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The biggest white elephant of recent years? Sirius Minerals bows out with a whimper

Sirius overpromised and underdelivered, a classic recipe for disaster in mining and mining finance

Sirius Minerals PLC - The biggest white elephant of recent years? Sirius Minerals bows out with a whimper

In the end, it didn’t take long to die.

The writing had been on the wall for Sirius Minerals PLC (LON:SXX) ever since it failed to raise a crucial US$500mln of financing at the end of last summer.

At that time US bond markets were a bit choppy, and the company tried to explain away the lack of market interest as part of a wider aversion to dead. It even went so far as to have its publicity agents telephone journalists who dared to suggest otherwise, and attempt to cajole them into changing their stories.

Those publicity agents are now long gone, and Sirius is on the way out too.

Without the crucial debt finance, there was no way the company’s Woodsmith mine was ever going to get built. Appetite in the equity markets was already exhausted, small-time investors had been bled dry, and the institutions who had propped up the company were becoming increasingly testy.

True, the hype machine that has been behind Sirius all along continued into overdrive. Broker Liberum set a price target for Sirius of 9p back in September, and went on to copy and paste this unwise investment advice into subsequent notes for the rest of the year.

There were many who stood to gain from a successful Sirius, including the brokers taking commissions on financings, the newspapers selling stories of British engineering and industrial renaissance, and politicians who saw the potential benefits of new jobs in a post-Brexit world.

Tellingly though, the government chose not to intervene, even when the Sirius publicity machine ramped its output up another notch and demanded state investment.

True, governments are well known for investing in white elephant engineering projects. Just look at Crossrail, and the ongoing saga of HS2. But this time, and perhaps out of character, the government steered a sensible course. Let the private sector shoulder the risk, as is right and proper, and sure enough along came Anglo American with its opportunistic 5.5p offer.

This was voted through by a large majority at a sometimes bad-tempered general meeting held by Sirius directors in London on 3 March.

But there was also a sizeable minority of dissenters. Nearly 20% of those eligible to vote voted against, and it’s not hard to see why.

The Anglo American offer price of 5.5p looks derisory when set against all the hope and expectation that the company had built up over the years.

True, it’s not a bad return if you bought the shares at the 0.75p lows they traded at at the height of the financial crisis. On the other hand, the shares went as high as 45p in 2016, and spent long periods trading at levels above 20p. And anybody who brought in the three-and-a-half year period between April 2015 and September 2019, when the shares never went below 10p, is sitting on a loss.

Gina Rhinehart, on the other hand, Australia’s wealthiest woman and serial mining investor, who bought in cheaply after the collapse of the summer bond issuance, retains her stake, as well as the royalty on the project that she negotiated at the time.

So, is anyone to blame for this mess?

In one sense, it wasn’t hard to see it coming.

The company that was planning one of Britain’s largest ever engineering projects had an untested product and was looking to fund itself on the junk bond market before it had generated a single penny of revenue. Many in the mining investment community were sceptical that it would ever work, but a momentum was built up in the retail market and subsequently fostered by the company.

That in turn meant that there was an environment in the City where fees could be earned and it didn’t pay to ask questions that were too penetrating. Brokers and banks sometimes expressed healthy scepticism, but among their ranks there were scarcely any outright naysayers to be found.

Cheerleaders though, there were aplenty. Chief among them was Liberum, which was running with a 40p target price for much of last year, which talked of an NPV of 68p, and which was still clinging on to a 9p target even as Sirius was being run into the ground.

There were plenty of others too, and in the end it took the US bond markets to demonstrate to the British investment community that the emperor had no clothes.

Quick facts: Sirius Minerals PLC

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