The Arrium lesson

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Stephen Bartholomeusz today argues that the Arrium capital raising went wrong because:

…Arrium announced the institutional component of the issue had raised $367 million — only about 79 per cent of the institutional entitlements were taken up. The rest were cleared in a bookbuild at 48 cents, so the institutions that renounced their entitlements get nothing. The placement raised the $98 million sought, taking the proceeds so far to $465 million.

Unsurprisingly in the circumstances, the Arrium share price crashed, falling to 40 cents. If it stays there the retail component — about $290 million — will be a debacle for the institutional sub-underwriters and be very painful for Arrium shareholders.

…The larger part of the explanation appears to lie in what Arrium didn’t do, rather than what it has done.

…If there were an emotional strain to the response, it might well have rational under-pinnings. If institutions felt they had been ambushed by the Arrium board and management it would influence their view of Arrium’s credibility and generate a loss of trust.

Hmmm, well, there’s no doubt Arrium surprised the market. But I’m not sure that that is its fault. The market isdelusional about what is happening to iron ore and the miners so how could it play out any other way? Anyone buying equity in a heavily indebted, high cost producer at any time this year (and let’s face it, any time since the end of 2011) thoroughly deserves to be mercilessly washed out.

As I said recently, the iron ore equity market currently reminds me of something a Fed governor said a few years back. Markets are no smarter than governments but what makes them useful is that when they discover a mistake it is ruthlessly punished (and is therefore efficient).

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Will there be opportunities in the carnage? Yes! But before we get there, all should tremble at the great idiocy spread:

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About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.