The Motley Fool

Warning: The Sirius Minerals share price could fall another 40%!

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Image source: Getty Images

This year, shares in Sirius Minerals (LSE: SXX) have crumbled. Year-to-date, shares in the mining company are down 32%. Over the past 12 months, the stock has lost 55% of its value.

This is despite the fact that Sirius has made a tremendous amount of progress on the development of its flagship North Yorkshire potash mine since this time last year. Construction at the site has continued, and the company has finally agreed on a financing package that will enable it to get to the production stage.

5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!

According to one leading industry firm, the 5G boom could create a global industry worth US$12.3 TRILLION out of thin air…

And if you click here we’ll show you something that could be key to unlocking 5G’s full potential...

Unfortunately, the funding has come at a cost. The $3.8bn funding plan required the company to raise $425m through the sale of new shares at 15p and a further $400m by selling eight-year convertible bonds.

This $825m cash call has significantly diluted existing shareholders, which goes some way to explaining why the stock has fallen so considerably over the past six months. The company’s market capitalisation hasn’t actually changed that much over the past year, it’s still around £1bn. But the number of shares in issue has ballooned to nearly 7bn, up from 4.7bn at the end of 2018.

Tremendous potential

Whenever I have covered Sirius in the past, I’ve always highlighted the company’s immense potential. If the enterprise does manage to develop its potash mine as planned, it could be worth $10bn-$20bn over the long term, which hints at substantial returns for shareholders from current levels.

However, dilution has always been (and will continue to be) a problem for shareholders. Sirius has leaned heavily on its investors over the past five years to fund its operations by issuing new shares. For example, back in 2013, the company had just 1.5bn shares in issue. By the end of 2016, the figure had grown to 2.5bn, and then 4.7bn by the end of 2018. 

As Sirius has continued to issue new shares, the percentage of the business each share is entitled to has dwindled. I calculate that at the current market capitalisation of £1bn, each share would be worth 67p today had the company kept its share count at the 2013 level of 1.5bn — that’s 380% above current levels.

Further declines ahead

It doesn’t look to me as if this trend is going to end anytime soon. The London-listed miner needs to raise a further $500m in debt by the end of September so it can access the $2.5bn corporate overdraft facility being offered by JPMorgan. 

If Sirius cannot find creditors who are willing to lend it the money, it could be forced to go back to shareholders. A cash call of this value would result in several billion more shares being issued, which would dilute shareholders once again and could push the share price down to 10p.

Although this is the worst case scenario, it’s something I think long-term investors should be aware of. Sirius could still generate enormous profits for investors, but the company has a long way to go before it’s self-funding. And that’s something I’m concerned about.

“This Stock Could Be Like Buying Amazon in 1997”

I'm sure you'll agree that's quite the statement from Motley Fool Co-Founder Tom Gardner.

But since our US analyst team first recommended shares in this unique tech stock back in 2016, the value has soared.

What's more, we firmly believe there's still plenty of upside in its future. In fact, even throughout the current coronavirus crisis, its performance has been beating Wall St expectations.

And right now, we're giving you a chance to discover exactly what has got our analysts all fired up about this niche industry phenomenon, in our FREE special report, A Top US Share From The Motley Fool.

Click here to claim your copy now — and we’ll tell you the name of this Top US Share… free of charge!

Rupert Hargreaves owns no share mentioned. 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.

Our 6 'Best Buys Now' Shares

Renowned stock-picker Mark Rogers and his analyst team at The Motley Fool UK have named 6 shares that they believe UK investors should consider buying NOW.

So if you’re looking for more stock ideas to try and best position your portfolio today, then it might be a good day for you. Because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply click below to discover how you can take advantage of this.