It may be pushing it a bit to say I’d rather eat raw turkey giblets than buy shares in Sirius Minerals (LSE: SXX), but it’s not too far from the truth.
The shares were trading at 36p when I turned bearish on the stock last year, and while they’re now trading at just 3.6p, I think the risk of a shareholder wipeout has increased more than tenfold. Here’s why I believe the risk is sky high, and why I continue to see Sirius as a stock to avoid.
Plans A and B
The events of the last year have made it clear, in my opinion, that lenders are unwilling to supply Sirius with debt on acceptable terms. Plan A, for $3bn borrowings, failed to materialise by the end of 2018, after two years of negotiations with a consortium of potential lenders.
The company then began discussions on a revised Plan A with the consortium. However, in March, it announced “it is pausing discussions” to pursue “a conditional proposal from a major global financial institution [JP Morgan Cazenove].”
Sirius commented that the new proposal “potentially offers a more flexible and attractive solution,” implying this represented a new Plan A (rather than a Plan B in the absence of progress with the original consortium). However, it now looks very much like it was a Plan B, because when it fell apart due to Sirius’s failure to get a $500m bond offering away, there was no resumption of the “paused” discussions with the original consortium.
Plan C
Sirius is now pursuing Plan C. It’s said it needs “to secure additional external financing in order to allow it to continue operations after 31 March 2020.” Its auditor has warned this represents “a material uncertainty which may cast significant doubt about the group’s ability to continue as a going concern.”
Sirius is desperate to raise $600m by March to keep the lights on. It’s looking for either a strategic investor or a structured debt financing package, “either of which may incorporate the issue of new equity or an equity-like component to the financing package.”
In view of Sirius’s serial failure to secure debt financing, I think a big equity issue is needed. Furthermore, with the clock ticking on its ability to continue as a going concern, I see no rational reason why a potential new equity investor wouldn’t take things to the wire, and offer a deal at the 11th hour that leaves existing shareholders owning only a token percentage of the company.
Of course, if there’s no interest at all, Sirius would run out of cash and shareholders would suffer a complete loss.
More signals flashing red
I see zero prospect of the government’s Infrastructure and Projects Authority (IPA) participating in the mooted $600m financing. It’s not a ‘state aid’ body and must make decisions on a commercial basis. It was part of the original consortium that failed to reach a deal with Sirius, and also declined support when the JP Morgan Cazenove package hit the skids.
Finally, Sirius’s existing debt is dealing at a deep discount to par. When lenders, who rank above shareholders, are pricing a recovery of only pennies in the pound on their loans, equity holders should be very afraid. The risk of a total or near-total loss makes Sirius uninvestable, in my view.