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 wont 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 firms 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 years 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.
Thats a good result for brave traders who successfully called the bottom, but its worth remembering that Lonmins share price is still 81% lower than at the start of the year.
Markets obviously like todays news. We wont know the full details of the rights issue until 9 November, so its hard to say exactly how dilutive its going to be for shareholders who dont choose to take part.
The new shares may well be issued at a massive discount to the current share price. Id wait until we know more before considering a buy.
Is Glencore a better bet?
Lonmin isnt the only troubled mining firm thats 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.
Glencores cash call was part of a bigger plan to shave $10 billion from the groups $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?
Im not sure. Although I think that Glencores survival is not in question, I remain concerned about the firms 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 isnt excessive, the business is simple and the firms management appears to have convinced its lenders that it has a realistic turnaround plan.
Whats 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.
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Roland Head 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.