The Australian Iron Ore and Steel company Arrium on Monday announced that it has plans to raise $754 million equity. New shares will be offered to investors at a 26% discount.
Competition in the steel and mining industry is becoming intense and Iron Ore price is sharply falling. This has resulted in a debt. Arrium needs to raise money to pay off its debts.
Iron Ore is one of the essential ingredients in steel manufacturing. Over last few months, the price of Iron Ore has fallen almost by 40%. The current price of one tonne of Iron Ore is $82. The estimated cost of producing one tonne of Iron Ore is $73, if servicing debt is added to it, the total will surpass Iron Ore’s market price.
Clearly, things don’t look up for Arrium. The company representative said in a statement “until sentiment turns around, we have a difficult environment in the mining industry.” Experts believe if the current scenario continues, Arrium’s debt by the end of this year will stand at around $100 or $300 million. Capital raising therefore is a must for the company.
Over the past month, the price of Iron Ore has slumped 13%. Some key mining companies such as Fortescue, BHP Billiton and Rio Tinto have suffered.
The capital raising program of the company launched in less than a month after it took the decision of paying 3c dividend for the year to june. Chairman Peter Smedley said “this positions the company for current markets. Debt reduction is a key priority for the company and the capital raising reduces our debt significantly in a single step.”
A team of analysts held if Iron Ore price continues to slide, Arrium would have to another plan. The company may even have to discontinue mining at the Southern Iron deposit, which is reasonably expensive. Since Arrium went for some costly acquisition just before the global economic meltdown started, selling some underperforming assets could be another strategy.
Currently, the miner exports nearly 12 million tonne a year of hematite ore from its mining base in South Australia. It also works as a supplier of ore. It has a steelmaking branch called the Arrium steel arm and a mining consumables business.