It’s been a sad year for Sirius Minerals (LSE: SXX) shareholders. The potash firm’s share price has fallen by more than 80% to just 3p at the time of writing.
If you’re a shareholder, you may think that it’s best to wait and see if boss Chris Fraser can rescue the firm with a new funding deal.
Unfortunately, I think this decision is likely to lead to even bigger losses. Here are three reasons why I’d sell today.
1. Cash is running low
On 17 September, Sirius admitted that its $3.5bn financing plan had failed. As of the end of August, the firm had £117m of uncommitted cash. By scaling back construction work, management said this would be enough to provide six months to review “all available options for the Company”.
Nearly two months has passed, without a word.
Two attempts at financing the mine have now been abandoned. Finding a third option isn’t going to be easy. I think there’s a real risk the firm will run out of cash and go into administration. The shares would then go to 0p.
2. Sirius needs to repay its loans
The stage two financing plan for the mine would have seen the Sirius take on a lot of new debt. But it’s worth remembering that the company has already borrowed a fair amount of money.
At the end of June 2019, the company reported £180m of loans, excluding the loans that were setup as part of the stage two financing (these have been cancelled). In addition to this, Sirius also recorded a £223m royalty financing liability. This relates to the $250m royalty payment received in September 2018, which was “secured over the assets of the project”.
So in total, I reckon that Sirius owes creditors about £400m. As things stand, these parties may not get their money back. But they’ll be keen to recover some cash if possible, and their claims will rank ahead of those of shareholders.
3. What about a rescue deal?
We know that the mine will cost about $3.5bn to complete, based on Sirius’s plans. Even if a smaller, cheaper project can be devised, it will still need new funding.
Could the project be saved by a rescue deal with a new investor? The main possibility I can see is that another mining company or an investment group might make a bid for the firm’s assets. This would allow Sirius to repay its existing lenders. The new owners could then arrange fresh financing for the mine.
However, I wouldn’t expect a deal like this to include much cash, if any, for shareholders. Indeed, I suspect Sirius would be left as a shell company that would then go into administration.
Whatever happens, I expect that any new financing deal will include a large ownership stake for the new investors. This means that existing shareholders will be heavily diluted and possibly squeezed out altogether.
Why I’d sell today
Crystallising a big loss is always painful. But in my opinion, continuing to hold Sirius stock is a pure gamble.
I expect the Sirius share price to continue falling. In my view, this remains a stock to avoid.
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Roland Head 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.