When a firm offers shares to the public, it is known as an initial public offering, or IPO. It may decide to go public for many reasons, such as wanting to gain more funding to pursue projects, or to enable an exit strategy for some of the founders/early investors.
The bottom line is that the IPO is not the beginning of the company, it may have been running for decades before. But from an investor’s point of view, the IPO is the start of when a ‘fair value’ can be attributed to the firm. From then on, the market of buyers and sellers will dictate what is perceives to be the value of the company, shown by the current share price.
The value of Sirius Minerals (LSE: SXX) has been very volatile since its IPO, with the market showing that it does not take any prisoners when it comes to large intraday price swings. But if you had invested £5,000 into the IPO back in the summer of 2005, how much would it be worth now?
Well, in short, less than you bought it for. If you had bought £5,000 worth of shares at the IPO in August 2005, it would currently be worth £2,850. This reflects the IPO price of 6.46p per share and the closing price from Friday of 3.69p per share. The drop of 43% does not tell the whole story of the 14-year history, but does reflect current sentiment.
Higher then lower
Sirius Minerals started out as a promising AIM-listed stock, falling under the category of being a mining/exploration company. From 2010 onward, the firm focused a lot of time and energy on its would-be polyhalite mine in the North Yorkshire moors national park.
Indeed, it raised well over a billion pounds to help fund the above project, which boosted it into the FTSE 250 in mid 2017. In the summer of 2017, the share price climbed to around 33p per share, over a five-times return from the IPO price in 2005.
Some investors may have exited at those highs a couple of years ago, but I imagine most held on, buoyed by the prospect of the mine coming online in the years ahead and having the potential to reap even larger rewards.
Up until the summer of last year, the share price was still well above 30p, but this is when the problems started. News that the company had pulled a junk bond issuance totalling around $500bn due to current market conditions saw the share price plummet. Without this, funding started to dry up for the mine, even with it rumoured to be coming online as soon as 2021.
The share price has fallen throughout 2019, dipping below the IPO price in September. With concerns that the company may indeed run out of money completely, it is tough to make an investment call on this.
I would steer clear of investing in Sirius now, and think this is also an object lesson for anyone buying into a company with no revenue or profits and a promise of riches to come. A small percentage of your portfolio might reap rewards if invested in such stocks. But for the most part, I would look for less risky companies that could still offer attractive share price appreciation. To this end, I wrote of my stock of the month for December — Greggs.
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Jonathan Smith and 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.