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Step-by-step get to buying the miner’s shares below market price
Thursday 10 Nov 2016 Author: Daniel Coatsworth

Shareholders in Sirius Minerals (SXX:AIM) have a chance to buy shares below market prices as part of the company’s $1.2bn fundraising to build a potash mine
in Yorkshire.

As this may be the first time many investors have taken part in an open offer, here we look at how the process works and what investors should consider before participating.

First, the details: Sirius has invited existing shareholders to apply for 2 new shares at the discounted price of 20p for every 25 that they already own. This is the ‘open offer’.

Should investors take part in the Sirius open offer?

This depends on each individual investor’s available funds, appetite for risk and investment time horizon.

Fundamentally we believe the project will create significant value in the long term and see 20p as a good price at which to buy more shares.

Is this a bargain or not worth the effort? 

This looked to be an absolute bargain when considering the shares were trading at 37p just before the fundraising was announced.

Sadly the market hasn’t responded that favourably, meaning the shares have been in a falling trend since Sirius explained how it would get enough money to build the first phase of its mine.

The shares at the time of writing had fallen to 23.44p. That’s still above the open offer price, but potentially at the point where some investors may question whether it is worthwhile taking part in the fundraising exercise.

What are the options?

Existing Sirius investors have four choices:

1. Apply for a full allocation of shares at 20p. If the entitlement to new shares isn’t a whole number, it will be rounded down to the nearest whole number.

2. Apply for more than your allocation of shares at 20p. There is no guarantee an investor will receive more than their basic entitlement, but Sirius will allocate extra stock if there is enough left over after filling all the ‘basic’ orders.

3. Apply for less than the basic allocation. For example, an investor entitled to 100 new shares may only want to buy 50 new shares.

4. Investors that do not wish to take part do not need to do anything.

Applications for new shares need to be made by 23 November 2016. Details of how to apply are in the prospectus available on Sirius’ website – or you can apply directly through your stockbroker. Capita Registrars is administering the open offer for Sirius.

Step-by-step guide 

Let’s assume you apply directly through your stockbroker – that’s the company through which you may have an ISA, a SIPP (self-invested personal pension) or dealing account. We’ll use AJ Bell Youinvest’s process as the working example.

Investors should have received a secure message from their broker’s corporate actions team. Electing for a basic entitlement of shares can be completed using online corporate action tools.

Investors must have sufficient cash in their investment account at the time the order is placed.

Anyone who wants to apply for excess shares will most likely have to send a secure message to the stockbroker, requesting X number of shares in excess. Your broker will then apply for those shares on your behalf.

What happens next? 

Once a broker’s corporate actions team have processed all the applications, both basic and excess, they will credit customers with the shares once received. They will also send a message notifying shareholders of this event.

Stockbrokers usually add a note regarding excess shares, especially if applications are scaled back, to explain how many shares have been allocated.

The new shares will be admitted to the stock market on 28 November 2016.

Why has the share price fallen since the fundraising announcement? 

There are a lot of reasons why the stock has fallen since Sirius said it had found a solution to building its mine.

A. Existing shareholders will get diluted by the significant number of new shares (priced at a discount) being issued.

B. Part of the broader funding scheme involves the issue of $400m worth of convertible bonds to a select group of institutional investors, due to be settled by 2023. Essentially Sirius is borrowing money at an agreed rate of interest with the option of either paying back the cash or settling the debt via the issuance of new shares.

The convertible shares can be exercised if Sirius’ share price trades higher than 25p (31c). Investors would hope that Sirius’ share price is trading at many multiples of 25p by 2023 – which means the bondholders could be getting a bargain at the expense of the company’s other investors and shareholders.

C. Many shareholders forget it costs a lot of money to build mines, so they panic sell when a miner announces a large fundraising exercise.

What's the difference between an open offer and a rights issue? 

An open offer is an invitation for existing investors to buy new shares. A rights issue is the same thing with one key difference.

You can sell your right to buy shares to a third party in a rights issue; therefore the event is open to anyone to take part. An open offer cannot be traded and is therefore restricted to qualifying investors.

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