Shares in Sirius Minerals (LSE:SXX) were off 18pc this morning as the company released details of plans for launching its Stage 2 financing. This consists of a £310m underwritten placing and open offer (priced between 15p and 18p) and a $644m convertible bond offering. Sirius’ shares closed as high as 38.7p last August, meaning the terms of today’s deal will no doubt come as a disappointment to long-term holders. This highlights once again that the promise of “jam tomorrow” in the resource space can leave a bitter taste in the mouth of investors.
There was some warning this might be coming earlier in the spring. On 12 March Sirius announced it had received an “alternative financing proposal” for its Stage 2 financing, which would “completely replace” the senior debt facility it had previously been pursuing.
In hindsight, this was something of a red flag that the market missed. In broad terms, senior debt facilities tend to be higher quality and reflect the underlying strength of a company’s offering. If a business struggles to secure a senior facility, on decent terms, this can suggest the commercial risk profile is not necessarily aligned with the equity market’s valuation of the opportunity.
When you start to throw words like “alternative” into the mix this is often suggestive that whatever financing is about to be secured is likely to be on the expensive side. And this is what appears to have happened with Sirius this morning.
March’s announcement about the “alternative financing proposal” was light on detail, but this morning we learned that Sirius has launched a $644m convertible bond offering. $400m of this is underwritten. This is not a conventional raise for a project as large as this. That alone is enough to make equity holders nervous. Factor in the heavily discounted £310m placing price range of 15p to 18p and it’s no wonder the stock is heavily off.
The question now is what upside might there be in holding Sirius shares?
For now, there is no reason to rush into buying. The final details of the bond offering aren’t expected to be released until tomorrow and we also need to see what price the equity raise is conducted at. Before even considering buying into this company a lot more research is required since the landscape has changed considerably. Sirius’ balance sheet is about to undergo a wholesale transformation, and although the company will be heavily cashed up, it will also be carrying a great deal of debt. The business will have to deliver significant fundamental returns to cope with this.
In the short term, it is hard to see what catalyst might drive the stock higher. The complexity of the planned funding presents a significant risk to retail holders and until that is fully understood, maintaining a watching brief on this stock seems the most prudent approach for the time being.
Author Ben Turney
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