After falling by almost 50% in 12 months, are shares in Sirius Minerals (LSE: SXX) a bargain buy That’s the question I’m asking today.
Why have the shares fallen?
Sirius boss Chris Fraser did a good job of selling the project to local communities. There’s widespread support for the mine in the local area and the project also appears to have decent political support.
However, Sirius still needs to raise about $3.5bn to complete the construction of the mine. Back in July, the company said it hoped to complete its financing arrangements by the end of 2018.
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In September, news that an extra $400m-$600m would be required to complete the mine caused the shares to plunge. The deadline for financing was pushed back to the end of March.
Time is getting tight
We’re now just three weeks away from the end of March. And although Sirius has cash to continue operating into the next quarter, I think it’s fair to assume that the firm’s cash reserves are starting to run low.
Without a funding deal, this project could fail. Even if a new backer was found, I’d expect shareholders to experience a near-total loss. In my opinion, these risks are real. That’s why the shares have fallen so sharply over the last six months.
Why the delay?
We don’t know what’s preventing Sirius’s lenders from agreeing a deal. One problem may be the extra $400m-$600m of funding that’s now needed, on top of the $3bn originally planned.
The firm has said that this money won’t be added to its planned borrowing. This suggests to me that some of the money will have to come from shareholders, or from a new outside investor in the firm. Nothing has yet been announced, but I’d imagine lenders will want certainty here before signing up to $3bn of loans.
Whatever the problem is, it seems fair to assume that the lenders who are talking to Sirius have a pretty strong negotiating position. That may not be good news for shareholders, who could be forced to accept dilution or a lower share of profits in the future.
Is the price right?
Despite the Sirius share price falling from almost 40p in August to about 20p today, the company still has a market value of nearly £1bn ($1.3bn).
Is this a fair price to pay, based on what we know?
One way to value the firm is to compare the value of its shares and debt with the present value of the future cash profits the mine is expected to deliver.
In a recent presentation, Sirius claimed a net present value of $9.8bn. This is based on production from the mine reaching 13 million tonnes per annum. The current project schedule indicates that this should happen at some point after 2024.
If we include the firm’s stage 2 financing and the extra $400m-$600m, I estimate Sirius is valued at about $4.8bn today. So the shares are trading at a potential discount of about 50% to their potential value. That suggests a fair value of about 40p per share for the stock.
The problem is that it will take at least five years, probably more, to find out if the company can deliver on these promises. Personally, I think the shares look fully priced. I’d want to see a bigger discount before I’d buy.
