2020 has started on a good note for the challenged polyhalite mining project Sirius Minerals (LSE:SXX), with FTSE 100 multi-commodity mining giant Anglo American making a move to acquire it. I have been positive on SXX for some time now, and less than a month ago, had written how it could turn around in 2020. Ten days into the year, and the stock price has soared by over 57%. So, what should the investor do now?
Dissecting the offer
I’d start by looking at the not-yet-firm offer closely. AAL is potentially offering 5.5p a share, a level SXX hadn’t seen since mid-September when it announced its strategic review following two failed fundraising attempts. In a press release, Sirius Minerals acknowledged that the price on offer is at a premium compared to the levels seen since.
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Given that SXX sounds positive on the proposed offer price, I believe it’s likely that the deal could go through, at the very least at the current offered price. This is particularly because of the deadline looming in front of Sirius. The company runs out of cash in March, and it needs to secure funding before that time to continue operations. I think it might be too much of a gamble to consider other options, like another round of fundraising, when there’s already an investing option on the table. There might be other bidders in the wings that we don’t know about yet, but that’s all just speculation.
Next investing steps
If you, like me, had managed to buy the share when it was at its really low levels late last year, the offer is a good one and you are sitting on appreciable capital gains now.
It’s likely that many investors aren’t feeling quite as optimistic about SXX’s long-term prospects yet and are in fact still nursing losses from investing in the share. The average share price for SXX since it was first listed in 2005 is 13.35p. This means, that on average, an investor holding the shares is at least 58% worse off with the level of the present offer.
As tempting as it might be to throw in the towel, I would encourage holding tight if you are in this latter category of investors. Anglo has made an initial bid, and as is often the case in negotiations, it’s entirely possible that Sirius Minerals could end up with a higher final price even with its limitations. And I can’t see why the stock price would decline materially from here, barring a broader market fall. It’s best to wait until the first week of February, by which time a formal proposal is expected to come through and then take a call.
For me personally, I am only encouraged to buy more of SXX’s shares for three main reasons: 1) I believe it’s very unlikely to go bust now, 2) because of its long-term potential to be game-changing for the fertiliser industry, and 3) the fact that its revenue pipeline is building up slowly but surely. As I mentioned earlier, I originally bought at very low levels, so this is a risk worth taking I believe.
There are less risky FTSE 100 options to consider but that SXX can provide higher return for higher risk over the long-term is worth bearing in mind.