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Sirius Minerals (SXX) share price: where next after suspending junk bond?

Sirius Minerals is finding it difficult to raise the funds it needs to finish constructing its huge fertiliser mine in North Yorkshire. Will it be able to secure the funding it needs before its cash pile runs out in September?

Sirius Minerals delays sale of $500 million bond

Sirius Minerals has postponed the sale of a $500 million bond, casting huge doubt over the future of the vast Woodsmith project in Whitby, UK.

In a short and blunt statement to the market, Sirius said it had decided to ‘suspend’ the bond sale ‘due to current market conditions’, without providing further insight. The company said it intends to ‘revisit the market when conditions have improved later this quarter’, which runs until the end of September.

Since the news broke, Sirius shares have fallen by around 39% as of 11.20am Wednesday 7th August.

Why is the news so significant?

There are two reasons why delaying the bond sale is significant. The main concern is that it must sell $500 million worth of US corporate bonds in order to unlock a $2.5 billion credit line from its broker JPMorgan, without which it won’t be able to keep construction going. The second is the fact that it doesn’t have a lot of time to do it. Existing cash is due to run out by the end of September, meaning Sirius only has around two months' wiggle room if it wants to keep construction going beyond then.

The project, which aims to produce tens of millions of tonnes of a new type of fertiliser named polyhalite each year, is being funded in two stages. Sirius completed the first part of its second stage financing earlier this year when it raised $825 million by issuing new shares and convertible bonds at a hefty discount. The next stage of financing is comprised of the $500 million bond sale and the $2.5 billion credit from JPMorgan, which intends to syndicate the debt and is contingent on the bond sale being completed.

Investors have already had to plug gaps in the budget and there will be concerns that Sirius could look to raise further equity to buy some time if it hasn’t found more funding before the end of September.

Why has Sirius Minerals postponed the bond sale?

Shore Capital, the company’s house broker, shed some further light on the decision to postpone the bond sale. It said Sirius was delaying the sale ‘given the current market turmoil’, citing the escalating US-China trade war as one reason why it isn’t the optimal time to tap the markets.

However, some are rightly asking how much has changed in a matter of weeks. The bond offer was launched on 19 July and was expected to be priced this week, meaning Sirius believes something has drastically changed over the past 18 days. Markets have declined over the past month, but not dramatically, and tensions between the US and China are heightening, but remain just as uncertain as they did a few weeks ago.

Whatever the reason, it is clear Sirius isn’t confident it can drum up enough interest for its bonds. That is a stark statement considering the Financial Times has reported Sirius was to offer buyers of the bonds an interest rate of 13.5% - which would be one of the highest of all US dollar corporate bonds to be issued in 2019. The fact Sirius can’t attract buyers at that price is worrying, and some are now rightly asking how this fact will change in the short time Sirius has left to sell them.

Is this the beginning of the end for Sirius Minerals?

Time is not a luxury that Sirius has, but the company feels it has no choice but to wait for better conditions before launching its bond offer, even after reportedly offering buyers an alarmingly high coupon. It is also limited in what it can do in the weeks it has left: it can’t de-risk the project any further without completing the stage two financing, and it has little-to-no influence over what the general mood of the market will be next month.

If appetite for its bonds does not improve by September, when existing cash is expected to be exhausted, then Sirius will have to make a tough decision. It will have to decide whether it is willing to hold firm and wait for better conditions, running the risk of running out of money, or offer an even higher coupon to secure enough interest in its bonds so it can keep construction going.

Liberum issued a research note following the announcement that remained bullish on Sirius, stating it expected the company to relaunch its bond offer in early September. It also said that while Sirius has said cash will run out by the end of September, it is likely that there is ‘scope to extend slightly longer if financing discussions push up against that deadline’.

Read more on whether the clock is ticking for Sirius Minerals

What could happen next?

There are several routes that Sirius could head down going forward. In an ideal world, Sirius will be able to complete its $500 million bond sale sometime in September, which will unlock the larger financing from JPMorgan and provide it with the cash it needs to finish construction and to make the business self-sustaining with positive cash flow. If it does go ahead then the key thing to look out for is the coupon, as this represents the amount of interest Sirius will pay buyers of the bonds.

If it decides there isn’t enough demand to sell the bonds at the right price, then Sirius could potentially have some other options. JPMorgan has not yet commented on the delay and it is not clear how supportive it will be if the bond sale isn’t completed on time. Sirius could look to strike an alternative arrangement with JPMorgan or another entity if it feels like the bond sale isn’t suitable. Sirius decided to end talks with previous prospective lenders earlier this year so it could explore the financing deal tabled by JPMorgan, even though it only had enough cash to keep going for a couple of months, so it is possible an alternative solution can be found.

If Sirius decides it can only secure the vast amount of funding it needs from JPMorgan, but that it cannot go ahead with the bond sale because of market conditions, then there is a chance that Sirius could look to raise a smaller amount of funding to tide the company over until conditions improve enough that the bond sale can be completed. That could involve asking investors for more money, many of which have already been heavily diluted.

The worst-case scenario could see Sirius unable to sell the bonds it needs to unlock the credit from JPMorgan. Cash would run out very quickly, construction would have to stop, and the project, as well as the entire business, will be in jeopardy.

Stakes are high for Sirius Minerals

The clock is ticking down and investors are rightly concerned about the future of Sirius, but all is not lost. This is at least the third time this year that headlines have warned Sirius could be bankrupt within a matter of months, but it has limped on and survived so far. Sirius still has time to complete the bond offering and JPMorgan’s credit line still lies tantalisingly on the table. With Sirius on the back foot and hardly flush with options, it is more likely that it will sell its bonds next month even if market conditions haven’t improved rather than pulling the plug altogether and putting the entire business at risk. It may have to pay a large price to do so, but beggars cannot be choosers.

Publicly-disclosed short positions on Sirius Minerals shares

With its future uncertain, Sirius has unsurprisingly become a target for short sellers. According to ShortTracker, at its peak in May, over 9% of Sirius shares were in the hand of short sellers. However, this fell to just 4.1% after the company raised the $825 million in new equity and convertible bonds in May, which removed some of the immediate financing risks at the time. However, this has slowly crept higher – to 6.63% as of 6 August - as the clock ticks down. Arrowgrass Capital Partners, BNP Paribas, Citadel Europe, Highbridge Capital Management, LMR Partners and Och-Ziff Management Europe are all betting against the company at present.

Fund Percentage short
Arrowgrass Capital Partners 0.80%
BNP Paribas 0.56%
Citadel Europe 0.86%
Highbridge Capital Management 2.65%
LMR Partners 0.54%
Och-Ziff Management Europe 1.22%
Total 6.63%

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