Shareholders in Sirius Minerals (LSE: SXX) are enduring a nail-biting wait to find out whether the company will be able to raise the $500m it needs this month.
In August, the company failed to seal the deal. It blamed market conditions and promised another attempt in September. But the Sirius share price has fallen by 30% since the start of August, as the market prices in the risk that the firm could run out of cash at the end of September.
Failure to raise $500m from bond investors will mean that the $2.5bn bank facility agreed with lender JP Morgan may be withdrawn. This would leave Sirius $3bn short of the total needed to complete the build of the Woodsmith mine in North Yorkshire.
All or nothing?
For shareholders, this could be very bad news indeed. Although the mine might find a new owner or financial backer, I would expect shareholders to be wiped out in such a scenario.
Borrowing money to build the mine is proving more difficult than expected for two reasons. Firstly, Sirius has no revenue or cash flow. Secondly, the firm’s Polyhalite fertiliser has not previously been sold as a mass-market product, so market appetite and future pricing is uncertain.
In my opinion, Sirius shares are little more than a gamble at the moment. If the company gets the cash, things could proceed as hoped. But if financing problems continue, the shares could be worth nothing.
I don’t see this as an attractive investment. I think there are much better opportunities elsewhere in the natural resources sector, including my next pick.
North Sea gusher
The Cairn Energy (LSE: CNE) share price is up by 6% at the time of writing, after management at the FTSE 250 oil and gas firm increased production forecasts for the year.
Production rose by 15% to 23,700 barrels of oil equivalent per day (boepd) during the first six months of 2019. This generated revenue of $257m and a net cash inflow, after production costs, of $177m.
Today’s results also mark a welcome return to profitability for the group, after five years of investment during which the firm has burned through more than $1bn of cash.
Cairn’s production gains come from its North Sea assets, the Catcher and Kraken fields. Catcher is said to be performing well and earlier difficulties at Kraken now appear to be resolved. These fields, which are operated by the firm’s partners, are generating valuable cash flow.
Could you get rich with CNE?
Investors’ biggest hope for long-term riches from CNE is probably the SNE field, which lies off the cost of Senegal. Cairn has a 40% interest in this project, which was the world’s largest oil discovery in 2014. SNE is expected to produce 100,000 bopd, with first oil targeted for 2022.
Is this the right time to buy Cairn? In the short term, I think the shares look fully priced, on 22 times 2020 forecast earnings.
However, if SNE is a success, then I believe the CNE share price could offer long-term value.
