Shares in Sirius Minerals (LSE: SXX) have slumped more than 90% over the past year. As the company has struggled to get financing in place to finalise the construction of its mine in North Yorkshire, investors have slowly turned their backs on the business.
Unfortunately, it now looks as if management is not going to be able to agree on a package with its lenders before the firm runs out of cash. And while management says it is doing everything it can to try and keep the lights on, it is clear that time is running out.
Essentially, the Sirius share price is now a lottery ticket. Either the company manages to clinch a last-ditch deal with creditors to keep the project going, or it doesn’t. If the enterprise fails to find more money, the only real option is bankruptcy.
With this being the case, if I owned shares in Sirius, I would swallow the loss and sell my shares today.
High risk, low reward
Taking a substantial loss on an investment is always hard to swallow. However, it is important to remember that if you’ve lost 90% of your capital, you still have 10% left to make a comeback. If you suffer a loss of 100%, you’re out of options.
Sirius might be able to agree on a last-minute deal with its creditors, and if it does, the stock could jump substantially from current levels. However, that is a big if.
Investing is a game of probabilities. According to statistics, only around 5% of commodity projects make money for investors. The reminder either collapse or never make it off the drawing board. If you look at this statistic from a different perspective, it implies that 95% of commodity projects fail. This figure suggests there’s a 95% chance that Sirius will run out of money and collapse.
Live to fight another day
Based on these figures, there is a chance that Sirius could pull through its current problems, but it’s so slim, I think investors will be better off selling up and investing their money elsewhere.
The FTSE 100 could be a great alternative. While an investment in this index might not promise the kind of life-changing returns Sirius initially offered, it is extremely unlikely the FTSE 100 will ever fall by 90% or wipe out investors.
While returns are not guaranteed, over the past 10 years the FTSE 100 has produced an average annual return for investors in the region of 7%, nearly doubling a £1,000 investment. Meanwhile, a stake in Sirius has lost almost all of its value.
The bottom line
So that’s why I would sell the Sirius Mineral’s share price after recent declines and move my money elsewhere. While a loss of 90% might be painful to stomach at first, it will leave you with 10% to fight another day rather than risk losing everything if the company declares bankruptcy.
There are plenty of other stocks out there with brighter prospects that could be a much better home for your money.
Rupert Hargreaves owns no share mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2019