Though I like to portray myself as a cool, calm long-term investor with no interest in short-term share price moves (that really is what I try to achieve), I must make two minor confessions.
When I bought some Sirius Minerals (LSE: SXX) shares in December 2016 at 18p, I was actually quite excited to see them climb quickly to over 30p . That’s despite knowing the actual value of the company wasn’t going to be known for some years and I expected a lot of volatility.
And I also admit to some disappointment after seeing the price fall all the way back to a little over 19p today, pushed down by uncertainties surrounding the second phase of the company’s financing.
Why the surprise?
But, to echo the famous words of US Secretary of Defense Donald Rumsfeld, how Sirius Minerals was going to be financed all the way to reaching actual potash production was always a ‘known unknown’. So why were investors seemingly not worried about that crucial financing round when it was still a couple of years away, but appear to be panicking now that we have inevitably come very close to it?
Part of it’s down to costs having overrun, to the tune of around $400m-$600m. But this is something anyone with any experience of watching a major engineering project must have known was inevitable, surely?
It’s pretty much guaranteed that any engineering project will overrun, and I’m pleasantly surprised that it’s been by only a relatively modest amount.
Dilution
The big uncertainty now concerns the dilutive effect of new financing. It’s one thing if the company gets the cash it needs to progress, but if the deal is strongly in favour of the new financiers, will it dilute out the holdings of existing shareholders?
Those fears have been strengthened by the cost overruns, and the resulting delay to securing a new deal — which had originally been targeted for the end of 2018.
New deal?
It’s all taking part right now, and the news we’ve had in March, of an alternative proposal, sounds positive to me.
The company “has been pursuing a senior debt financing with a group of prospective lenders since 2016,” which was “adjusted on 22 January 2019 to focus on a US$3 billion multi-tranche structure.”
Now, it seems, Sirius has received “a conditional proposal from a major global financial institution” for alternative funding. This would involve a senior debt structure in place of the previous mooted deal, which Sirius reckons “potentially offers a more flexible and attractive solution.”
Power shift
When potential lenders are competing with each other to fund the company, I’d say that swings things back towards the interests of existing owners, with the board now having the luxury of choosing what it sees as the best deal.
The original negotiations are now on hold while this alternative is further pursued, with a target of the end of April for firming up the potential deal.
So we’re going to have to wait a little longer than expected. But I see it as a positive development, and it reinforces my opinion that Sirius Minerals’ shares will be worth considerably more than today’s price in five years’ time.
