If you were watching the Sirius Minerals (LSE: SXX) share price last week, you might have noticed something odd. As the FTSE 100 and markets across the western world dropped, shares in Sirius barely budged. It was only on Friday that they joined in and ended the week 16% lower.
Sirius is developing a polyhalite fertiliser deposit in North Yorkshire. The consensus is that it will offer robust operating margins for a long time, and Sirius has already negotiated offtake agreements for its product.
The snag is that the infrastructure is not built and Sirius has run out of money. It cancelled a $500m bond sale in September last year, blaming poor market conditions, and missed out on a $2.5bn credit facility as a result.
A strategic review announced in November that Sirius would attempt to raise millions to complete parts of the project, instead of trying to raise billions to complete the project in full. To get things moving a strategic partner was being sought to help with raising $600m and to help roll over some £500m of debt.
Anglo American (LSE: AAL) offered to buy the struggling miner for 5.5p a share. That is a 34% premium on the pre-offer share price. Employees and shareholders would receive £405m in total.
I have written previously that Anglo has the financial might to swallow Sirius, debt and all, as well as the expertise to complete the project. The Sirius board has pretty much said the alternatives are administration or accepting the offer, as money will run out soon. It should come as no surprise that they recommend shareholders accept the later option.
The votes are going to be counted tomorrow, but the offer is on shaky ground.
You cannot be Sirius
The reason that Sirius’s share price wobbled on Friday had little to do with the broad market sell-off. It had everything to do with fears that shareholders will vote against the takeover.
A lot of retail investors bought into the idea of Sirius. The company was once valued in the billions, and their positions would have looked equally epic. Now they are being asked to let it go for millions. A fair few I expect sunk more than they should have into Sirius and face losing a lot of their wealth. They want a higher price, as does at least one institutional investor. A hedge fund thinks 7p per share is more like it and will vote no. Brokers are reporting that 25% of retail investors are voting against the takeover, which needs 75% approval to pass.
If the offer is rejected, the company will likely go into administration and be run for the benefit of its creditors. Shareholders would lose everything in that scenario, and there is a strong chance it will happen.
Sirius shares are trading at 3.9p now. If the deal goes ahead, buying now could net a 41% gain. No deal will probably send the shares to zero in time. I don’t think this gamble is worth it. If you own shares in Sirius, then I think your best interests are in voting for the takeover, as I am doing.
There is a broader lesson here. Don’t make large investments in a single stock, especially risky ones like Sirius. Accepting a loss is never easy, but it hurts a lot less if you invest 1% of your wealth, rather than 10% or even 100%.
Right now, this ‘screaming BUY’ stock is trading at a steep discount from its IPO price, but it looks like the sky is the limit in the years ahead.
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James J. McCombie owns shares in Sirius Minerals and Anglo American. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.