The Sirius Minerals (LSE: SXX) share price rose by 35% on Wednesday morning, when the Yorkshire-based firm revealed it was in takeover talks with FTSE 100 miner Anglo American.
If confirmed, the proposed cash offer of 5.5p per share would represent a 60% premium to the average SXX share price over the last three months. In total, Anglo would be paying about £386m for the shares and the right to develop the Woodsmith mine.
Management have said that they will support the offer, if it’s confirmed. Under UK takeover rules, Anglo American has until 5 February to make a firm offer or withdraw.
Here’s what this week’s news means, and what I think shareholders should do now.
A big disappointment
I know that many private investors are sitting on big losses on this stock. The SXX share price hasn’t traded much below 7p since 2010 and reached highs of 45p in 2016.
Boss Chris Fraser did a good job of selling the project to the local community. Many people believed that this would be a long-term cash cow, generating valuable employment and dividends for shareholders.
If the mine is developed, then it should still make a valuable contribution to the local economy. But the project’s $3bn+ financing requirements were always going to be a challenge, especially after management announced early cost overruns in September 2018.
As I’ve discussed here on a number of previous occasions, I couldn’t see how the mine could be financed without outside investors taking ownership of at least part of the project. That seems to be the situation we’re in now.
Are management selling too cheap?
I’ve seen suggestions on social media that management are selling the business too cheap – or that Anglo’s potential offer of 5.5p is just an opening bid. Unfortunately, I think that’s unlikely to be true.
The harsh reality is that without new funding, Sirius could run out of cash by April and be forced into administration. In this situation, the company’s existing lenders would likely to take a leading role in looking for a buyer. Small shareholders would not be able to provide the cash needed to develop the project on, so would get nothing.
My personal view is that Anglo’s proposed offer is very fair, given the project’s funding requirements. I’d be very surprised if a higher bidder appears.
What should you do now?
As I write, SXX shares are trading at about 5.4p, just below Anglo’s proposed 5.5p offer level.
If you’re a Sirius shareholder, you could sell now into the market and get most of the proposed bid cash.
Alternatively, you could hold on and hope that the takeover is confirmed (or that a better offer emerges). In that case you’d get the full amount in cash without having to pay any dealing charges.
Ultimately it’s your choice. I can’t tell you what to do.
Unfortunately, Sirius has provided us all with a painful reminder of why it’s important to have a diversified portfolio.
Loss-making early-stage businesses like Sirius are always risky and can deliver big losses unexpectedly. In situations like this, I reckon it’s best to only investing money you can afford to lose.
Roland Head 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.