Theshares of Ferrexpo (LSE:FXPO) and Metals Exploration (LSE: MTL) are down 32% and 20%, respectively, around midday why? And should you hurry to buy them?
Bank Bankruptcy
Ferrexpo issuedan update todayon its transactional bank in Ukraine, Bank Finance and Credit JSC, a related party ultimately controlled by Ferrexpos largest shareholder Kostyantin Zhevago.
Its very bad.
Following the close of business on the 17thof September 2015, the National Bank of Ukraine made an announcement on its website stating that it had adopted a decision to declare Bank F&C insolvent.
But just how bad is the situation?
Cash
As of the 16September 2015, the groups total cash balance was approximately $280m after the payment of the interim dividend. Of this cash balance, approximately $174m was held at Bank F&C with the remainder held offshore.
Itsoperations are not currently affected, the miner added, and theboard is assessing the situation and will update the market as necessary.
A supplier of iron ore pellets to the steel industry, Ferrexpo had a net debt position of $653m in the first half (1H) of the year ending 30 June, for a net leverage of 1.9x (1.2x on 31 December 2014).Revenues have plunged and operating cash flow have declined fast in recent months, and these trends are likely to persist, in my view.
Even if we assume that its level of adjusted operating cash flow (Ebitda) in the second half will be in line with 1H at $176m, thenits net leverage could easily soar to between 2.4x and 2.8x, based on its cash balances, according to my calculations.
Also noteworthy is thatthe groups net leverage must staywithin net debt to Ebitda covenant of 3x, according to the agreement with its lenders, and this could be a real problem.
A dividend cut is a base-case scenario right now, in my view, yet more bad news could be around the corner.Incidentally, Citigroup raised its price target from 38p to 58p on Thursday, but the stock today plunged from 59p to 39p. The analysts, who have a sell recommendation, could not predict what was about to hit Ferrexpo, and Id agree that its valuation wasnt incredible high yet its price-to-book value already testified to a very risky investment.
Placing
Elsewhere in the resources space, Metals Exploration announcedtoday that it had obtained commitments to raise US$5 million via the issue of a total of 108m new ordinary shares () at a price of 3 pence per new ordinary share, from certain existing shareholders.
It stock traded around 3.3p around midday.
A much smaller entity with a market cap of less than50m, and whose stocks trade on thin volumes, it kindly reminds us what kind of risk we face investing in tiny explorers, and why diversification rules!
Moreover, the group said thatis in final discussions to receive commitments from certain shareholders to raise up to a further $5m for working capital and contingency purposes by way of the creation and issue of debt securities up to a maximum nominal amount of $5m.
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Alessandro Pasetti has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
