Last Thursday morning, the shares in Petra Diamonds, a mining company, have dropped 23 percent, after the firm flooded the market with new shares in an attempt to raise £127.4m.
During at a special general meeting that was held last Wednesday, the shareholders approved the rights issue to help in cutting the debt burden of the company by a 99 percent majority, driving share prices to go up by five percent.
However, after the firm issued 332,821,725 new shares last Thursday morning, the share price of the gem miner quickly declined, driving the value of the mining firm down to £323 million.
The company has suffered setbacks in Tanzania as well as delays in production and strikes. It said that there was a risk that it could run low on working capital and breach the debt covenants of the company if shareholders did not support the rights issue.
However, according to the market analyst at CMC Markets UK, David Madden, the rights issue is really a short-term fix for much greater problems.
Madden stated: “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.”
He added: “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.”
In 2017, the shares of Petra Diamonds lost approximately half of their value after the firm experienced delays in expansion projects. Also, last September the Tanzanian government confiscated a consignment of diamonds.
Still, Madden states that despite the drop in the share price of the company last Thursday morning, this could be considered as a significant step forward.
He stated: “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.
He continued: “If they hadn’t got the high approval for the rights vote, it would be very much circling the drain time.”