Sirius Minerals (LSE: SXX) shocked its investors and the rest of the market at the beginning of this month. The company announced it was pulling a $500m bond sale required to fund the next stage of its massive fertiliser mining project.
Only a day after the Financial Times reported that institutional investors were demanding an interest rate of as much as 13% of the debt, Sirius announced it had decided to put the deal on ice due to market conditions.
Postponing a planned bond offering in times of market volatility isn’t unheard of. In fact, companies delay deals like this all the time. And it’s in the best interests of shareholders. If, for example, Sirius can get investors to agree to an interest rate of just 10% after waiting for a month or two, the firm could save over $100m in interest costs over the life of the bond — those are the sort of numbers that could make or break a project.
Running out of cash
The problem is, Sirius can’t really afford to wait a couple of months for the markets to calm down. According to the documents provided to investors alongside the bond offering, management reckons the company will run out of cash at the end of September if it doesn’t raise additional funds.
This isn’t the first time Sirius has mentioned the end of September deadline. In its second-quarter progress update, the firm said the net proceeds from its $425m equity offering and $400m convertible bond offering, completed as part of the Phase 2 financing at the beginning of the summer, “provide the company with sufficient cash to progress the project in line with key milestones to the end of September 2019.”
So the end of September seems to be the deadline for the company to unlock the rest of the financing to complete the project.
Waiting for calm
For his part, CEO Chris Fraser is confident the company can pull a rabbit out of the hat during the next few weeks. He believes if markets calm down after the summer break, Sirius will be able to get its bond offering off the ground.
At this stage, that’s a big IF. It looks as though the outlook for the global economy is only deteriorating, and the trade war between the US and China doesn’t look as if it’s going to come to a head anytime soon.
Because it’s so difficult to predict what the future holds for financial markets, I think at this point it’s almost impossible to say whether or not Sirius will be able to raise the required financing next month.
That said, if it can’t, I don’t think the company will collapse into bankruptcy immediately. Management will most likely tap shareholders for more cash to keep the lights on while it continues negotiating with bankers. This will stop Sirius from entering administration, but further dilution will weigh on the miner’s already depressed share price.
To put it another way, I think it’s unlikely Sirius’s share price will fall to zero in the next few months, but it could decline a lot further from current levels.
