Is wannabe potash miner Sirius Minerals (LSE: SXX) a bargain or a basket case? The honest answer is I don’t believe it’s either.
However, the recent share price action could have led many investors to ask the question. Indeed, since flirting with the heady heights above 37p back in August 2018, the shares have plunged to stand close to 16p today.
Beware of shareholder dilution
However, not much has changed to bolster either the bargain or basket case sides of the argument. In November 2018, I punched out an article asking if the firm was worth its then-£1bn valuation as expressed in the market capitalisation. Back then, the share price stood at around 23p. Yet today, with the shares at 16p, the market capitalisation sits close to £1.12bn.
The market-cap is up a bit even though the shares are down. Such is the dilutive effect on existing shareholders when a company issues new shares, and Sirius Minerals has been doing just that as part of its latest round of fund-raising activities.
There’s no immediate gain in the value you’re getting for your money now the share price has fallen. But there’s arguably an increase in the probability of a successful mine-building outcome now Sirius has secured the funds it needs.
Commenting in the results announcement for a Firm Placing and Open Offer back in May, chief executive Chris Fraser said the company enjoyed a “positive” response to the launch of its Stage 2 financing solution, “which is key to unlocking the vast and long-term potential” of the potash project.
Financial de-risking in progress
By degrees, it seems, the financial and funding risk is being squeezed out of the equation and, as that process continues, it’s possible the share price could ease higher to reflect greater certainty. Fraser said the directors are now focused on securing the next phase of the company’s Stage 2 financing requirements.
Sirius has a vast appetite for financial capital and there’s a long road to travel before we see the first potash lifted from the new mine. A lot could go wrong in the meantime. One thing that seems certain is that any delays, overruns or unforeseen problems will net down to even more demands for capital.
I don’t see Sirius as an obvious bargain and I still believe the company has plenty of potential for shareholders. However, I see no hurry to invest in the shares because there’s likely to be more volatility ahead. I’d like to see the mine-building and infrastructure project much closer to completion before piling in so that most of the construction and finance risks are behind the company.
So, for me, it’s back to sleep and waiting, despite the apparent weakness in the share price recently.
