2019 was a truly dire year for the Sirius Minerals (LSE: SXX) share price, which collapsed after the failure of the firm’s $3.8bn stage two fundraising plan.
However, this story isn’t over yet.
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Sirius says that it has enough cash to last until April. The company has produced a new financing plan that’s designed to contain the risk faced by future financing partners. And I think we can be pretty sure that CEO Chris Fraser has spent his Christmas working hard to find new sources of funds.
Even a sniff of a financing deal would be likely to send the shares rocketing higher. In such a scenario, I wouldn’t be surprised to see the Sirius share price double overnight.
Should we be buying SXX stock in anticipation of a recovery? Here’s what I think.
Will the government rescue Sirius?
My colleague Rupert Hargreaves recently suggested that Sirius might be able to secure some financial support from the new government, which has promised to spend more on infrastructure.
However, the previous government refused to support the project, so I wouldn’t get too excited about this prospect.
Finally, even if the government does provide some support, this wouldn’t necessarily be enough to save existing shareholders from being diluted by new strategic investors.
Is the new plan better?
The key change in Mr Fraser’s latest financing plan is that funding for the shaft-sinking activity — which the company says is the riskiest part of the project — has been separated from funding for the mine build.
The plan now is to raise $600m to complete the mine shafts and then raise a further $2.5bn to fund the build-out of the mine.
One problem with this is that this new plan is likely to delay the date at which the project is fully funded, potentially by several years.
For shareholders, this is a serious concern. Until funding is secured, there’s no way to be sure that the company won’t run out of cash or be forced to sell a stake in the business to raise the funds needed to complete the mine. In either scenario, I think existing shareholders would be likely to face dilution and large losses.
Remember, the mine might eventually be built by different owners, leaving existing shareholders with nothing.
Should I buy Sirius Minerals shares?
Before investing in a mining project like this, I’d want to see proven market demand, predictable pricing and a short-term path to positive cash flow and profitability. Sirius Minerals offers none of these, in my view. The mine is expected to take around five years to complete and the firm’s POLY4 fertiliser has not been sold in such large volumes before.
Debt investors seem to share my view of the risks involved. Even the promise of a 15% interest rate wasn’t enough to persuade them to lend $500m to Sirius earlier this year.
I think there are only two likely outcomes for existing shareholders. One is that the company will go into administration, sending the share price to zero pence. The other possible outcome is that a new financing partner will be found who will demand a significant equity stake in the project, diluting existing shareholders.
For these reasons, I think that Sirius remains much too risky to consider as an investment.