In an article earlier today, I reviewed the shifting risk/reward history of Sirius Minerals (LSE: SXX) and looked at some of the lessons for investors. Here, I’m going to discuss the potential outcomes for those who may be considering buying, selling, or holding the stock right now.
Binary outcome
According to Sirius’s board of directors, shareholders face a stark choice. Vote in favour of Anglo American‘s 5.5p-a-share offer on 3 March, or face “a high probability that the Sirius board will place the business into administration or liquidation.”
Sirius has substantial liabilities, including Gina Rinehart’s royalty, “secured over the assets of the project.” And the company is due to run out of cash by 31 March. As things stand, administration or liquidation would be almost certain if shareholders reject Anglo’s offer. In this event, I can only see Sirius’s equity being worthless.
I’ll look first at the mooted binary outcome of 5.5p a share, or 0p (zero) a share. And go on to look at some possibilities — remote ones, in my view — that could produce different outcomes.
Sell or buy
Shareholders who want out have the option of waiting for Anglo’s 5.5p, but at the risk of the offer being voted down. Alternatively, they can sell in the market before 3 March. The shares are trading at 5.16p to sell, as I’m writing. So the price of the certainty of banking your cash is currently to accept 6.2% less than the Anglo offer.
For any investors mulling a quick-buy trade, the shares are 5.2p to buy. The potential upside to Anglo’s 5.5p offer is 5.8%, but with the risk of total loss if shareholders vote against it. This is a poor risk/reward prospect, in my book.
Other outcomes
A group of retail shareholders are trying to revive Sirius’s attempted $680m keep-the-company-going funding package by raising money themselves. A consortium of institutional lenders previously pulled out of this, due to Sirius’s inability to find an institutional anchor investor to provide a substantial chunk of new equity. I don’t think the retail shareholders’ initiative has any legs.
There was news last week that hedge fund Odey Asset Management has bought shares in Sirius (at an average price of 4.9p). I think Odey’s talk of accepting 7p, or above, from Anglo is a red herring. The hedge fund’s here to turn a fast buck. As FT Alphaville noted, all it’s really saying is: “We’ll take what you’re paying unless you’ll pay more, in which case we’ll take that.” There’s no reason I can see for Anglo to sweeten the deal.
What about a rival to Anglo appearing with a higher offer? Again, this looks unlikely to me. Despite trying for a number of months, Sirius has had no success in finding a strategic equity investor. And there’s been no whiff of any interest in the company other than Anglo.
Bottom line
At the end of the day, I think it’s very much on the cards it’ll come down to one of the aforementioned binary options. I imagine most Sirius shareholders still holding have decided to hang on come what may, and leave the outcome to fate.
Meanwhile, I can see little upside incentive for other investors to get involved with the stock. As such, and also due to the downside risk, I’d avoid it.