Korea Zinc shares slide over MSCI index exclusion after rights issue

Korea Zinc's Onsan Refinery in Ulsan / Courtesy of Korea Zinc

Korea Zinc shares fell sharply Tuesday after its exclusion from the Morgan Stanley Capital International (MSCI) index was announced a day earlier.

The removal, set to take effect next Monday, followed the zinc smelting firm’s latest third-party share issuance to finance its smelter project in Tennessee.

According to the Korea Exchange, the stock slid 8.8 percent to 1.19 million won ($825) at the close. Shares opened at 1.31 million won and initially climbed to 1.327 million won, but soon reversed course and widened losses as the session progressed. Meanwhile, the KOSPI gained 67.96 points, or 1.52 percent, to close at 4,525.48.

Selling pressure was led by foreign brokerages, with Merrill Lynch and Citigroup ranking among the top sellers.

The sell-off followed MSCI’s announcement a day earlier that the zinc smelting company would be excluded. The index provider said Korea Zinc failed to meet free-float and free-float-adjusted market capitalization requirements after conducting a third-party share issuance.

On Dec. 15, Korea Zinc announced plans to invest about 11 trillion won in partnership with the U.S. government and local investors to build a large-scale smelter in Tennessee. To fund the project, the company completed a third-party share issuance on Dec. 26, allocating new shares to Crucible JV LLC, a joint venture in which the U.S. government is the largest shareholder.

Following the capital increase, Korea Zinc’s total number of outstanding shares rose to about 20.9 million, with the amount raised totaling 115.5 billion won.

"MSCI determined that Korea Zinc’s adjusted free float fell below 15 percent after the latest share issuance, triggering the criteria for index removal," Kim Dong-young, an analyst at Samsung Securities, said.

He estimated that forced selling by MSCI-tracking funds could reach around 171 billion won, about 2.9 times the stock’s average daily trading volume.

Ko Kyung-beom, an analyst at Yuanta Securities, offered a similar assessment, noting that while routine capital increases typically do not pose a problem, a rise in holdings by controlling shareholders or other non-free-floating stakes can affect MSCI eligibility.

He added that Korea Zinc’s free float had already declined amid an ongoing management dispute with the Young Poong–MBK Partners alliance.

“The additional third-party share issuance ultimately pushed its free-float-adjusted market capitalization below the required threshold,” Ko said.

Meanwhile, Korea Zinc said Chairman Choi Yun-beom emphasized in a recent letter to shareholders that the planned U.S. smelter "is expected to enhance long-term shareholder value on the back of stable profitability."

In the letter, Choi acknowledged concerns over the pricing of the new shares issued to the joint venture but said the actual discount burden for shareholders would be negligible.

He did not address the ongoing control battle with Young Poong and MBK.