Shares in Sirius Minerals (LSE: SXX) surged around 20% last week after the company announced the first stages of its long-awaited strategic review.
After informing investors it would be slowing the pace of development at its North Yorkshire polyhalite project in mid-September (after the company failed to get its stage 2 funding off the ground), the market has been eagerly awaiting further news from management.
At the beginning of last week, the company finally broke its silence by publishing the first part of that review.
A new plan
Rather than seeking a partner to fund the whole second stage of the project, Sirius is now looking for a strategic investor and financial investor to provide funding of $600m to “achieve the key de-risking milestone of first polyhalite.“
Management believes by meeting this smaller, initial milestone first, it will “significantly de-risk the proposition for senior debt providers at a later date and therefore facilitate the raising of senior debt to fund the remaining infrastructure.”
In my opinion, this is a very sensible plan. Sirius had previously been looking for around $3bn to fund the second phase of construction, a vast sum for such a small company in the early stages of development. It was always going to be an uphill struggle for the firm to raise this money, considering the risks involved for backers.
However, management’s new plan is to use this initial $600m to de-risk the project by proving that the mine can produce polyhalite. When this critical milestone is complete, I think the outlook for the company will significantly improve.
Time to buy?
Even though Sirius is still on track to run out of money in the first half of next year unless it raises new funding soon, I think its chances of success have greatly improved with this new plan.
$600m is still a sizeable sum, but it’s only 20% of that $3bn the business was initially seeking. That opens up the playing field for potential backers, especially for other commodity companies, with stronger balance sheets, which might be happy to stump up the extra cash in return for a piece of the business.
Still, while Sirius’ outlook has improved in my eyes until a backer has signed on the dotted line, the firm’s outlook remains uncertain.
The new funding target is a lot less demanding, but that doesn’t mean backers will leap at the chance. And until the funding is in place, the chances the company could run out of money in 2020 are still high.
On that basis, even though the Sirius share price has risen strongly over the past week, I’m not a buyer. I would much rather wait until we have clarity whether or not the company will survive the next 12-months before I take a position. Even though sitting on the sidelines might end up costing me money.
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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.