Effect on the share price of raising capital

In today's lesson we will be looking at what happens to a share price when a company goes to the market to raise additional capital. The shares for Lihir Gold (LHG) resumed trading today, following last week's suspension when it announced that it was seeking to raise almost $1 billion dollars from the market (institutions and retail). The reason for the restructuring was for LHG to close out it's gold hedge book, and repay their gold loan and other debt. This financial restructuring would allow the company greater exposure to the gold price.

We will be look more closely at the effect on LHG share price in our below analysis. We will be looking at why the share price fell and the theoretical value of the shares as compared to the actual value.

Some of the money raised was from institutions, however retail shareholders were offered a 1 for 3 offer. That means those individuals who owned LHG shares prior to the trading halt will be offered 1 LHG share for every 3 LHG shares they own, at a lower than market price. The price offered was $2.30.

So why did the share price go down today?

LHG shares were placed in suspension from Tuesday 17th April 2007 until the raising was completed by the close of businesss Friday 20th April 2007. The closing price on Tuesday was $3.36.

If you decided to take up the issue, then the theoretical value of your shares would change as follows:

Lets assume you held 3000 LHG shares, and therefore you have been offered 1000 more at $2.30

• 3000 LHG shares at $3.36 = $10,080
• Offered 1000 new LHG shares @ $2.30 = $2,300

Total shareholding of LHG will be 4,000 shares

Total Value of 4,000 LHG shares $12,380

Theoretical value $3.095 ($12,380/4,000)

The difference between the actual share price today and the theoretical value calculated above could be from the following reasons. LHG closed at $3.06.

The retail dilution doesn't take into consideration the institutional component of the rights issue at the price of $2.80 per share. Furthermore, the shares were placed in suspension from last Tuesday, therefore any gold price movement since then will also need to be reflected in share price. Another possible reason could be the fact that the market might perceive LHG's full exposure to the gold price movement as either more or less riskier.