Earlier this week, Sirius Minerals (LSE: SXX) dropped a bombshell on its shareholders. The company announced it has “not been able to deliver” its Stage 2 financing plan and has taken the hard decision to reduce the rate of development of its flagship North Yorkshire potash project.
The future of the SXX share price, which opened Thursday at only a little over 4p (a year ago it was almost 30p), is now uncertain. Management is planning to conduct a comprehensive strategic review of operations over the next six months to try to come up with a plan, but it doesn’t look good.
After repaying $400m of convertible bonds due 2027, issued earlier this year, the firm’s cash balance was just £180m at the end of August. Only £117m of this balance is uncommitted. With several billion required to finish its mining project, management either needs to come up with a new financing plan, or the business could go bust.
An alternative plan
Since the company’s announcement at the beginning of this week, City analysts have been trying to guess how Sirius might go about raising the money required to complete its project. Solutions include a government bailout and a rights issue, which would allow shareholders to support the business for a bit longer while it finds another solution to its financing problems.
The problem is, after recent declines, the company’s market capitalisation is just £310m. With around $3bn required to finish the project, Sirius would have to issue billions of new shares to raise money, diluting existing shareholders substantially. A smaller issue of around $500m might be possible, but it remains to be seen if shareholders would support this after the firm’s recent failures.
Government support also seems unlikely. The state has been unreceptive up to this point. In my opinion, it’s unlikely policymakers are going to change their minds now.
Sirius’s one saving grace is the fact it has some big names on its shareholder register. The Qatar Investment Authority acquired a 3.3% stake as part of its $425m share placing earlier back in Q1. On top of this, Australian mining magnate Gina Rinehart also supported the business in September 2018 with a $250m emergency cash injection.
These deep-pocketed backers might come to the miner’s rescue over the next few weeks, although they could also just walk away. Losing $250m might hurt Rinehart, but it’s only a fraction of her $15bn estimated net worth. The same is true for the Qatar Investment Authority, which currently manages more than $300bn. These investors might be happy to cut their losses and walk away. In other words, I wouldn’t bet on a bailout from these parties.
The bottom line
All in all, it looks as if Sirius’s options are very limited at this point. It might be able to get a last-minute financing plan in place, or a government backstop, but that’s a big if. The other option is bankruptcy.
With this being the case, I don’t think its the end for the SXX share price just yet. But I’d avoid the stock at all costs because the risks of failure are just too high. There are plenty of other investments out there offering more significant upside potential and greater protection against the downside.
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.