Shares in Sirius Minerals (LSE: SXX) were down by 17% at the time of writing on Tuesday morning. The fall came after the company revealed details of its long-awaited $3.8bn financing deal.
The good news is that this funding should see the mine through to completion, barring further cost overruns. But this cash will come at a fairly high cost, much of which is still unknown.
In this article I’ll explain what today’s news means, and what I’d do about Sirius Minerals shares.
Shareholders face dilution
In March, Sirius abandoned funding talks with its planned lenders to discuss a possible financing deal with US bank JPMorgan. This deal will now go ahead.
The first stage is a $400m (£310m) share placing. This will be launched immediately. The new shares are expected to be issued at 15p-18p. My sums suggest this will result in about 1.9bn new shares being issued, adding about 40% to the group’s current share count.
This means that future earnings will have to be spread among a larger number of shares, meaning that earnings per share will be lower. This is known as dilution.
And even more dilution
Unfortunately, today’s placing may just be the start of the dilution. Sirius is also going to issue $644m of new convertible bonds, due in 2027. This will raise $400m of new cash and allow the group to refinance $244m of existing bonds.
Convertible bonds can be converted into shares, hence the name. The conversion price is expected to be somewhere between 18p and 22.5p. So if the Sirius share price heads upwards in future years, bondholders may choose to convert their bonds into shares.
If all the bonds are converted, I estimate that about 2.4bn new shares might be issued, adding a further 35% to Sirius’s share count.
Overall, my sums suggest that the placing and convertible bonds could reduce the value of each existing Sirius share by nearly 50%.
What comes next?
The share placing and convertible bonds should provide $800m of new cash. The next $500m is expected to come from some standard (non-convertible) bonds issued later this year. The interest rate and repayment terms for these bonds have not yet been agreed.
The final $2.5bn needed will initially come from a giant overdraft provided by JPMorgan. As the project develops, the plan is for this short-term financing to be converted into further bond issues.
Good news vs bad news
The good news is that Sirius Minerals has secured the funding it needs to complete the build of the Woodsmith mine in North Yorkshire. Unless costs rise again, this funding should see the firm through until production hits 10m tonnes per annum (mtpa). This is expected in mid-2024.
Another piece of good news is that prospective customers still seem interested. The company now has supply agreements for 10.7mtpa of POLY4 fertiliser, up from 8.2mtpa at the end of 2018.
The bad news is that shareholders will face significant dilution.
Another concern is that most of the firm’s borrowing costs are still unknown. This is a risk for equity investors, as debt costs are likely to be a significant drain on cash in the early years of production.
My view: At under 20p, I think Sirius is a speculative long-term buy. But it’s not without risk and certainly isn’t a short-term trade, in my opinion.
