The Sirius Minerals (LSE: SXX) share price has fallen nearly 90% over the past 12 months, and I’m worried that the company’s performance could get a lot worse.
Lack of cash
For a start, the mining minnow is at risk of running out of money in the next 12 months.
After the group was forced to pull a $500m bond issue that would have unlocked a larger financing package from JPMorgan back in September, management has been struggling to raise money from investors.
At the beginning of November, the company announced that it was in “active” discussions with several potential partners to raise $600m, which would allow it to finish sinking shafts and access the deposits of polyhalite Sirius is trying to mine.
This would substantially de-risk the project, and potentially make it more attractive for backers who will need to put up a further $2.5bn to complete the project.
I worry that potential backers will see the problems that Sirius has had raising finance so far, and decide that this is too risky a step to take. A sum of $600m might not seem like much compared to the initial $3bn requirement, but it is a lot if you think you’re never going to get your money back.
Some investors and analysts have also been questioning whether or not Sirius’s project can live up to management expectations. These analysts believe that the company might struggle to sell its fertiliser product into an oversupplied market.
What’s more, there has been some speculation that there is no real proof this fertiliser does produce better results for farmers.
That being said, the company has signed a range of agreements with third-parties that have agreed to buy its product when the Woodsmith mine is eventually up and running. I’m assuming these parties have done their due diligence, and know what they have agreed to buy, but if the product fails to live up to expectations, this could be a big problem for Sirius and its share price.
Another potential problem area that I think could hold back the Sirius share price is cost. As noted above, the company wants to raise $600m to fund the next stages of its project, with a further $2.5bn required further down the line.
However, this does not leave the company much room for cost overruns. The firm has already revised its costs for the project higher once so far, and as construction progresses, I think it is highly likely we could see yet another cost increase.
Only a small percentage of mining projects around the world every year come in on time and on budget. It’s going to be a lot harder for the group to get backing for additional funding if it does increase the budget once again.
The bottom line
So those are the three reasons why I am worried about the Sirius share price. The company is facing an uncertain future, and at this point, it is just impossible to tell if the business will still be here 12 months from now.
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Rupert Hargreaves owns no share mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2019