FTSE 250 future polyhalite miner Sirius Minerals (LSE:SXX) saw a 33% drop in its average share price in August from the month before. The fact that the overall FTSE 250 index only fell 3% during the time puts its sharp dip into perspective. So what really happened here? And more importantly, is this an investing opportunity or a time to dump the share? Let’s find out.
Stock market’s impact
The big drop came after the company announced early in the month that it’s suspending its proposed bond offering of $500m because of “current market conditions”. Broader markets weren’t inspiring much confidence at the time. In the first six days of August, the FTSE 250 had fallen 4% and FTSE 100 by around 5.5%. Whether the fall in Sirius’s share price was an extreme reaction to the overall market decline or specific to the announcement is a matter of speculation. I suspect it’s a bit of both.
Financing at risk
The implications of abandoning the bond offering could well have made investors panic. The pre-revenue company is heavily dependent on external funding sources. JP Morgan’s proposed funding to the tune of $3.8bn, announced earlier in the year, was a shot in the arm for it. However, the funding itself was dependent on the company being able to issue both new shares and bonds. It has achieved part of this, but risks losing the bulk of the bank’s offer if isn’t able to get this bond issuance off the ground.
This is, of course, a tricky situation for the company, and definitely one for investors. Yet I think it’s worth keeping in mind that it could be a game-changer in that it’s mining a cost-competitive, long-term resource. It promises to create large-scale employment and boost the economy. With this as the background, it’s unsurprising that has acquired political support. Some MPs are now lobbying for UK government support for the project, which could throw a lifeline for Sirius in the days to come.
It’s also worth remembering that the share has always been a volatile one, a fact I have pointed out earlier as well. Funding worries are keeping investors on tenterhooks, and any long-term investor in the share should continue to expect more such gyrations until the project’s future hits predictable ground. The challenge here is that even if you see value in the company, current financial instability threatens to grind it to a halt at any time.
To make an investment decision, it might help to remember that the company has now been around since 2003, which isn’t a short period of time. And it’s quite close to becoming a revenue generator, in 2021. Based on this history and its prospects, I would wager that it would ride out of the current situation. But investing in it requires nerves, if you normally prefer a steady stock.
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Manika Premsingh has no position in any of the shares 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.