With all the problems, controversy, and funding issues it has suffered, it is easy to overlook a key aspect of Sirius Minerals (LSE: SXX) – if investing today, at the low price of 3.5p, it may not in fact have a lot to offer.
Though financing issues are far from over, which could be detrimental to the chances of both the mine being built and the company existing in the future, I think recent news that Sirius is in active discussions with a number of potential investors to raise some £600m means things are looking up.
If investing in Sirius today, I see three potential things that could happen – this latest news seemingly making the two profitable scenarios even more likely than they were.
This is the best-case scenario, which admittedly is still a long way off. One way or another, Sirius will raise enough funding to continue building its mine. Even a small step in the right direction could bring momentum to financing, setting off a domino effect that would see everything get built.
If and when it is able to move into actual production, it will in effect be at a tipping point where it should be able to fund itself, expanding production in turn, and setting itself up as a large scale, profitable polyhalite miner.
In this scenario, investing at the current low price could reap massive rewards. If its shares were to reach only previous highs of 50p for example, every £1,000 invested now would be worth over £14,000. In the long run, with the potential for its stock to climb to £1 per share or higher as an actual producer, this could really make people rich.
This is the worst-case scenario, and one that though I think may be less likely than it was, is still a possibility. Sirius Minerals, either through entirely going bust, or perhaps more likely through some form of deal or arrangement, will delist its shares at a price of zero, or without having to compensate investors in any way.
A lot here will depend on the nature of financing offers and perhaps even government intervention, but I think offering zero value to shareholders is looking far less likely than it was. This leads me to my third scenario, which I would argue is at least as likely as this one, if not more.
and the ugly.
Given that Sirius is sitting on the world’s largest polyhalite deposit, and that it already has some infrastructure and facilities in place, it makes it a prime target for a takeover, merger, or strategic partnership. Almost all of these scenarios should be favourable to someone who invests at today’s low price.
CEO Chris Fraser has long had a positive belief in the company despite its funding problems, and said this latest effort to find a strategic investor should help de-risk the project and mean less dilution for shareholders. He will be fighting for the best deal.
This means any buyout or merger offer would likely have to offer shareholders a premium on today’s price. It is true in this scenario that those who invested at its height would lose money, but even an offer of just 5p to 10p per share would see anyone buying shares today double their money or more.
Personally I had already considered this a risk worth taking, and this latest news has reinforced this belief even more.
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Karl has shares in 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.