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You cannot be Sirius, as Anglo American offers 5.5p a share

Investing in small companies is always inherently more risky than in more established big cap companies. Nowhere is this better illustrated than in the performance of Sirius Minerals share price in the last 12 months.

Sirius Minerals share price plunges

The Sirius Minerals share price has lost over 70% of its value since the beginning of 2019, as small investors, seduced by the prospect of investing into this project that would use the material to supply fertiliser to hundreds of businesses across the country, as well as the world, have seen their stakes wiped out.

Sadly the development costs turned out to be much higher than originally anticipated, with £850m already spent, and with only a small amount of progress in drilling the two shafts to allow for production, the Yorkshire-based polyhalite miner needed another £2.4bn to complete the project. The company also needs to construct a 23-mile long tunnel to house a conveyor belt which would transport the rocks to a port on Teesside.

In a sign that all was not well, the company tried to raise some extra cash last summer, in the form of a £400m bond sale, which it needed to unlock a $2.5bn credit facility from JP Morgan that would provide the rest of the financing.

It turns out that management may well have underestimated the costs of developing such a project at a time when the global economy appeared to be slowing, and at a time when the market for polyhalite is by no means certain. The intention it to mine the mineral for use as a fertiliser, however there is some doubt that the business would be able to sell enough product to justify the costs of getting it out of the ground.

Anglo American steps in

With the economics in question and the UK government not keen to invest $1bn of taxpayers money, the project appear doomed until Anglo American stepped in with an offer of its own. The global mining giant has agreed to buy the company for £405m at a price of 5.5p, and at the price Anglo American is paying it represents a very small sum relative to the size of its balance sheet. Last year Anglo American turned over $28.7bn and has operations all over the world, including iron ore, coal, base metals, as well as platinum and diamonds.

It also marks a return to the fertiliser business which the company left in 2016, with some doubts about the long-term demand prospects for this particular product. It is said to be fairly new and more organic than other fertiliser products, meaning that in an age where there is much more awareness about protecting the environment, it could well see demand increase sharply over the course of the next decade. This would appear to require the resources of a large company to deliver, with Anglo American’s expertise in this area likely to be a good fit.

Sirius’s longer-term shareholders might be reluctant to take such a big hit to their shareholding, however there aren’t any other offers on the table, and if Anglo were to walk away, there don’t appear to be any other candidates lined up to make the project viable. The choice would appear to be to get 5.5p of something, or risk losing everything. It’s not much of a choice, but at least it is one, and at least the mine has a chance of being built, along with the boost to the local economy the finished article might bring.

 

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