Is the Sirius Minerals share price heading to 10p?

As my colleague Kevin Godbold recently noted, the Sirius Minerals (LSE: SXX) road to success was always going to be a difficult one to travel.

As Kevin noted in his article, building a mine and associated infrastructure is “an uncertain pursuit“. You don’t know at the outset what problems companies will face along the way, or if the mine’s construction will go to plan.

Growing risks 

The risks associated with building a mine are all too apparent to Sirius’ investors. 

At the beginning of September, the company shocked the market when it announced an updated estimate of $3.4bn-$3.6bn of capital funding would be required to complete the development of its flagship mine and get it to the first stage of production — $400m-$600m more than initially projected. 

Management is seeking up to $3bn of debt and the additional $400m-$600m “through the most efficient and cost-effective capital structure” to meet the overall funding target. According to the company’s latest update, it expects to announce the closing of this second stage of financing at some point in the first quarter of 2019. And if it does meet the deadline, the business will have all the resources it needs to fund itself until production begins. 

The big question is, what happens to the company if it doesn’t meet this funding deadline? 

Right now, there’s no definitive answer to this question. But both Sirius’ directors and the company’s accountants believe that there’s a “material uncertainty” about the “group’s ability to continue as a going concern” if it doesn’t unlock the required funds.

Material uncertainty 

According to the company’s own first-half results release, its current level of liquidity provides enough wriggle room to maintain the current level of activity until the end of the second quarter of 2019. If there’s no deal in place by then, it would need to “curtail discretionary expenditures” until additional funding is secured. 

By cutting all discretionary spending at the end of the first quarter of 2019, the company’s auditors believe it could “operate for a period of at least 12 months” from June 30. This gives Sirius a remaining lifespan of eight months if no further funding is secured. 

Time to sell? 

All of the above is the worst case scenario. In reality, I don’t believe we will ever see Sirius run out of money. The enterprise already has some deep-pocketed investors who are unlikely to let the business fail. 

However, the warning from auditors shows just what’s at stake here for the firm over the next few months. In my opinion, the longer it takes to announce that funding has been secured, the lower the share price will drift as investors start to fret about the long-term prospects for the enterprise. 

The stock might not fall to 10p, but I wouldn’t rule out this lower level if Sirius doesn’t announce progress soon. Unfortunately, the company is now in a race against the clock.