The Motley Fool

Why I’d still shun the Sirius Minerals share price at 3.6p

Image source: Getty Images

It may be pushing it a bit to say I’d rather eat raw turkey giblets than buy shares in Sirius Minerals (LSE: SXX), but it’s not too far from the truth.

The shares were trading at 36p when I turned bearish on the stock last year, and while they’re now trading at just 3.6p, I think the risk of a shareholder wipeout has increased more than tenfold. Here’s why I believe the risk is sky high, and why I continue to see Sirius as a stock to avoid.

5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!

According to one leading industry firm, the 5G boom could create a global industry worth US$12.3 TRILLION out of thin air…

And if you click here we’ll show you something that could be key to unlocking 5G’s full potential...

Plans A and B

The events of the last year have made it clear, in my opinion, that lenders are unwilling to supply Sirius with debt on acceptable terms. Plan A, for $3bn borrowings, failed to materialise by the end of 2018, after two years of negotiations with a consortium of potential lenders.

The company then began discussions on a revised Plan A with the consortium. However, in March, it announced “it is pausing discussions” to pursue “a conditional proposal from a major global financial institution [JP Morgan Cazenove].”

Sirius commented that the new proposal “potentially offers a more flexible and attractive solution,” implying this represented a new Plan A (rather than a Plan B in the absence of progress with the original consortium). However, it now looks very much like it was a Plan B, because when it fell apart due to Sirius’s failure to get a $500m bond offering away, there was no resumption of the “paused” discussions with the original consortium.

Plan C

Sirius is now pursuing Plan C. It’s said it needs “to secure additional external financing in order to allow it to continue operations after 31 March 2020.” Its auditor has warned this represents “a material uncertainty which may cast significant doubt about the group’s ability to continue as a going concern.”

Sirius is desperate to raise $600m by March to keep the lights on. It’s looking for either a strategic investor or a structured debt financing package, “either of which may incorporate the issue of new equity or an equity-like component to the financing package.”

In view of Sirius’s serial failure to secure debt financing, I think a big equity issue is needed. Furthermore, with the clock ticking on its ability to continue as a going concern, I see no rational reason why a potential new equity investor wouldn’t take things to the wire, and offer a deal at the 11th hour that leaves existing shareholders owning only a token percentage of the company.

Of course, if there’s no interest at all, Sirius would run out of cash and shareholders would suffer a complete loss.

More signals flashing red

I see zero prospect of the government’s Infrastructure and Projects Authority (IPA) participating in the mooted $600m financing. It’s not a ‘state aid’ body and must make decisions on a commercial basis. It was part of the original consortium that failed to reach a deal with Sirius, and also declined support when the JP Morgan Cazenove package hit the skids.

Finally, Sirius’s existing debt is dealing at a deep discount to par. When lenders, who rank above shareholders, are pricing a recovery of only pennies in the pound on their loans, equity holders should be very afraid. The risk of a total or near-total loss makes Sirius uninvestable, in my view.

“This Stock Could Be Like Buying Amazon in 1997”

I'm sure you'll agree that's quite the statement from Motley Fool Co-Founder Tom Gardner.

But since our US analyst team first recommended shares in this unique tech stock back in 2016, the value has soared.

What's more, we firmly believe there's still plenty of upside in its future. In fact, even throughout the current coronavirus crisis, its performance has been beating Wall St expectations.

And right now, we're giving you a chance to discover exactly what has got our analysts all fired up about this niche industry phenomenon, in our FREE special report, A Top US Share From The Motley Fool.

Click here to claim your copy now — and we’ll tell you the name of this Top US Share… free of charge!

G A Chester 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.

Where to invest £1,000 right now

Renowned stock-picker Mark Rogers and his select team of expert analysts at The Motley Fool UK have just revealed 6 "Best Buy" shares that they believe UK investors should consider buying NOW.

So if you’re looking for more top stock ideas to try and best position your portfolio in this market, then I have some good news for your today -- because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply enter your email address below to discover how you can take advantage of this.