Last week, Sirius Minerals (LSE: SXX) announced the details of the second funding package the company will use to bring its flagship North Yorkshire potash mine into production. The long-awaited package is a mix of debt, equity and a substantial loan facility provided by Wall Street giant JPMorgan.
Unfortunately, the market has not taken this news well, and its shares have since slumped. The question is, should you take advantage of the opportunity to snap up shares in the future mining giant at a discounted price?
Investor exodus?
There are several parts to Sirius’s $3.8bn Phase 2 funding package. The first two stages, a share placing and convertible bond issue, are already complete. On Wednesday last week, the firm placed $425m of shares and sold $400m of eight-year convertible bonds, raising a total of $825m. The shares were placed at 15p, the bottom end of the company’s indicative range of 15p-18p, which seems to explain some of the recent share price declines.
There’s also the problem of shareholder dilution to consider. At the end of 2018, the firm had around 4.3bn shares in issue. To get away with raising $425m from investors, the company had to place nearly 2bn new shares, diluting existing holders by almost 50% (without factoring in the dilution from the convertible issue). With the new shares in issue, each share is worth less as shareholders have a smaller claim on the business overall.
The next hurdle the company needs to overcome is raising $500m in the debt market by the end of September. That’s on top of the funds already raised. Management needs to complete this debt issue to access a $2.5bn corporate overdraft facility being provided by JPMorgan, which will hopefully get the firm to first production stage in 2021, assuming there are no additional delays.
A good deal?
The fact that Sirius has found a backer for its project is undoubtedly good news. However, the company isn’t out of the woods yet. Even the most optimistic forecasts suggest it will be at least two years before cash starts to flow into the group’s bank accounts, and only then will it be able to start paying off creditors.
Management will have to balance the books carefully until this point. When it completes the second bond issue, Sirius will have $1bn of convertible and non-convertible debt, compared to a market capitalisation of $1.1bn at the time of writing, excluding the $2.5bn credit facility. That’s a tremendous amount of debt, and it doesn’t give the company much room for manoeuvre if it runs into problems at the Woodsmith mine.
Generally, I like to stay away from companies that have more debt than they’re worth and, with this being the case, I’m not a buyer of Sirius at current levels.
Even though the second stage of funding package will allow the company to progress towards production, there’s still plenty that can go wrong over the next two years. And there’s no guarantee the business will survive long enough to see production commence at Woodsmith.
