Investors in struggling platinum miner Lonmin (LSE: LMI) pushed the stock 15% higher this morning, after the company announced plans to raise $400m from shareholders.
In a trading update, Lonmin said that it had agreed a new $370m lending facility to replace its existing $543m facility, which expires next year. However, the banks won’t sign this off without Lonmin raising some fresh cash from shareholders.
The proposed $400m rights issue is equivalent to about £260m, which is more than the firm’s current market capitalisation of £200m.
In reality, a rights issue was inevitable. To be honest, things could have been much worse. If Lonmin had failed to convince banks to lend it any fresh money, the shares could have gone to zero.
As things stand, the group appears to be making progress with its new strategy of focusing on low-cost production. Net debt actually fell from $282m to $185m between March and September, as cash started to flow again following last year’s long-running strike action.
Market reaction — buy?
Lonmin shares have risen by 15% to 33p today, and are now up by 128% from the all-time low of 14.5p seen at the end of September.
That’s a good result for brave traders who successfully called the bottom, but it’s worth remembering that Lonmin’s share price is still 81% lower than at the start of the year.
Markets obviously like today’s news. We won’t know the full details of the rights issue until 9 November, so it’s hard to say exactly how dilutive it’s going to be for shareholders who don’t choose to take part.
The new shares may well be issued at a massive discount to the current share price. I’d wait until we know more before considering a buy.
Is Glencore a better bet?
Lonmin isn’t the only troubled mining firm that’s been forced to raise cash from its shareholders. FTSE 100 commodity firm Glencore (LSE: GLEN) has already raised $2.5 billion through a placing of new shares at 125p per share.
Glencore’s cash call was part of a bigger plan to shave $10 billion from the group’s $29bn net debt.
Like Lonmin, Glencore stock has risen sharply since hitting an all-time low of 66p in late September. However, unlike Lonmin, current forecasts suggest Glencore will deliver a reasonable profit and pay a dividend next year.
The latest consensus forecasts put Glencore shares on a 2015 forecast P/E of 17.5 and a prospective yield of 4.3%. On this basis, is Glencore a better buy than Lonmin?
I’m not sure. Although I think that Glencore’s survival is not in question, I remain concerned about the firm’s combination of low profit margins and high debt levels.
Glencore is also an extremely complex business — another warning sign for me.
I prefer Lonmin. Debt isn’t excessive, the business is simple and the firm’s management appears to have convinced its lenders that it has a realistic turnaround plan.
What’s more, Lonmin shares currently trade at a massive 90% discount to their tangible book value. Even allowing for major dilution in the forthcoming rights issue, I believe that Lonmin has the potential to offer some material gains for new investors.