Just 18 months ago, the Sirius Minerals (LSE: SXX) share price was north of 35p. It was the best of times. Investors felt wise, full of belief, light and hope. Today, with a putative take-it-or-lose-everything 5.5p-a-share offer on the table, it’s the worst of times. Investors feel foolish, full of incredulity, darkness and despair.
But let’s put things in perspective. Even the world’s greatest investors make mistakes in assessing risk and reward. What’s important is to learn from them.
In this article, I’ll review the shifting risk-reward history of Sirius Minerals to see what we can learn. In a follow-up article later today, I’ll discuss the permutations of potential outcomes for investors who may be considering buying, selling or holding the stock right now. And I’ll give my view on the current risk-reward position.
Good progress
When I first wrote about Sirius five or six years ago, it was a highly speculative proposition. It was, though, one of the market’s more interesting ones. This was due to its vast polyhalite asset in North Yorkshire, and potential mine life of over 100 years.
I felt Sirius moved from speculative punt to a more solid investment after the company secured Stage 1 financing in 2016, with management’s plan for Stage 2 financing via debt reducing the risk of further significant equity dilution.
Investment case and valuation
I remained positive on the stock until September 2018. Now, it’s always wise to give due consideration to critical views about a company. Having done so, I developed some concerns about the price Sirius’s polyhalite product might command, the size of the market for it, and the quality of some of its off-take agreements. I also saw a rising risk of a dilutive equity fundraising forming part of the Stage 2 financing.
I re-ran my valuation numbers on a modestly-less-successful business outcome by 2027 than I’d previously assumed. The projected investment return from the share price at the time of 36p appeared insufficient reward for the risk. Reluctantly, I rated the stock a ‘sell’. I think it pays to regularly revisit the investment case and valuation of stocks you own.
Towards the end game
Sirius has been on my ‘avoid’ list ever since. This is because securing debt financing to complete the project became increasingly remote. At the same time, the risk of running out of cash, and either going into administration or having to accept a low-ball offer for the company, became increasingly likely.
It’s important for investors to understand, and a key part of weighing risk and reward, that there are circumstances in which equity can become worthless, even if a company owns valuable assets.
Anglo American‘s offer of 5.5p a share is better than I was expecting. When I wrote about Sirius in December, I thought any potential investor interested in the equity would take things to the wire, and offer a deal at the 11th hour. Anglo made its move earlier and at a higher price than I envisaged. I got that part wrong, but will add it to my mental store of knowledge of these kinds of situations, and learn from it.
Meanwhile, if you’re considering buying, selling or holding Sirius’s shares right now, look out for my follow-up article later today, discussing the permutations of potential outcomes for investors at this point.
