Sirius Minerals setback for thousands of UK investors and Ocado customers increase order frequency

“European markets were fairly quiet on Tuesday with the FTSE 100 dipping 0.1% to 7,313. Oil prices retreated from yesterday’s sharp rally, albeit only slipping by a small amount. Brent Crude retreated by 0.5% to $68.71 per barrel and WTI fell 0.9% to $62.31 per barrel.

“Hong Kong experienced another day of pain with the Hang Seng index falling 1.5% to 26,725. Consumer cyclicals, industrials and tech stocks were worst hit,” says Russ Mould, Investment Director at AJ Bell.

Sirius Minerals

“The UK miner is struggling to raise enough money to develop its big potash project in Yorkshire.

“This is terrible news for a very large number of retail investors who had put their faith in the company. Many of these shareholders live close to the mine and invested as a show of support in a project that had the potential to greatly improve the local economy.

“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.

“It has enough cash to give it six months’ breathing space to either find a different solution for the financing or bring in a new strategic investor who could theoretically provide cash upfront in exchange for a stake in the business.

“Given the current situation it seems highly likely that existing shareholders are going to suffer because Sirius may have to raise more money or sell a chunk of its business to a new strategic investor on unfavourable terms, given how it is desperate for a lifeline.

“It is disappointing to see the UK Government refuse to support the company when you consider that Sirius believes it can generate £100 billion for the UK economy over the next 50 years should the mine become operational.

“However, the reality is that Sirius has never built a mine before, nor has it operated one. In that sense it is a high-risk entity from a lender’s point of view.

“History would suggest that finding a strategic partner is harder than you think, so that option is not a certainty. Sirius will need to find someone 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.

“It wants to extract polyhalite, a form of potash containing potassium, sulphur, magnesium and calcium. The product would be used by farmers to help improve crop yields. Traditionally farmers use different fertilisers and so Sirius is spending a lot of time educating potential buyers as to the benefits of polyhalite.

“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.”

Ocado / Marks & Spencer

“A tie-up previously met with some scepticism is off to a reasonable start. Ocado Retail, now operated as a 50/50 joint venture between the online grocer and Marks & Spencer, achieved acceleration in sales growth in the third quarter.

Ocado deserves a pat on the back for acting quickly to find extra capacity after a fire at its flagship robotic warehouse earlier this year.

“The real test for the combination is yet to come though, with M&S food set to be home delivered from next September. So although the trading statement is pitched as the joint venture with M&S, the reported figures predominantly relate to Ocado’s own delivery operations.

“While there may be some disappointment at a slight fall in average order size, in the main these numbers are likely to be greeted with a bit of a shrug.

“For M&S the key rationale for pursuing the deal, which involved irritating investors with a fundraise and dividend cut, is yet to be tested as the delivery service for its products is not yet up and running.

“For Ocado, while its retail business is important, the key driver for its shares is the platform business, where it provides an out-of-the-box online groceries solution for global retailers.”

These articles are for information purposes only and are not a personal recommendation or advice.

The daily market update is written by Russ Mould, AJ Bell’s Investment Director and his team. The article highlights the movement in the main index, winners and losers on the day and any macro-economic announcements.