Sirius Minerals (LSE: SXX) shareholders are enduring an agonising wait. They must see if chief executive Chris Fraser can secure financing for the Woodsmith Mine, preferably without wiping out shareholders.Â
This is far from certain. The last time the shares were trading at under 4p was in 2010.
Since then, the company has proved up this world-class potash asset, secured planning permission, and raised $1.2bn of stage one financing. For the shares to fall to this level again now suggests that the market has serious doubts about the remaining value of the firm’s equity.
Are the shares a bargain buy? In this article I’ll explain why I’m not yet convinced.
A great project
There’s no doubt in my mind that the Woodsmith Mine could be a world-class asset. Potential customers seem interested, too. According to a recent announcement, Sirius has now contracted buyers for up to 13.8 million tonnes per year of POLY4 fertiliser.
Although this level wouldn’t be reached until a number of years after production has started, I still think it’s encouraging.
I hope the project succeeds. But I believe that shareholders need to separate their view of the project from their view of SXX shares. Even if the project succeeds, existing shareholders could still suffer further losses. Let me explain.
This is what’s happening now
September’s share price crash was caused by the company’s failure to secure the $3.5bn funding it needs to complete the build of the mine. Without a replacement funding package, the firm could run out of cash by the end of the year.
To try and solve this problem, two things are happening.
The first is that Fraser and his team are trying to find a cheaper and less complex way to build the mine and the 23-mile transport tunnel. I see this as potentially good news for shareholders.
The second thing that’s happening is that the company is looking far and wide for potential new investors.
Although there are hopes that the government will guarantee some of the funding, so far there’s been no indication that this is likely. I think this refinancing process is likely to be bad news for shareholders.
You see, Sirius Minerals has already failed to secure conventional debt financing, even though it was offering an interest rate of up to 15%.
Given this, I expect anyone who agrees to invest now will also want to own part (or all) of the business. This would increase the upside potential of their investment. But for existing shareholders, this could mean massive dilution. Sirius could agree to issue billions of new shares to anyone who will provide funding.
Does this matter?
You might say that the shares would rise so rapidly on news of any deal that concerns about dilution would be irrelevant. That’s possible.
But it’s worth remembering that the firm’s desperate need for money is an open secret. Any new investor is likely to drive a hard bargain. Existing bondholders also have claims that rank ahead of shareholders. The company could go into administration before a deal is done, wiping out shareholders completely.
Given what we know at the moment, I think there’s a good chance SXX shares have further to fall. I see the shares as a high-risk punt, at best. I’m continuing to avoid this stock.