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Is the Sirius share price finally worth a gamble?

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I like it when share prices drop. Not the shares I own of course, but stock I might consider buying. News-driven (or perhaps fear-driven) price declines usually mean one of two things – a great opportunity as a stock gets oversold, or the beginning of the end for a company’s time on the stock exchange.

Looking at Sirius Minerals (LSE: SXX), though I can imagine a scenario where its shares recover and the mine opens, I think that is the less likely of the above two choices.

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It takes money to make money

Sirius is suffering the same problem that hits many smaller mining companies – it is sitting on a massive deposit of natural resource that if it could be brought into production, would make the company lots of money. Unfortunately it will take a large amount of cash to be able to actually do this.

Last week, the chances of Sirius ever raising enough finance to open its mine took a turn for the worse after it was forced to pull its planned $500m bond issue and failed to receive government support. The bond would have have unlocked a $2.5bn financing package from JP Morgan, which is now on hold once again.

What is interesting though, is that CEO Mark Fraser has said he is still confident the mine will open. Admitting this latest setback was “an incredible challenge”, he took a confident tone, saying “we have to adapt and evolve”. Indeed, putting his money where his mouth is, a regulatory statement showed his family trust purchased 250,000 shares at about 4p per share.

Problems for shareholders

The major problem for current shareholders and potential investors as far as I can see, is that even if some form of financing can be raised, the terms of it may still mean dilution of current shares (if there is a new share issuance), though as it stand this seems highly unlikely given the lack of appetite. it could also mean delisting or a private buyout that may or may not offer fair terms.

Fom this point on, it may be all-or-nothing news for investors. With the failed bond issuance now leaving the stock at 4p, it is hard to envision any news that would see the price drop much lower – that is to say, news that would spur the shares to lose ground rather than just go to zero.

Any further bad news for shareholders will probably mean the delisting of the stock or a poor buyout. On the flip side, it probably wouldn’t take much positive news to help the shares gain some ground. Talk of raising money, lenders coming to terms, or even the government succumbing to political pressure to support Sirius may all help the stock.

Of course as a potential investment, we are not in fact talking of investing at all, but rather gambling. In all honesty, I can see more than one potential scenario that would have the stock recover, have the mine move into production and see shareholders making lots of money. But how likely is this? As I said, it would be a big gamble.

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Karl 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.

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