*The story has been updated with corrected details about the Gascoyne Resources recapitalisation process


This week, debt-laden lithium producer Altura Mining (ASX:AJM) went into voluntary administration.

When it comes to recovering any money, Altura’s shareholders are at the bottom of the heap. Secured creditors, like banks, are at the top.

“The key message is that shareholders are often the last in the queue,” says Quentin Olde, senior managing director at global insolvency and restructuring firm Ankura.

“If there is insufficient money to repay the creditors, then the shares in that company, at a simplified level, no longer hold value.”

As part of any proposal to restructure and recapitalise the company – called a deed of company agreement (DOCA) — new investors often come in and take control, Olde says.

Often there is something salvageable for the original shareholders if a company is restructured, but they will be massively diluted.

“New investors know it is usually easier just to give shareholders something in order to get approval for the restructuring process,” Olde says.

“But if an ASX company is relisted the original shareholders quite often end up with less than 5 per cent of the new company.

The original shareholders are heavily diluted by all this new money coming in.”

In Altura’s case, neighbouring producer Pilbara Minerals has already sponsored a proposed DOCA to buy the shares in Altura for $US175m ($247m). This will need approval from Altura’s creditors.

This cash – around replacement value for the assets — will go towards paying back Altura’s creditors.

The loan noteholders are believed to be owed $US180m by Altura, and other company creditors are owed $US35m including several million dollars to employees.

Shareholders would probably get nothing.

But it could also represent a ‘floor’ price in the bidding, with the sales process for Altura officially due to commence next week.

And it sounds like Pilbara Minerals could have some competition.

There is also potential for Altura to recapitalise the business, but previous attempts to refinance its debt have so far failed.

Still, best case scenario is that whoever puts the new money in will take most of the equity.

However, this ‘5 per cent rule’ is not always the case.

Gold producer Gascoyne Resources (ASX:GCY) went to the wall last year. In an ‘unusually successful’ recapitalisation, pre-existing Gascoyne shareholders ended up retaining an ownership interest of ~20 per cent, even if they did not subscribe or take up any part of their entitlements.

They could also subscribe for new shares on the same terms as entering investors.


Liquidation: when shareholders get nothing

Then there’s liquidation, when a company cannot be recapitalised, and assets are sold to pay back creditors.

This is a ‘worst case’ scenario for shareholders.

“We were the voluntary administrators for [defunct miner Kagara] and tried to recapitalise it, failed, and it went into liquidation,” Olde says.

“Everything gets sold off, pulled apart and creditors get paid what they can. Shareholders get nothing.”

Although there is some upside — as a shareholder of an insolvent company, you can probably write off your shareholding as a capital loss.


Can traders speculate on insolvent stocks?

In June, almost 100,000 people on the Robinhood investing app opened a position in US-listed Hertz — a company that had just filed for bankruptcy protection. The shares doubled in a week.

The regime in Australia is very different to the ‘debtor in possession’ regime under chapter 11 in the US, Olde says.

“There, companies continue to trade under the control of the directors during a restructuring,” he says. “In Australia the process is more terminal.

“There is [also] a restriction on the transfer of shares in Australia for companies in administration;  it is difficult.

“Either way, those buying these shares are really speculating.”


How do shareholders identify a sinking ship?

The main thing shareholders should be looking at is cash. Cash is king.

“One of the things we always look at is the quarterly cash reporting, and whether a company has sufficient cash headroom and cash runway to continue,” Olde says.

‘Cash runway’ is the length of time a company will remain solvent if they are unable to raise more money.

‘Cash headroom’ is the difference between a company’s required and available cash.

“We look at current cash (how much they have) and cash burn rate (how much they spend every month) to try figure out how long a company has before they run out of money,” Olde says.

“Then we overlay that with ‘what are they doing from a capital perspective to ameliorate the cash burn?’

“Are they raising capital? Are they selling an asset?”