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Should I buy shares in Sirius Minerals?

Alan Oscroft
Businessman selecting a Sell symbol

When I bought some Sirius Minerals (LSE: SXX) shares back in December 2016 at a price of 18p, I really didn’t think I’d now be looking back at such a short-term disaster.

The price peaked much higher than that twice. But both times it was a bit of over-enthusiasm and I wasn’t surprised when it fell back. But I certainly wasn’t prepared for the difficulties the company has faced over its second round of funding. Apart from what I saw as a relatively minor cost overrun, I expected the funding to go well — and I didn’t think I’d see a 50% price drop over six months.

But today, looking at a share price of 9.3p and a near 50% loss, I’m faced with a tricky decision over what to do. Has it gone so badly I should sell, or should I buy more? And should those who haven’t invested in Sirius take the plunge and buy?

Problem

Right now, we’re faced with one immediate difficulty. As part of the financing arrangements, and to gain access to a £2.5bn facility agreed with JP Morgan, Sirius needs to raise $500m through a bond offering. But on 6 August, the firm told us it “has decided to suspend the proposed offer… due to current market conditions,” adding it “intends to revisit the market when conditions have improved later this quarter.”

My immediate question is how does Sirius know market conditions will have improved later this quarter? That’s a big unknown, and the whole thing is a major cause for concern. If potential lenders don’t see enough in Sirius’s prospects to stump up $500m, what are the rest of us doing holding the shares (or thinking of buying)?

Prospects

But, in the current financing turmoil, what I think a lot of people are missing is Sirius Minerals is genuinely sitting on proven reserves of top-grade polyhalite potash. That’s a super fertiliser that farmers around the world want in large quantities, and Sirius has already lined up a long list of customers.

The one thing I’m confident of is that the polyhalite will make it out of the ground and on to those clamouring customers, and that someone will make some good money digging it up and selling it. The question is who?

The worst scenario is that the next attempt to place those bonds fails, Sirius doesn’t get the JPMorgan cash, and calls it a day. Somebody then will surely buy up the assets and exploit them, but we shareholders probably won’t get a bean.

Profit?

But the optimist in me thinks that surely this project has gone too far and has too much potential for nobody to want to take up the bonds at the next offering. And if the firm succeeds in that, then I reckon the long-term share price potential should be back on.

I’m glad I only made a relatively small investment in Sirius Minerals, because I knew that with such a long lead time to profitability there would be significant risks along the way. Right now, I think my holding could either plunge to zero or multiply in value several fold, and I’m holding. I’m even tempted to risk a further small amount…

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Alan Oscroft owns shares of Sirius Minerals. 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