Shares in Sirius Minerals (LSE: SXX) are down by as much as 14% today, with the company continuing to see investor sentiment decline as the key 30 June decision regarding planning approval for its proposed potash mine nears. Clearly, a number of investors have decided to take a profit on shares that as at 27 May were up by 135% since the turn of the year, with an update provided by the company apparently doing little to improve investor sentiment in the short run.
Investing Versus Gambling
Of course, the ‘will it or won’t it’ story that follows Sirius Minerals around is very interesting for the neutral. However, for shareholders in the company, it is even more exciting, since a positive outcome at the end of June is likely to lead to a jump in the company’s share price, while a disappointing decision could lead to a total loss on investment in the company.
This puts Sirius Minerals at quite possibly the farthest point on the risk spectrum and, in my view, this situation is not investing. In fact, it is more akin to gambling, with a ‘yes/no’ outcome that hinges on the decision of an individual/external committee being the deciding factor when it comes to whether the company is successful or not.
Furthermore, it causes the worst traits of investors to come to the fore. For example, buying shares in Sirius Minerals is a short term move, with either a large loss or a sale upon major gain being the two most likely outcomes. In addition, it causes investors in the company to become overly emotional and to dedicate a large proportion of their time to an investment that is likely to represent only a small part of their overall portfolio.
An Alternative Idea
Of course, that’s not to say that only low risk investments are appealing. The wider mining sector contains a number of stocks that, like Sirius Minerals, are dependent upon a small number of factors going their way. For example, Randgold Resources (LSE: RRS) is a price taker when it comes to the gold it produces, and so an increase in the price of gold could have a positive impact on its bottom line. However, unlike Sirius Minerals, it has a strong balance sheet, track record of growth and is financially strong enough to survive even if its key factor, the gold price, does not go its way in the short run.
Furthermore, Anglo American (LSE: AAL) (NASDAQOTH: AAUKY.US) also relies upon the price of the commodities it produces. But, unlike Sirius Minerals, is well-diversified, with it producing iron ore, manganese, coal, copper, nickel and a range of other metals. Furthermore, it offers excellent value for money, with shares in Anglo American trading on a price to book (P/B) ratio of just 0.65, which is even less than Randgold Resources’ appealing P/B ratio of 1.9. Both of these ratios show that the two companies offer sufficient margins of safety to cope with asset writedowns over the medium to long term if commodity prices go against them.
Looking Ahead
Although Sirius Minerals may prove to be a superb investment if news flow goes for it, the opportunity appears to be overly short term, extremely high risk and offers no margin of safety. And, while Randgold Resources and Anglo American are also reliant upon the price of the commodities they sell (and over which they have no control), they at least offer good value for money and long term potential so that if things don’t go their way in the short run, they could still offer excellent long term share price performance.