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I’d accept the Sirius Minerals share offer and buy these two stocks instead

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A miner down a mine shaft
Image source: Getty Images.

The Sirius Minerals (LSE: SXX) share price is down by over 10%, as I write, after the company said its efforts to find alternative financing had failed. Here, I’ll explain why I’d accept the 5.5p per share takeover offer from FTSE 100 giant Anglo American. I’ll also look at two natural resource stocks I’d consider buying next.

It’s all over now

In a statement on Friday, Sirius said it had tried and failed to find an anchor investor for the $680m fundraising it would need to continue developing the mine. As a result, this proposal has been abandoned.

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The firm repeated its previous warning that if shareholders don’t accept the Anglo American bid, then there is “a high probability” Sirius will be placed into administration. This would result in a total loss for shareholders.

Many Sirius shareholders feel the board is selling the firm cheap by recommending Anglo American’s bid. However, the reality is that mining companies like Sirius — with one undeveloped asset and no revenue — are risky bets. The company can’t find funding because the mine isn’t an attractive asset as a standalone investment.

Anglo American can fit Woodsmith into its portfolio of mines and will be able to finance the project more cheaply than Sirius. I think the group’s bid of 5.5p per share for Sirius is fair. I’d accept the offer and reinvest the cash elsewhere.

North Sea cash machine

Oil and gas producer Enquest (LSE: ENQ) is highly profitable and generating a lot of cash. The group’s production rose to an average of 68,606 barrels of oil equivalent per day last year. Operating costs averaged just $21 per barrel, leaving plenty of room for profit, even with oil prices under $60 per barrel.

Despite all of these attractions, Enquest shares currently trade on just 4.2 times 2020 forecast earnings. Why?

The answer is debt. Enquest has too much — $1.4bn at the last count. However, this figure has now fallen from $2bn at the end of 2017. If the company can continue to repay debt despite lower oil prices, then I’d expect the share price to rise steadily to reflect the group’s falling leverage.

Enquest’s debt levels mean the shares carry some risk. There’s no dividend, either. But if things go to plan, I could see the shares doubling from current levels.

Poised for a big gain?

My next pick doesn’t have any debt problems. Indeed, Gulf Keystone Petroleum (LSE: GKP) currently has a net cash balance. However, this firm operates in the Kurdistan region of Iraq. This means it faces continual political risks and the possibility that conflict in the region might disrupt operations.

So far this hasn’t happened. Indeed, the company expects to deliver a 30% increase in annual production in 2020. Analysts expect this to drive a 77% increase in earnings per share but, so far, the market isn’t giving Gulf Keystone any credit for this.

Perhaps understandably, given the company’s risk profile and mixed history, the market is waiting for proof that CEO Jón Ferrier can deliver. The falling price of oil is also putting pressure on the stock’s valuation.

GKP shares currently trade on just six times 2020 forecast earnings and offer a cash-backed dividend yield of 3.2%. I think this could be a buying opportunity.

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Roland Head owns shares of Gulf Keystone Petroleum. 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.

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