has received firm commitments for a fully underwritten $25 million institutional placement at an issue price of 16 cents per new share. This represents a 20% discount to where the Arafura share price was trading prior to its halt.

Management notes that placement bookbuild saw strong demand from leading investor groups both domestically and abroad. It believes this provides an endorsement of the company's development plans for the Nolans Project.

It will now push ahead with a share purchase plan that aims to raise $10 million at the same price. Though given the weakness in the Arafura share price today, the company may not find it as easy to raise funds from retail investors given the lack of discount.

The funds raised will be utilised toward continued development of the Nolans Project and for general working capital purposes while targeting contractual close for project finance.

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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