On Friday the Sirius Minerals (LSE: SXX) share price fell another 20% to 3p. SXX shares have now fallen by more than 70% over the last month.
As far as I can see, there was no particular reason for Friday’s fall. The company hasn’t released any news.
What I expect is happening is that an increasing number of shareholders are deciding to cut their losses and sell, given the uncertain outlook for the mine.
Could we have seen this coming?
For many shareholders, Sirius will have been a financial disaster. I know that many people who lived local to the mine bought shares, including some who would not normally invest in stocks.
Could we have seen this coming? Firstly, I should say that as far as I can see, the size and quality of the mine’s polyhalite fertiliser resource is genuine. This really could be a very big mine.
However, building large, complex mines is rarely straightforward. Sirius’s mile-deep main shaft and 23-mile transport tunnel are not easy projects. And finding more than $3bn of funding was never going to be easy, either.
We couldn’t be sure that problems would arise. But we could have been sure that problems were possible, even likely.
A persuasive story
I’ve argued many times in these pages that the commercial forecasts for the Woodsmith Mine relied on a lot of educated guesswork and projections far into the future.
That kind of thing is necessary when planning a big project of this kind.
But as my colleague Ed Sheldon highlighted recently, at some point investors seemed to lose sight of these risks. Just a few months ago, Sirius was trading with a £1bn market cap, even though the firm had no revenue and was struggling to arrange a $3bn-plus financing deal.
I suspect that many small investors were won over by the exciting, home-grown story of the mine and – perhaps – by chief executive Chris Fraser’s powers of persuasion.
What happens now?
In my last piece on Sirius, on 10 September, I warned that failure to secure the financing would be very bad news indeed for shareholders.
As I see it, the commercial potential of this project is unchanged. As far as we are aware, nothing has changed in terms of construction requirements, commercial forecasts, or the size of the polyhalite resource.
What I think will change is the ownership structure of the mine. Sirius has gone into a slowdown in order to stretch out its £117m of remaining spare cash while it tries to find a new strategic partner.
Driving a hard bargain
The company has failed to get conventional debt financing. But it’s indicated that it might have been able to raise the cash if the funding package included an allocation of new shares to the lenders.
I suspect that any new financing partner will want to receive an ownership stake in the project, in addition to lending it money. In this scenario, existing shareholders would see their stake in the business reduced.
In a worst-case scenario, a new partner will wait until Sirius is on the verge of bankruptcy before making an offer. This could result in a total loss for existing shareholders.
I think that Sirius shares remain risky and could fall further. This is a stock that I’ll continue to avoid.