Fear and pessimism is sweeping across the globe, including Australia, and the main target appears to be the small and medium resource miners and explorers. Commodity prices are on the way down with zinc down 6.4%, aluminium down 20%, nickel down 27% and copper has fallen to a three week low. With fixed costs and falling commodity prices, smaller resources companies are stuck between a rock and a hard place.
Kagara Zinc Limited's (ASX: KZL) share price has sunk by 78% to close at 12 cents, and shares have been in a trading halt since 23rd April 2012, as administrators have been called in to restructure the company. All of the company's operations have been placed on care and maintenance, and 216 staff made redundant. According to the administrators, the company has assets valued at $411m, with creditors owed between $85m and $95m.
The strong Australian dollar and falling commodities prices have been blamed for the fall into administrators hands. According to Kagara managing director, Geoff Day, the combined effect was a 30% cut in the effective price of its metals.
It's unlikely that Kagara will survive, with the most likely outcome a sale of its assets. With falling commodity prices and fixed costs, it will be tough to find buyers for the company's assets at anything above fire-sale prices, and it's unlikely to realise anything like its book value of $411m. There may not be much left for shareholders.
Mirabela Nickel Limited's (ASX: MBN) shares fell 30% yesterday to close at 30 cents, before the company requested a trading halt in it shares. For the year, the shares have sunk by 76.9%. Mirabela has been hit by falling nickel prices, and is considering a capital raising to shore up its balance sheet. The company reported that it had cash in the bank of $US41m, but was forecasting to spend an additional US$41.5m on capital expenditure in 2012.
The problem for Mirabela is that any capital raising now would need to be done at a hefty discount to its last share price, to compensate investors for the higher risk, and that's if it can find any willing to stump up the cash.
Mirabela will be working hard to try to avoid Kagara's fate.
The Foolish bottom line
We could see more small resource stocks head the same way as the two above. Share prices for the junior miners look set to continue falling, and that's despite the Australian dollar falling to parity with the US dollar from $1.08 back in February 2012. According to Bloomberg, the Australian dollar is currently trading around 100.55 US cents,
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Motley Fool contributor Mike King doesn't own shares in any of the companies mentioned. The Motley Fool's purpose is to help the world invest, better. Take Stock is The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it's still available. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.
