Gold Bars

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What: Shares of Gold Star Resources (NYSEMKT:GSS) are getting slammed on Monday, and were down by 18% at 10:45 a.m. EDT. Lackluster second-quarter earnings coupled with its intentions to raise a substantial amount of capital are weighing on the stock.

So what: Gold Star Resources reported a 22% year-over-year decrease in second-quarter revenue due to lower gold production resulting from the suspension of its Bogoso refractory operation and reduced production from its Wassa mine. That said, cash flow improved from $0.03 per share to $0.07 per share thanks to higher margins from rising gold prices and an advanced payment from Royal Gold (NASDAQ:RGLD) as part of their streaming agreement. Meanwhile, the company noted that it continues to make good progress on the construction of its Wassa and Prestea underground gold mines, both of which remain on track to meet their respective first production targets.

Of a more pressing concern for investors is that Gold Star Resources announced its intention to offer $30 million in common shares to the public, which at the current stock price will dilute investors by roughly 10%. The company plans to use the proceeds from the equity offering to bolster its balance sheet by repurchasing some of its 5% convertible senior notes due next year as well as to repay a term loan facility. In addition to that, the company announced a private offering of $65 million in convertible senior notes. As part of that offering, it is directly exchanging $40 million of the new notes with two holders of its legacy convertible notes.

Now what: Gold mines are expensive to build, forcing junior gold miners such as Gold Star Resources to raise outside capital for expansion projects. That often leads to shareholder dilution, which is certainly the case with the company's recent equity offering. That said, while this dilution hurts in the short term, the hope is that it will pay off down the road when the new mines open and drive higher production and earnings.

Matt DiLallo has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.