Small companies with big futures ahead of them will always tempt investors. Don’t be dazzled by the potential riches on offer though. You can lose money just as quickly as you can make it, as investors in Sirius Minerals (LSE: SXX) know to their cost right now.
I’m one of them. How clever I thought I was when I bought the Yorkshire-based polyhalite potash miner a couple of years ago, after taking advantage of a dip in its share price to 36p. The danger with buying on a dip is the stock can always dip further. Perhaps we need a more dramatic word for the crash that has sent the Sirius Minerals share price down to 4.3p at time of writing, pretty much wiping me out.
Save your tears, because I did what every sensible investor should do when faced with a risky proposition, and only invested around 1% of my total portfolio value. I’m more concerned about the thousands of local investors who bought into what could have been a real success story, and Teeside, which will miss out on 1,200 sorely-needed jobs.
Now, as Rupert Hargreaves wrote on Thursday, Sirius Minerals isn’t out of options yet. Management is drawing up a comprehensive strategic review over the next six months. Hope springs eternal.
Unfortunately, it needs to come up with $3.4bn to get the mine operational, and start generating revenues. In today’s cautious market, that’s going to be a struggle. Thomas Cook couldn’t find £200m. It couldn’t get a government bailout either, so I’d rule out hopes of support on that front as well.
Some are pinning hopes on existing investors, such as Australian mining magnate Gina Rinehart, or the Qatar Investment Authority, swooping on the business. Market rumours have thrown up mining giant BHP and Aussie-owned Fortescue Metals Group. We all dream of being saved by a white knight, don’t we?
I’m not hopeful. Funding has been a problem right from the beginning. Sirius is down to its last £180m and CEO Chris Fraser is slowing the rate of cash burn to see if he can come up with a workable plan by Christmas. But it’s all a bit Mr Micawber, hoping something will turn up. If Fraser is waiting for markets to calm down, he could be in for a long wait.
Where there’s life there’s hope, and the merest whiff of a breakthrough could see the share price flying again. If you’re tempted, remember this. You may double your money if the stock jumps to 8p, or multiply it by nine if it ever returns to my entry price of 32p, turning £1,000 into £9,000.
However, the maths works in both directions. If the share price drops from 4p to 3p, you’ll have lost 25% of the money you’ve invested. And if it drops to 2p, or 1p, or zero… which is feasible.
When sentiment turns negative, it affects every part of the business. Many commentators are now pointing out there is no proven market for polyhalite, even if Sirius does start deliveries. The way things stand, we may never find out. Still, something might turn up.
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Harvey Jones owns shares of Sirius Minerals. 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.