Talking to a friend the other day, in reference to a different company, he asked that fateful question – “surely this is as low as the price can go?” These words, often uttered by potential investors, received the truest of answers – “of course it can go lower, it’s not zero yet”. Thinking a share has hit the bottom is a fallacy that we can all succumb to occasionally and looking at the Sirius Minerals (LSE: SXX) share price, it would be easy to fall for this false belief once more.
Seeing a high of about 45p per share in 2016, today’s price of 9p seems ridiculously low in comparison. Though this 80% drop in price might seemingly make the stock look cheap, if the company goes into liquidation, the down down to 0p drop will be far worse.
Show me the money
Sirius Minerals suffers from one overriding issue in regards to its share price – the company isn’t making any money. It is sitting on a very good prospect, the world’s largest and highest-grade deposit of polyhalite, which if it can actually build its mine, would make today’s share price the bargain of a lifetime. As it stands though, the company could be unable to get the money together to build what it needs to move into production.
This problem became even more apparent last week after the firm’s efforts to raise $500m through the issuance of a corporate bond (which in turn would give access to $2.5bn of funding from JP Morgan) failed. Given that these high-yield debt assets (Sirius was offering 13.5% returns) are known as junk bonds, a market that gives us the image of 80s yuppie trades shouting “buy” and “sell” at each other, it should worry investors that Sirius was too risky even for them.
Sirius is suffering from a catch-22 in many ways – it can’t raise funding without proving it will make money, and it can’t prove it will make money without getting funded. Unfortunately, this has been a nail in the coffin for many small mining companies, whether they held good assets or not. Inevitably a larger, better-funded competitor will come along, sometimes in partnership, but often under less hospitable circumstances for existing shareholders.
The company’s need to go to the bond market has come about because its share price has dropped and equity investors are just not interested (or rather are openly hostile) to the Sirius prospects. CEO Chris Fraser has said he would be going back to the bond market soon to try again, and that current “market jitters” are why it failed this time. Exactly what he thinks will change in the interim, I am not sure.
Where do we go from here?
For me, this failed bond issuance has placed Sirius Minerals shares in a riskier bracket than I already believed they were. No doubt if the project does get funded with terms that allows the company’s shareholders to hold on to most of their stock, the current low price could be the maker of millionaires. However, with this funding problem becoming an even greater hindrance than it already was, I can’t help but think the risk of the shares being worthless one day is now greater than them reaching the 45p mark once again.
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Karl has no position in any of the shares 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