It’s a nerve-racking time for shareholders and directors at Sirius Minerals (LSE: SXX), as we tick-tock towards a planning decision on the firm’s proposals for a mine and associated workings at its lead Yorkshire potash development project.
News came on 30 September that the revised application is in, and the stakes are high. If the application fails, Sirius may never be able to build the mine it needs to get the potash from deep under the beautiful Yorkshire countryside.
A promising development project
That would be a disaster, as selling the high-grade mineral — capable of helping farmers grow the world’s biggest and juiciest cabbages, by all accounts — is what Sirus’s hopes are pinned against for making some money.
The firm desperately needs some income. It’s an expensive business taking a project from discovery, proving up the resources and then developing the infrastructure to start production. Sirius has yet to start building its mine, but already accumulated losses are well in excess of the £78.4 million reported with the full-year results in March.
Since acquiring the Yorkshire Potash project in 2011, the firm has worked hard with drilling the deposit in order to assess its quality and quantity. The results are good. It’s a high-grade discovery of world-beating proportions and constitution, a happy circumstance that helped the directors secure some early supply deals with worldwide customers.
All of that good work is in jeopardy if the planning decision results in a negative outcome when it arrives in January. At this stage in its stock market life, Sirius Minerals strikes me as something of a binary bet for shareholders. A green light from the planners will surely see the shares soar, as Sirius swings into frenzied mine-building activity. A red light will, no doubt, spring the trapdoor on the shares and leave the directors’ combined £1.14 million annual remuneration bill looking ever more onerous to share holders.
Sirius, the fund-raising machine
It’s no surprise that this kind of development project launches under the umbrella of public-limited-company status. Accessing the capital markets — shareholders like you and me — seems key to getting things off the ground. It takes vast sums of capital to keep operations moving along and, when the risks are high as in this project, the attraction to private equity must dwindle.
The way that a stock market listing accesses capital and shifts risk from the controlling parties must be attractive. Sirius raised £20 million from shareholders in 2011, £55 million in 2012 and £43 million in 2014. Although there is a bit left in the bank, progressing to build the mine will likely take more capital and I’m unsure whether this will come from equity, or borrowings, or both, at this stage.
What next?
Investing in a mine development project is an uncertain pursuit, which is one reason Sirius’s share price has been so volatile. Even if planning permission comes through there is some danger that dilution and changes in sentiment could drive the shares lower as the reality of further development costs sets in with investors.
On the other hand, the quality and scale of the resource seems promising. Overall, I’m inclined to hold off investing until production seems imminent a little further down the line.