What happened
Shares of Arch Resources (ARCH -0.24%) plunged Thursday morning, trading more than 18% lower as of 11:34 a.m. EDT after the mining company announced plans for a new debt offering.
So what
Arch Resources plans to sell $125 million worth of convertible senior notes due in 2025. Further, it expects to grant the initial purchasers the option to buy up to an additional $18.75 million of these notes. The company intends to use some of the proceeds to help fund the development of its Leer South Mine.
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Holders of these notes could eventually convert them into shares of Arch Resources, and given that its current market cap is below $500 million, the potential dilution here for current shareholders is substantial. Further, in the near term, it would add significant debt to the company's books, and Arch already has nearly $370 million in long-term debt outstanding. While the miner does have more than $150 million in cash on hand, it anticipates it will need to spend more than $100 million more to bring Leer South fully online.
Now what
Arch Resources believes that Leer South will enhance its steel-making coal operations by boosting its volumes, reducing its average unit costs, and improving its product quality. However, it's investing in this project during a challenging period -- most steel producers are running well below capacity due to the economic downturn caused by COVID-19. That issue has weighed on Arch's financial results, and led it to look for ways to enhance its liquidity while it waits for market conditions to improve.
