Arrium is down 77% since February – time to buy or is there more pain to come?

Arrium is down 77% since February – time to buy or is there more pain to come?

The collapse in the iron ore price has claimed its highest profile in Arrium (ASX: ARI) which has plummeted well beyond what other iron ore miners have seen. ARI is the old OneSteel Ltd that was originally spun out of BHP and is a business which only as recently as August announced a very solid FY2014 profit result of $296m (including the payment of a final dividend worth almost $100m). Ironically that result and the investor briefing may have been the catalyst for its severe falls since then.

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After increasing its exposure to iron ore in recent years (and loading up on debt in the process), the board has clearly gotten a very big fright by the recent falls in the iron ore price and has decided to make the first move to shore up its balance sheet. It secured an underwritten $754m equity raising which would double the amount of shares on issue – the new shares being raised at a 26% discount to the pre-raising share price – a price of 48c per share. The issue would be an accelerated renounceable entitlement offer which is considered one of the more equitable approaches, so the scene looked set for a pretty standard script.

That was all knocked on the head as the share price re-opened (after the institutional component had been completed successfully) at a price around 40c and has since fallen further to its current price of 35c, around 27% below the issue price, and 46% down on the price before the capital raising was announced. This is a huge embarrassment for the company and a huge loss-making exercise for those institutions that took part in the raising.

Even worse, the retail component is being completed now and will inevitably have a massive shortfall which – while still raising the money for ARI as it was fully underwritten – will leave the underwriters holding the bag and likely leading to a pretty significant overhang. It is unknown whether lead underwriter UBS has shared the risk but we will know in coming days if a new substantial shareholder is announced!

It’s hard to actually pinpoint what went so very wrong but it seems a revolt by institutional shareholders after the picture painted only in August was so rosy. The irony of the situation is that ARI is now a company that is appropriately capitalised with stable cash flows from its non-iron ore assets of around $200m a year and is a far more attractive investment than what it was before the raising, but the way the whole saga was conducted has tarnished the company and its board, and unfortunately for shareholders this overhang left behind from the raising could weigh on the stock for some time as those shares will undoubtedly be put on the market.

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