After Sirius Minerals’ share price plunge, can the stock recover?

Sirius Minerals' [SXX] share price plunged by more than 50% to 4.7p on Tuesday after the company said it had been forced to abandon a $500m bond issue, putting the future of its giant fertiliser mining project in North Yorkshire in doubt.

Sirius, which is aiming to develop the polyhalite fertiliser facility near Whitby, added that it was slowing down its construction plans and launching a strategic review because of fundraising problems. The stock’s dramatic fall meant the share price was down by close to 80% so far this year.

The planned bond issue could not go ahead in “current market conditions” because of the uncertainty related to Brexit, Sirius said. Over the next six months, it would seek to find different funding sources for the project, which it had hoped would begin production in 2021.

A scramble for investment

Sirius said it had asked the UK government for a commitment to enable the issue of up to $1bn of guaranteed bonds, but the government did not provide the support. The developments raise serious concerns about Sirius’s future, as it had previously said it could run out of cash by the end of the year if it did not receive the funds needed to unlock a £2.5bn revolving credit facility from JP Morgan Chase.

“We have taken the decision to reduce the rate of development across the project in order to preserve funding to allow more time to develop alternatives and preserve the significant amount of inherent value in this world-class project,” Sirius CEO Chris Fraser said. “This is the most prudent decision to give the company the time necessary to restructure its plans to move the project forward.”

Glory, glory polyhalite

The site of the Woodsmith mine contains the highest grade and biggest amount of polyhalite, at 2.66bn tonnes, according to Sirius. The company said it has agreed volume supply deals with customers in emerging markets, such as Nigeria and Brazil. To date, it has 4.7m tonnes per annum of contracted sales volumes, with hopes of reaching 20m a year if the facility manages to start up. It aims to create 1,000 jobs and £2bn worth of exports each year.

However, the construction of the mine has faced obstacles over the years, including concerns about costs and environmental impact.

In the half-year period to 30 June, the company reported an operating loss of £14.7m, wider than the £10.8m loss a year earlier. It said cash reserves as of 31 August totalled £180m. That’s not enough to build the mine, but the company hopes that will give it sufficient time to persuade a partner or strategic investor to buy a “significant part” of the project.

“Do I think [the mine] should get built, do I think the economics are there? Absolutely. Do I think someone will make a lot of money if they do build it? Yep,” said Richard Knights, analyst at Liberum Capital Markets. “But it’s finding someone with access to that amount of capital who is willing to think a bit outside the box. When push comes to shove, who is going to pull the trigger on this?”

According to Russ Mould, investment director at AJ Bell, the failed bond issue does not represent the end of the road for Sirius. “Although the share price has taken a beating on today’s news, it isn’t game over for Sirius and its shareholders. The miner has a few options to try and salvage the project,” he said.

“Although the share price has taken a beating on today’s news, it isn’t game over for Sirius and its shareholders. The miner has a few options to try and salvage the project” - Russ Mould, investment director at AJ Bell

Who will be a Sirius partner?

Yet Mould was equally tentative. “History would suggest that finding a strategic partner is harder than you think, so that option is not a certainty”.  He suggested that the firm would need to find a partner “with very deep pockets and an appetite to back a mine which will create a product for which there is not currently an established market.”  Mould explained that traditionally farmers have used different fertilisers to improve yields “and so Sirius is spending a lot of time educating potential buyers as to the benefits of polyhalite”.

Other analysts fear Sirius may now never reach its potential. “This makes difficult reading for the raft of private investors who were attracted to the first major mine in England for a long time,” said Graham Spooner, investment research analyst at The Share Centre. “With cash running out fast, investors will be fearing for the future of the mine and remain cognisant that the recent history of mining in the UK has been littered with failures.”

Sirius Minerals share price vitals, Yahoo finance, 18 September 2019

Similarly, the Motley Fool contributor Royston Wild said he doesn’t expect things for Sirius to improve. “The risks now outweigh the rewards by some distance, in my opinion. So, my advice to battle-worn Sirius investors is to sell out while the stock is still worth something.”

Meanwhile, for Mould, Sirius provides a classic case study for investors. “Overall this situation is a reminder of the risks involved with investing. You need to fully understand what could go wrong as well as what could go right,” he considered.