When the Thomas Cook share price was tumbling, many were asking “how low can it go?” I think buying on that basis is a mistake, as the simple answer is “all the way to zero.” That didn’t actually happen, but those investing in Carillion with the same sentiment learned a painful lesson.
What’s this got to do with Sirius Minerals? Well, there seems to be plenty of people looking to buy right now, based on asking that very same question — how low can it go?
Sirius Minerals shares are down 58% over the past 12 months (and down 42% on the price I paid three years ago). That was largely down to the firm’s long-awaited financing deal for getting its North York Moors potash production on track bringing more onerous terms than many shareholders had hoped. Our holdings are being diluted more than we’d feared.
Then it got worse. The company withdrew its planned $500m bond offering because market conditions weren’t right, which was conditional for unlocking around $3.8bn of funding from JP Morgan. The shares crashed further, making August a month that most shareholders would probably prefer to forget.
If the bond offering doesn’t happen, what’s next? Could we be further diluted, the way Thomas Cook shareholders were, in the event of an even tougher new funding bailout? Or is it even possible for a new Carillion situation to arise and the company fail completely?
With the huge value of the resources in question and the drastic effect a complete failure could have on the potential for a massive jobs boost in the region, I doubt the latter will be allowed to happen. There have even been noises about government support, but it’s anybody’s guess what the government will look like tomorrow, never mind any further ahead.
I think the realistic options are that either Sirius will get its bond offering underway, perhaps this month, and the share price will pick up from its current low. Or that some alternative funding will be needed, and the price could tank even further. But what are investors actually doing?
The list of stocks most bought by DIY investors in August was dominated by FTSE 100 companies, with Vodafone leading the way, and National Grid and Lloyds Banking Group taking the next two places. But who was in fifth place? Why, Sirius Minerals.
A lot of investors were buying defensively by going for gold, or spreading their cash with index trackers. But there’s one thing I’m confident Sirius Minerals isn’t right now, and that’s a safety purchase. So there’s clearly optimism there.
What am I going to do? I still think the likelihood is Sirius will come through, will finalise its funding, and a few years down the line will be selling all that lovely potash fertiliser to its long list of signed-up customers. So I’m definitely not selling my shares.
But I really do think there could be more hardship in the coming weeks, and the price could dip even lower. The question I’m wrestling with at the moment is whether to buy more.
Alan Oscroft owns shares of Lloyds Banking Group and Sirius Minerals. The Motley Fool UK has recommended Lloyds Banking Group. 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.