Are Sirius Minerals Digging a Big Hole For Themselves?

Are Sirius Minerals Digging a Big Hole For Themselves?

Brought to you by City Confidential

 

One of the most popular companies for retail investors over the last couple of years has been Sirius
Minerals (9.155p). It ticks a lot of the boxes that many private investors look for when making an
investment – it has a low share price, it operates in a volatile sector, it is a small company and there
is serious potential for capital growth if it proves to be successful.

As many investors reading this article will know, Sirius is a mining company operating in North
Yorkshire focused on what is believed to be the world’s largest and highest-grade polyhalite deposit.
Polyhalite is a mineral that could successfully compete within the potash and multi-nutrient fertiliser
market on a global basis. The aim of the company is to establish a mining facility to extract the
mineral which will then be shipped to Teesside through a 37km long underground tunnel where the
materials handling facility will convert the raw material into POLY4, the group’s trade mark name for
the fertiliser product.

The company has had various rounds of funding to raise the money for the project with the latest
equity fund raising being at 15p only a few weeks ago. However, the major source of funds is due to
be a $2.5bn banking facility from JP Morgan, the US bank. In order to gain access to these funds
though the company needs to issue $500m of senior secured notes due to last until 2027. The
process of the issue was underway until the company suspended the process on 6 August, due to
current market conditions. The company aims to revisit the market later this quarter, but the share
price slumped on the news to 7.5p.

This issue for investors is simply that the bond issue must be completed by 30 September or else the
company will not gain access to the banking facility. This would put the company in danger of
running out of cash. In this case shareholders could be effectively wiped out. On the other hand, if
the bond issue is successful and the company can then gain access to the banking facility there could
be considerable upside to the share price with this likely to move back up towards 20p in our view.
So, cautious investors should wait until there is more certainty of the outcome but for those
investors who like a high risk punt the shares are a HIGHLY SPECULATIVE BUY.

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