At the start of September, I said that if I decided to buy shares in Sirius Minerals (LSE: SXX), I’d be looking for an entry price of about 25p.
The firm’s share price has fallen into my trading range remarkably quickly. News of a $400m-$600m funding shortfall sent the shares plummeting two days after my article was published.
The extra money represents about one third of the group’s current market cap. It’s needed because the 23-mile tunnel from the mine site to the firm’s Teesside dock facilities now needs to be larger than planned, and will take longer to complete.
The stock hasn’t yet recovered and is trading at about 23p at the time of writing. That’s a fall of more than 35% in just two months.
Today I want to explain why I think the shares have fallen so sharply and whether it’s a good buying opportunity. I also want to look at another fast-growing FTSE 250 stock whose share price has fallen today.
What next for Sirius?
Sirius boss Chris Fraser now needs to find an extra $400m-$600m, on top of the $3bn he was already planning to borrow this year.
Cost overruns aren’t a big surprise on a project of this size. I suspect what’s caused the share price to crash is the fear that the firm will have to raise the extra cash by selling new shares.
Sirius has already ruled out borrowing more than $3bn. So the extra cash seems likely to come from shareholders, or perhaps deals to pre-sell future production.
My verdict
I believe Sirius could be a decent long-term buy at 23p. But with production not due to start until 2021, I suspect there will be further bumps in the road. I wouldn’t buy this stock if I wasn’t happy to hold it for five to 10 years without dividends.
Another 40% faller
Shares in fast-growing firm Metro Bank (LSE: MTRO) have continued falling since I suggested taking profits in April. The bank’s shares are now down by almost 40% from their March high of 4,056p.
The share price is down by another 5% at the time of writing today, after the bank’s third-quarter results showed that tough competition for mortgage lending had caused profit margins to fall.
Net interest margin — a measure of how profitable a bank’s lending is — was 1.77% during the third quarter, down from 1.94% one year ago.
Profits +197%
Despite this, Metro is continuing to grow very quickly. New lending rose by 9% during the third quarter, while deposits grew by 8%.
The bank’s pre-tax profit for the first nine months of the year rose by 197% to £39.2m. Underlying earnings were 179% higher, at 32.6p per share.
Although this growth rate seems impressive, it’s worth noting that analysts are expecting the bank to deliver full-year earnings of 52.9p per share. In my view, this could be difficult unless performance improves significantly during the fourth quarter.
I’m not convinced
Metro Bank has grown aggressively since its flotation in 2016. But with profit margins under pressure, I suspect earnings growth could slow in 2019.
Even if the firm hits City forecasts, the shares look expensive to me on a 2018 price/earnings ratio of 46 and a 2019 forecast P/E of 25. There’s no dividend either.
For me, this is one to avoid.
