Many investors are drawn to shares making new lows because of the tantalising prospect of bagging a bargain. The idea is to take a contrarian position and ride the stock to new glories as operations and sentiment recovers.
Sometimes, though, the attraction of a plunging share price is akin to the allure of flame to a moth – the connection often ends badly with a complete wipeout for the unfortunate moth.
Funding crisis
So which of the two situations confronts us with wannabe polyhalite producer Sirius Minerals (LSE: SXX) after its more than 50% plunge last week? I think it could go either way because the reason behind the freefall in the stock price is actually quite serious – and has been well reported.
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In a nutshell, the company couldn’t get its proposed $500m (US) senior secured notes offering away in “the current market conditions” and has therefore pulled the plug on the idea.
That’s grim. Without cash coming in to finance the mine development, nothing can move forward. In the meantime, the company has around £117m of uncommitted cash to keeps the lights on while it searches for a new funding solution.
Drastic measures have been forced on the enterprise and it plans to dial down the rate of development “across the project.” The directors have launched into a “comprehensive” strategic review over the next six months, which will include seeking “a major strategic partner.”
I can’t help thinking that the price required by any partner to take on the risks of the project will be high. And existing shareholders’ interests will likely be diluted further. Indeed, the cynic in me believes the firm’s polyhalite project has always been deemed too risky to be launched in the private equity arena. Which is probably why it found itself listed publicly on the stock market in the first place.
It could all end in failure
The market capitalisation is lower now at around £300m, as I write. But I reckon it could yet fall to a fraction of that level. And if no partner is prepared to stump up the millions needed to finance the mine development project, SXX could even go bust, or simply terminate operations, which would likely lead to a complete wipeout for shareholders. Just like the poor moth.
I still believe a better entry point into this share could happen further along the development road. Let’s allow the company to secure all the finance it needs and get the mine and infrastructure substantially built before we even think about buying any of the shares. My guess is that even then, with much of the development and finance risk behind it, the shares could remain quite low.
If it doesn’t happen, so be it. The stock market always has plenty of other great growth stories in which we can invest.
