When I wrote about Sirius Minerals (LSE: SXX) early last September, the shares were trading at 36p. I thought there was a risk the price could crash 50% by the end of the year, and I reluctantly rated the stock a ‘sell’. Reluctantly, because I’d previously been bullish.
The share price hasn’t quite halved, but it’s down 45% at a little under 20p. The question now is whether investors at this level could double their money in 2019. After all, 40p wouldn’t be much above last year’s high.
Optimism
Sirius did a brilliant job to jump through all the planning hoops to get its polyhalite mine in North Yorkshire off the drawing board. Subsequently, the $1.2bn stage-one funding for the first phase of construction was only a little more generous to new investors than I’d anticipated, and I remained bullish on the stock. I particularly liked that management was intent on avoiding any further equity dilution, planning to raise debt of $3bn at stage two to see the project through to production in 2021.
Caution
There were two reasons why I turned bearish on the stock. First, I took a more cautious view of the company’s production, revenue and profit targets. This was due to concerns about the size of the market for its polyhalite product, the price it might command, and the quality of the off-take agreements it had signed. My other concern was that there’d been no swift finalisation of the stage-two funding. I felt the risk was rising that lenders might insist on a dilutive equity fundraising as part of the $3bn package.
Revisions
On 6 September, the spectre of a dilutive equity fundraising suddenly loomed much larger — from another quarter. Sirius announced it had revised its estimate of capital costs. It said it now required stage-two funding of $3.4bn to $3.6bn, but that it wouldn’t be seeking to increase the planned $3bn of borrowings to cover the additional costs.
Then, last week, it announced it had revised the structure of the $3bn borrowings package with which it had been trying to get lenders on board. Its original aim had been two equal tranches of debt, split between commercial banks and the UK government’s Infrastructure and Projects Authority (IPA). However, the deal it’s now trying to get lenders to buy into is a three-stage financing, with cash being released sequentially on the completion of key construction milestones. It’s proposing the first portion as a high-yield bond (analysts reckon $0.5bn to $0.7bn), followed by a tranche of commercial banks debt ($1.5bn), and finally IPA loans ($0.8bn to $0.9bn).
Looking for clarity
After Sirius completed the stage-one funding, there appeared to be a clear, non-dilutive route to production, via what looked a relatively simple stage-two debt raising. However, due to the increase in the capital costs estimate, the company’s failure to secure the borrowings package it contemplated, and no guarantee its revised proposal will win over lenders, there’s now considerable uncertainty.
The ultimate quantum of equity dilution at stage two is unknown, and there’s also a risk of overall higher borrowing costs. Investor sentiment would doubtless improve on the removal of uncertainty, but I’m not convinced any deal will be sufficient to double the share price. As such, I’m minded to avoid the stock, until we have more clarity.