In my opinion, Sirius Minerals (LSE:SXX) is in the horrible position where everybody knows the company needs funding and that it is now out of bargaining chips. The vultures are eyeing up their prey, ready to strip the company as they please – Sirius has been left helpless by the failure of its $500m bond offering (pulled due to “poor market conditions”).
This would have rewarded the company with a $2.5bn financing package from JP Morgan and ensured the development of the polyhalite mine and tunnel, but without it the company is powerless to do anything to protect its shareholders. In another time, the company might’ve got it – but it didn’t.
Overambitious project
Sirius intends to build a 37km long tunnel underground. Like most projects, they often overextend and overrun, and that is exactly what is happening here. The facts are:
- Sirius Minerals does not make any money;
- Sirius Minerals is not due to make any money for several years;
- Sirius Minerals is reliant on the begging bowl to continue development.
And how much will that development cost? Well, the company wishes to bring in a “potential strategic partner” it says; a partner that will pay for $600m in development costs. That would be great if the company could, but there is still the small outstanding amount of $2.5bn left. Who is going to pay for that?
Lack of institutional holdings
There is a distinct lack of major funds and institutions owning a notifiable (3%+) amount of stock. The company has been backed by retail investors, who bid the stock up to an extreme valuation. Unfortunately, that valuation is now coming back down to earth with a bang. Institutional investors often follow their money to average down, but there are few institutional investors on the shareholder register.
Government bailout unlikely
In recent weeks, there have been calls for the government to bail out the project. It’s true – the project collapsing will sadly cost a lot of people their jobs, and many their savings. But why should the taxpayer fund uneconomic projects? The project has always been a hugely speculative bet, with funding planned but never guaranteed.
Potential outcomes
In my opinion, the outlook is bleak for Sirius Minerals shareholders. The company has a CEO that is disparaging of bulletin board posters, but many of those same posters will feel aggrieved having backed the CEO who takes home just under £1m in salary and bonus.
Debt funding is unlikely. It’s already failed, and when debt holders do not benefit from the upside unlike equity holders, they want secure projects that will generate consistent cash flows.
Equity funding is more likely but, with the company on its knees, nobody is in a rush to offer them cash. It’s better to wait for the company to be down and out then offer a highly dilutive placing, which will likely wipe out existing shareholders.
The only other option is that nobody offers equity and the entire project goes bang. In my opinion, this is not so unlikely given the huge amounts of capital expenditure still required. The stock is a short in my view.
