Shares in mining company Petra Diamonds have fallen 23 per cent this morning, after the company flooded the market with new shares in an effort to raise £127.4m.
Shareholders approved the rights issue to help cut the company’s debt burden at a special general meeting yesterday by a 99 per cent majority, driving share prices up five per cent.
However, after the company issued 332,821,725 new shares this morning, the gem miner’s share price quickly tumbled, driving the mining firm’s value down to £323m.
The company, which has suffered setbacks in Tanzania as well as production delays and strikes, had said there was a risk it could run low on working capital and breach its debt covenants if shareholders did not back the rights issue.
But as David Madden, market analyst at CMC Markets UK, the rights issue is really just a short term fix for much bigger problems.
“When you do a rights issue like this you’re not doing it for any expansion purposes – you're doing it to stay above water,” said Madden.
“There are still the underlying issues of production in Tanzania, and the overall investment sentiment is still quite weak.
“Yesterday was a positive day in a difficult few months, but today, it’s back to reality.”
Petra Diamonds’ shares lost around half of their value last year after the company suffered delays in expansion projects and in September the Tanzanian government seized a consignment of diamonds.
Still, Madden says that, despite the plummet in share price this morning, this could be a significant step forward.
“If the capital can sustain them in the short and medium term, they can look back and see this is as a turn around point.
“If they hadn’t got the high approval for the rights vote, it would be very much circling the drain time.”