This year, shares in Sirius Minerals (LSE: SXX) have crumbled. Year-to-date, shares in the mining company are down 32%. Over the past 12 months, the stock has lost 55% of its value.
This is despite the fact that Sirius has made a tremendous amount of progress on the development of its flagship North Yorkshire potash mine since this time last year. Construction at the site has continued, and the company has finally agreed on a financing package that will enable it to get to the production stage.
Unfortunately, the funding has come at a cost. The $3.8bn funding plan required the company to raise $425m through the sale of new shares at 15p and a further $400m by selling eight-year convertible bonds.
This $825m cash call has significantly diluted existing shareholders, which goes some way to explaining why the stock has fallen so considerably over the past six months. The company’s market capitalisation hasn’t actually changed that much over the past year, it’s still around £1bn. But the number of shares in issue has ballooned to nearly 7bn, up from 4.7bn at the end of 2018.
Tremendous potential
Whenever I have covered Sirius in the past, I’ve always highlighted the company’s immense potential. If the enterprise does manage to develop its potash mine as planned, it could be worth $10bn-$20bn over the long term, which hints at substantial returns for shareholders from current levels.
However, dilution has always been (and will continue to be) a problem for shareholders. Sirius has leaned heavily on its investors over the past five years to fund its operations by issuing new shares. For example, back in 2013, the company had just 1.5bn shares in issue. By the end of 2016, the figure had grown to 2.5bn, and then 4.7bn by the end of 2018.
As Sirius has continued to issue new shares, the percentage of the business each share is entitled to has dwindled. I calculate that at the current market capitalisation of £1bn, each share would be worth 67p today had the company kept its share count at the 2013 level of 1.5bn — that’s 380% above current levels.
Further declines ahead
It doesn’t look to me as if this trend is going to end anytime soon. The London-listed miner needs to raise a further $500m in debt by the end of September so it can access the $2.5bn corporate overdraft facility being offered by JPMorgan.
If Sirius cannot find creditors who are willing to lend it the money, it could be forced to go back to shareholders. A cash call of this value would result in several billion more shares being issued, which would dilute shareholders once again and could push the share price down to 10p.
Although this is the worst case scenario, it’s something I think long-term investors should be aware of. Sirius could still generate enormous profits for investors, but the company has a long way to go before it’s self-funding. And that’s something I’m concerned about.
