After what feels like an endless wait, investors in Sirius Minerals (LSE: SXX) awoke this morning to discover the company’s plans for securing the $1.2bn Stage 1 funding needed for its polyhalite mine in North Yorkshire. This follows last week’s announcement that the company had signed a royalty finance deal worth $300m with Gina Rinehart, Australia’s richest woman and boss at Hancock Prospecting. Stage 1 will pay for all work related to preparing the site, excavating the mine shafts and building the tunnel cavern.
From a standing start, Sirius is suddenly sprinting. And yet the shares have plummeted 15%. What gives?
Show me the money!
Having secured Rhinehart’s backing, Sirius now plans to accumulate the remaining cash through a placing of new shares and convertible bonds. The issue of new shares means that the company will now be working over the next two days to find buyers through a bookbuild. Having discovered what price institutional investors will be willing to buy the new stock, the company can then confirm the firm placing and offer price to the market. Sirius estimates that the new shares will be priced between 20p-30p. To put things in perspective, a price of 20p would be 54% lower than yesterday’s closing price of 36.75p. This explains why the share price has behaved the way it has in response to such excellent news from the company. If you offer anything at a discount, it’s value falls accordingly.
But what does this all mean for the humble private investor who already has a stake in the business? As CEO, Chris Fraser has long hinted, they haven’t been ignored in this process. Of the new share issue, roughly 10% (£40m) will be offered to those who already hold the shares. This will happen on 7 November unless the book build completes today, at which point the company is likely to launch the offer earlier than first thought.
Perhaps the most interesting aspect of this offer is the fact that existing holders will be able to apply for as many new shares as they desire. This may lead some to question whether they should jettison their existing holding and buy back in at the placing price, assuming this is lower than the price they originally paid.
So, I should sell?
Not so fast. I would strongly caution against any investors dumping their shares at such a crucial time simply because there are no guarantees of being able to repurchase their existing holding (and more) once the offer goes live. The issue is likely to be heavily oversubscribed and, as those who applied for shares in Royal Mail will remember, it’s sometimes the case that you get less than you may want. At times like this, it’s important to remember the two driving forces behind the market: fear and greed. Attempting any kind of ‘buyback’ strategy now would be rather risky and potentially undo a lot of the dedication early investors have shown to this point.
In my opinion, any Foolish investors out there with shares in Sirius Minerals should sit back and do nothing other than toast Chris Fraser’s words: “Once we have received shareholder approval, we want to get on with the job of delivering this compelling value proposition, not only for our shareholders but also for the North Yorkshire community.”
