For years now, Sirius Minerals (LSE: SXX) – which is developing the world’s largest and highest-grade deposit of polyhalite (used to make fertiliser) in North Yorkshire – has been one of the most popular stocks on the London Stock Exchange. Clearly, many UK investors see Sirius as a stock with huge, life-changing potential.
Yet as you are probably aware, the shares have delivered disappointing returns for investors recently. Here’s a look at how much £1,000 invested in SXX shares a year ago would be worth today.
One year ago, Sirius shares were changing hands for around 22p. Had you invested £1,000 in the stock at the time, you would have picked up around 4,545 shares (I’ll ignore trading commissions for simplicity).
Looking at Sirius’s one-year share price chart, there would have been several occasions when you were actually sitting on a profit had you bought this time last year. For example, in April, the shares briefly spiked up to around 27p on the back of optimism over a funding deal for the company.
However, the second half of 2019 was nothing short of a disaster for the stock, as the company cancelled a planned $500m bond sale (it needed to raise this cash to get access to £2.5bn in funding from JP Morgan) due to global market conditions and the ongoing uncertainty surrounding Brexit. This saw SXX shares plummet to near 2p at one stage.
Today, SXX shares trade for 3.8p. This means that, had you bought a year ago, you’d now be sitting on a loss of approximately 83% (note that I have ignored the $425m equity raise in May that enabled institutional investors to pick up shares at 15p, as well as the one-for-22 open offer to existing shareholders in order to keep things simple).
Of course, as Sirius is not yet profitable, there are no dividends here to soften to blow. So that means that your £1,000 investment in SXX would now be worth just £170. Ouch.
So what are the lessons we can learn from SXX’s collapse?
Well, to my mind, the biggest takeaway is that investing in smaller companies (particularly those that have no revenues or earnings) can be risky. With these types of companies, you should only invest what you can afford to lose. To reduce your risk, it’s sensible to diversify your capital over many different companies.
Secondly, Sirius’s collapse highlights the risks associated with investing in small mining companies. While there’s certainly money to be made investing in small-cap miners, it’s important to be aware that these stocks are notoriously volatile. With miners, there’s an awful lot that can go wrong. Quite regularly, small firms in the sector experience operational or funding challenges.
Ultimately, if you’re looking to make big gains from smaller companies, I think you’re better off focusing on entities, outside the mining sector, that are already profitable and growing quickly. Investing in these kinds of businesses has certainly worked for me.
Edward Sheldon has no position in any 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.