Arrium to finance debt through A$754m share sale

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Australian iron ore miner and steel maker Arrium Ltd is looking to raise A$754 million with the launch of a huge share sale to shareholders and institutions.

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According to the article on Reuters, the company intends to use the money to pay off the A$1.7 billion debt accumulated in the wake of the collapse in iron ore prices.

Iron ore prices have dropped by 40% this year to reach their lowest levels since 2009, crippling all but the biggest iron ore miners who increased output to flood the market with new supply just as demand growth has slowed in China.

“While the company last month reported it had achieved significant progress with debt reduction, iron ore prices have fallen significantly in the last month to 5-year lows and there is increased uncertainty over the extent and timing of recovery,” Chairman Peter Smedley said in a statement.

The sudden dip in price has forced Goldman Sachs Group Inc. to call an end to the Iron Age as the raw material tumbled into a bear market in March, according to Bloomberg.

The ore’s 39% slide this year has prompted some small producers from Sweden to Canada to idle or close mines.

Arrium, which is the country’s largest iron ore producer, is offering the new stock at 48 cents per share, 26% less than its closing price on 12 September.

Analysts largely agreed with Arrium’s decision to finance the debt through major share sales, as there had been concerns about how it would manage it, as of 30 June, with iron ore prices likely to remain under pressure for some time.

“I don’t see iron ore prices going up in a hurry. We’ve got to start seeing a recovery in the Chinese building market. We’re not seeing that yet,” said Robert Hook, a portfolio manager at SG Hiscock & Co, whose SGH20 high conviction fund sold its stake in Arrium before iron ore prices plunged.

“We just felt it had reached a good valuation point and we also took the view that growth rates in China were probably going to start slowing – and I emphasise growth rates not demand – and there would be a huge (iron ore) supply coming on the market.”

Analysts fear that iron ore prices may fall to $80 a tonne in 2015 and $79 a tonne in 2016 as expansions by the biggest producers see a global surplus more than triple this year.

Arrium’s iron ore break-even price of $80 a tonne, compares to $67 a tonne for Vale SA, the biggest exporter, and $45 for Rio Tinto Group, according to a 12 September note from UBS AG.