Shares of South African gold miner Sibanye Gold (NYSE:SBSW) are down 32% as of 10:45 a.m. EDT today. The catastrophic stock price drop came after the company announced it had finalized the terms of its underwritten renounceable rights offer of $1 billion.
Whenever a company issues additional shares, the market typically responds with a stock price drop. A 32% drop, though, is a bit extreme. When you look at the terms of the rights offer Sibanye just issued, though, this stock price drop seems very much justified.
According to Sibanye, the subscription price for shares in this rights offering was 11.28 South African rand, or $0.82 per share based on the exchange rate at the time of the announcement. That price is equivalent to a whopping 60% discount to the closing price on May 17.
The reason for the rights offer was that Sibanye needed to raise cash to help pay down a $2.65 billion loan it took to pay for the acquisition of U.S. platinum and palladium miner Stillwater Mining last year. It's hard to imagine many other situations where a company would go ahead with a financial move that would dilute shareholder value so drastically.
Even before this rights offering, Sibanye Gold wasn't exactly the first name on anyone's buy list for gold miners. With declining production and all-in sustaining costs of $1,163 per ounce, Sibanye is a marginal cost supplier that is barely making modest profits at today's prices. Furthermore, the operating profit margins for its new platinum and palladium mining operations are a modest 8% as well.
For investors looking to invest in gold, Sibanye probably isn't the best bet today, and the pricing of that rights offer supports that idea.