Sirius Minerals (LSE: SXX) is currently in limbo. Nobody knows what’s going to happen, and time is running out for the polyhalite miner. Many shareholders have seen their large and hefty investments turn into little more than pennies after the failure of a $2.5bn JP Morgan financing plan due to the bondholders withdrawing. This left Sirius adrift on a life raft, with no land in site.
Sirius needs cash
Since the failed bond issue, the company has taken control of its operations and slashed some costs in an attempt to slow the cash burn (one may wonder why this wasn’t done earlier), but it is only buying time before the inevitable. It is unlikely that any bondholder is going to fund Sirius Minerals, so when debt is ruled out the only other option is equity. So the question becomes, how likely is it that someone will offer cash?
Many were hoping that a Conservative government under Boris Johnson would salvage the project. I think that if the banks weren’t bailed out in the 2008 financial crisis, it is unlikely that the government will prop up a project that can’t get proper funding due to its lack of economic viability. Maybe the project is viable and the problem is instead a failure of management. Either way, shareholders knew the risks when they funded this project, and unfortunately events haven’t gone their way.
When I’d buy Sirius Minerals stock
Currently, everyone is bearish on Sirius Minerals because it has the begging bowl out, and the vultures smell blood. The negotiating position of the plc is weak. Anyone who isn’t a shareholder already will be wanting to pick up the project on the cheap. However, Sirius Minerals does have a large following of retail investors. It is said that there are some 85,000 retail shareholders in the business, and if the company can tap those cash sources then they may be able to use it as a bargaining chip to fend off aggressive offers.
If Sirius Minerals can sort its funding out, then that could be the start of a bounce back for the stock. Currently, the risk is high – but it also might be priced in already. The market cap stands at £256m at a share price of 3.6p, and the company had £349m in cash as of the end of June 2019. That said, the company also invested £171m in that year and will require over £2bn in capital expenditure to complete the mine and get it up and running. It’s a lot of money – a lot more than the equity value is currently worth.
I can’t see the company getting this cash – but if it does – then the tables may well turn. I’ll be watching for financing news closely.
Michael Taylor has no position in any of the shares 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 2020