Sirius Minerals shares: is a possible 5.5p a share offer a good or bad deal for shareholders?

After a horror run in which they fell from above 20p to around 3.5p in less than nine months, Sirius Minerals (LSE: SXX) shares surged 45% last week on the back of news that the company is in ‘advanced discussions’ with FTSE 100 mining giant Anglo American regarding a possible takeover. The proposed deal, which would see Anglo American pay 5.5p per share for each SXX share, values Sirius at a little over $500m.

Would this be a good deal for shareholders? I think it depends on how you look at it.

5.5p is better than nothing 

One on hand, you could argue that the proposed 5.5p per share offer is a good deal. I say this because Sirius looked very close to going bust.

With no funding in place, and only £180m in cash left as of September (about six months’ worth), the outlook for the company was not good at all. If it had gone bust, shareholders would most likely have lost everything (what was left of their original investments anyway). Receiving 5.5p per share is certainly better than receiving nothing.

It’s also worth noting that, if you bought Sirius shares recently when they were trading near 3p, as my colleague Manika Premsingh did, then the proposed 5.5p per share deal is a great deal. You could make a huge gain in a short period of time if the deal goes through.

A rough deal for long-term holders

On the other hand, when you consider that many long-term shareholders will have paid over 20p (maybe even more than 40p) for their Sirius shares, the 5.5p per share proposed deal is not so good. In fact, it’s likely to be pretty painful for investors. If you paid 20p per share for your SXX shares, you could be forced to lock in a loss of more than 70%.

I’ve been in this kind of situation before myself and it’s very frustrating. A little over 10 years ago, I owned shares in an oil exploration company whose share price crashed during the Global Financial Crisis. A larger company came in with an opportunistic bid, the oil explorer accepted the bid, and I was forced to lock in a loss of about 40%. So, I feel shareholders’ pain. 

What I’d do now

Wondering what to do with your Sirius Minerals shares after news of the proposed offer?

If you’re a long-term shareholder, I’d hold on to your SXX shares for now. While Sirius has advised that “there can be no certainty that any firm offer will be made,” it does sound like the company is keen to push the proposed deal through. “The Board of Sirius has indicated to Anglo American that it expects to be able to recommend a firm offer for Sirius if made by Anglo American at the price set out in the Proposal,” it said last week. Anglo American, too, sounds quite interested in a deal. It has until February 5 to make a firm offer.

It’s certainly not an ideal situation if you’re a long-term holder, but as I said, receiving 5.5p if the deal goes through is better than receiving nothing if the company goes bust. There’s always a small chance that another bidder could come in with a higher offer too.