Anglo American (AAL) is a stock I’m sure you will be familiar with. It is one of the bellwethers for the mining sector, and owner of the De Beers diamond company. It also bought out the previously listed Sirius Minerals, the Yorkshire-based polyhalite project, for 5.5p – a figure that many felt undervalued the company. But in the stock market, equity is only worth what somebody else is willing to pay. And at that point in time, Anglo American was the only game in town.
Sirius Minerals highlighted the dangers of investing in a good story, as the stock had a popular retail following among the local population. The difficulties it faced in being able to fund its exciting development also shows the importance of investing in companies that are adequately financed to deliver on their investment promise. In the immediate rally after the miner’s failed $500m bond offering (and therefore failing to unlock the $2.5bn JP Morgan loan to build out the Woodsmith mine) traders saw an excellent opportunity to short Sirius’s shares.
This was because everyone knew the company would be out of cash within the year, and was now fully reliant on tapping shareholders for a cash injection through equity. That was, of course, until Anglo American swooped in with a low-ball (albeit premium to the then-current share price) offer for the company. The deal made a lot of sense for Anglo American – it picks up a project on the floor and as a global business has the clout and financial backing to bring it into production.