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Why I think the Sirius Minerals share price could fall 60% in 2020

The Sirius Minerals (LSE: SXX) share price could be on the verge of collapse, despite recent news about a possible takeover.

Last year was supposed to be a transformational one for the group. Management was planning to get the second stage of financing locked in to complete the firm’s flagship North Yorkshire potash mine development and move forward with the project.

However, after the company had to pull a planned bond issue over the summer, Sirius’s development plan fell apart.

Financing

Management has been struggling to pull together some form of financing ever since. Some good news came at the end of November when the company announced that it was in “active” discussions with several potential partners to raise $600m.

The plan is to use this capital to fund shaft sinking and access the deposits of polyhalite Sirius is trying to mine. In doing so, management believes that the company would be able to prove to outside investors that it is worth backing and find the rest of the $2.5bn required to finish the project.

There has been no further news on this front since November.

However, this week it emerged that global mining giant Anglo American is considering a bid for Sirius. According to the initial announcement, Anglo is in advanced discussions with Sirius about a possible offer at a value of 5.5p per share in cash valuing the entire issued share capital of Sirius at approximately £386m.

This deal makes a lot of sense for several reasons. For a start, Anglo has far more experience in the mining industry than Sirius, it also has deeper pockets and a global network of suppliers. Anglo says it identified Sirius as being of “potential interest some time ago,” due to its unique mine asset. It seems management has been waiting for the right opportunity to pounce. 

That said, there’s no guaranty the two parties will agree on any deal, which means shareholders are still exposed to the company’s funding problems. 

Shareholder funding

If the company cannot find any backers, then all is not lost. In the past, Sirius has leaned heavily on its investors to fund the development of its mine. It could do the same this time around.

A rights issue or placing might raise the cash requires to progress with mine development, but it would dilute existing shareholders substantially. At the current market capitalisation of £260m, the company would have to nearly triple its number of shares in issue to raise the $600m, the amount management believes they will require to fund the next stage of the project. This suggests that the stock could fall by as much as two-thirds in 2020 if Anglo’s offer falls through.

As such, I think it might be best to avoid the Sirius share price in 2020. Anglo’s offer looks appealing, but if it falls through, the company will have to lean heavily on investors. With the stock trading at the offer price, it seems as if there are many other investments out there with better risk/reward profiles.

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Rupert Hargreaves owns no share 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.