I’ve been watching the progress of AIM-listed potash miner Sirius Minerals (LSE: SXX) for some time, aware that this stock has massive potential, but also presents super-sized risks. Two months ago, my focus shifted to the positive, when I asked the question: could Sirius Minerals really have a 200% upside? I concluded that yes, the potential is there, but you might have to bide your time.
Fertile ground
Investors who got in early may be confused by all this. They’ll have seen the share price soar over the last year from 7.5p to yesterday’s spike price of 22.75p, a rise of 200%! The spike was short-lived, however, and the price has now retreated to around 15p.
Yesterday’s excitement was caused by the release of the eagerly-awaited feasibility study into Sirius Minerals’ potash project in North Yorkshire, which reported a healthy net present value of $15bn, rising to $27bn once production finally begins. It also predicted annual operational earning before interest, taxes, depreciation and amortisation of between $1bn and $3bn a year, depending on volume and prices. With estimated operating costs at $27.2 per tonne, the mine could deliver “industry-leading” cash margins of 70% to 85%, the report concluded.
Take me to the moors
This is a major boost for chief executive Chris Fraser’s quest to raise around £2bn to develop the mine in a sensitive area below the North Yorks Moors National Park with export facilities at Teeside. Seeking funding for the mining sector isn’t easy these days, although Sirius doesn’t deserve to be lumped together with all the struggling metal miners. Fertiliser is a very different business.
Fraser hailed his “world-class fertilizer business” that will “create thousands of jobs in North Yorkshire and Teesside, deliver billions of pounds of investment to the UK and put the country at the forefront of the multi-nutrient fertiliser industry“. Which investor wouldn’t want a piece of that action?
Deep reserves of patience
Low operating costs and high margins certainly look tempting, but one thing hasn’t changed after this report: patience will remain the chief investor virtue. First production isn’t expected until 2021, five years away, with a ramp up to 10m tonnes a year by 2023, rising to 13m, then ultimately 20m tonnes. Until then there’ll be no company revenues and no dividend to tide you over.
What you may get is more share price growth, assuming the news flow remains positive, which you must offset against the risk that the project could still run into the ground or a collapse in fertiliser prices may ruin all the sums. While the share price is vulnerable to bad news it can also suffer from lack of news, as investors drift away in search of more immediate gratification.
Despite the recent surge, many investors will still be down on their stakes in Sirius, which was trading higher at between 20p and 25p last spring. Still, the outlook is bright, with Shore Capital noting that it’s well-funded for an early stage company, with £25m cash on its balance sheet. Higher-risk investors may want to let yesterday’s excitement subside a little further, then look for an attractive entry price.