Sirius Minerals (LSE: SXX) made headlines for all the wrong reasons this week, when it suspended a planned $500m debt funding deal. The SXX share price has now fallen by about 50% over the last three months, to less than 10p.
The company hopes that market conditions will improve later this summer, allowing the fundraising to go ahead. But the situation is uncomfortable, as there’s some risk that the company will run short of cash in the autumn without fresh funds.
In this article I’m going to look at three things I believe you should consider before deciding whether to buy SXX shares.
What’s gone wrong?
Sirius needed to raise $500m to unlock a $2.5bn funding facility it has agreed with JP Morgan. If the miner fails to raise $500m as agreed, then its whole financing plan could collapse. This could leave the company unable to complete the build of the mine.
It’s true to say that market conditions have worsened over the last month. But I don’t think that’s the whole story. I think the Sirius’s failure to proceed also indicates that lenders see this project as highly speculative, with a lot of financial risk.
Show me the money
When a company borrows money to fund a big project, it’s usually able to demonstrate how future cash flows will be available to service and repay the debt.
That’s not so easy for Sirius to do. Production at the Woodsmith mine isn’t expected to start until 2021. Output of POLY4 fertiliser won’t reach its initial plateau level of 10m tonnes per year until 2024.
Even then, many of the sales agreements the company has put in place with potential customers won’t reach peak volumes until several years later.
In addition to all of this, the firm’s POLY4 fertiliser is effectively a new product that’s not been proven commercially. This means that future pricing is uncertain.
I think it’s very hard to be sure of Sirius Minerals’ likely cash flows over the next 10 years. Last week’s events suggest to me that potential lenders share my view.
What happens if the cash runs out?
If Sirius is unable to get the bond issue away in September and reaches a point where it runs out of cash, what will happen next?
The company would be left with a large, proven mineral deposit and planning permission to build a mine. But it would need fresh cash — or a buyer — in order to build the mine.
I think it’s fair to say that some kind of rescue funding would probably be found. One possibility is Australian mining billionaire Gina Rinehart, who has already invested in Sirius. Ms Rinehart would be able to fund the project with the kind of expertise and long-term view it needs.
However, in a situation like that, I’d expect Sirius shareholders to be wiped out. With the company in financial distress, the firm’s existing lenders would control what happened. Shareholders would likely be left with nothing unless they invested fresh cash.
In my view, Sirius remains highly speculative and risky. The shares could rise 10-fold from here, or they could go to zero. This kind of situation is far too risky for me, so I won’t be investing.