Why Alamos Gold Stock Tumbled 13% on Thursday

By Rich SmithMarketsFool.com

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What happened

Alamos Gold (NYSE: AGI) stock dropped nearly 13% in early Thursday trading, and as of 11:30 a.m. EST, was still down 10.4%.

So what

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Yesterday, Alamos announced a plan to flood the market with 31.45 million common shares of stock sold to a "syndicate of underwriters" at an offer price of $7.95 per share. Adding an overallotment option permitting the underwriters to buy more at that price, if they so desire, could increase the size of the secondary offering to 36.16 million shares, raising as much as $288 million for Alamos.

The downside: Added to Alamos's 267.1 million shares already outstanding, this would result in about a 14.4% dilution of existing shareholders.

Now what

Investors don't seem to like the deal, and are bidding below Alamos' offer price for shares on the open market today. (The share price is currently at $7.51.) That doesn't necessarily make a lot of sense, however. According to Alamos, it plans to take the money raised from this share offering, combine it with the $287 million in cash it already has on hand, and pay off its entire $315 million in high-interest debt -- and still have $200 million in cash and equivalents left over to help fund its operations.

That seems to me a perfectly reasonable use of the share proceeds, and certainly not a bad enough reason to explain existing investors wanting to sell Alamos shares for less than new investors are paying to acquire new Alamos shares. (Again, $7.51 is less than $7.95, so existing investors are accepting less money than new investors are signing up to pay for Alamos shares.)

While I'm not really a big fan of unprofitable gold miners myself, I do suspect that investors in this particular gold miner are overreacting to today's news.

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Rich Smith has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.