Australian potash developer Salt Lake Potash (LSE: SO4) has seen its share price fall by 60% to less than 7p since 29 July. The drop came after the company said it could run out of cash before the end of 2021.
SO4 shares have now lost 80% of their value over the last 12 months. In my view, this latest news leaves shareholders in a risky position. New funding isn’t guaranteed. Is this a situation where it makes sense to buy the dip, or should I stay away?
Why has the SO4 share price fallen?
I think it’s fair to say that Salt Lake Potash’s problems have surprised investors. In June, chief executive Tony Swiericzuk said the company had had “concluded the debt financing process”, drawing the final stage of a $138m loan.
Mr Swiericzuk said he was looking forward to “ramping up SOP production over the next 9-12 months”.
Unfortunately, things haven’t gone to plan. The reason for this is that the company has had to delay its plans for harvesting potassium salts from Lake Way to allow higher levels of potassium to build up.
This salt provides the feed material that will be used to make potash fertiliser. Harvest delays mean that once the initial stockpile is used up, production will have to be paused until more feed becomes available.
Shareholders face a new risk
The good news is that the processing plant being built at Lake Way appears to be on schedule and near completion. Unfortunately, the cut to production forecasts means that extra funding will be needed to replace lost production revenue.
SO4 says that it’s in talks to agree financing and will release details when possible. That’s all we know at the moment.
My concern is that any new funding could require Salt Lake Potash to issue new shares. If this happens — after the recent fall in the SO4 share price — then existing shareholders could face heavy dilution.
What I’ll do
Salt Lake Potash has already been able to secure debt funding to build the Lake Way plant. Debt investors are generally quite smart, so this suggests to me that the company has a viable business model and good assets.
However, lenders often build safeguards into their loans to reduce the risk of future losses. There is no such protection for shareholders.
If SO4 cannot easily solve its funding problems, then one risk for shareholders is that the company may be sold cheaply to an institutional buyer who can fund it. This is what happened to Sirius Minerals in the UK last year, leaving many shareholders facing big losses.
Of course, I may be too cautious. It’s possible that Salt Lake Potash will secure the funding it needs on attractive terms. If that happens and production starts without further problems, then I think the SO4 share price could rebound strongly from here.
For me personally, the situation is too speculative. I’m worried about the risk of further unpredictable losses. So I’ll be avoiding Salt Lake Potash shares for now.
