Today I’m explaining why Sirius Minerals (LSE: SXX) and Monitise (LSE: MONI) are a risk too far for shrewd investors.
Digger dives
Shares in potash play Sirius Minerals continue to trade in an extremely volatile manner, a 5% decline on Friday trading taking the stock to its lowest level in a fortnight.
Such extreme trading patterns are a common phenomenon for companies involved in the business of minerals and energy extraction, where news of bubbly discoveries — or conversely exploration disappointments — can prompt both panic buying and selling.
And so a blockbuster definitive feasibility study at its North Yorkshire polyhalite project sent Sirius Minerals spiking to 10-month highs back in March. Indeed, the London-based digger said that the asset had the potential to make it “a world leader in the fertilizer industry.”
But news released shortly afterwards that the firm would need $3.56bn to get the project off the ground, a sum Sirius Minerals plans to raise through issuing equity and raising debt, prompted investors to stampede towards the exits.
The mining play advised last month that pre-tax losses clocked in at £7m for the period to March 2016, not a surprise given that it’s yet to generate any revenues.
And the City expects losses to widen over the next few years as it attempts to get production up and running — indeed, Sirius Minerals is anticipated to see a loss of £66.7m for 2016 scream higher to £74.3m and £142.2m in 2017 and 2018, respectively.
Not only does Sirius Minerals face near-term obstacles to fund its polyhalite project, but the supply/demand imbalance washing over the potash market — not to mention the aforementioned unpredictability related to mining operations — casts further doubts over the company’s ability to flip into the black beyond the next few years.
I believe Sirius Minerals carries unacceptable levels of risk at the present time.
Software struggler
I also believe payment processing play Monitise is currently an unattractive investment destination. The company has remained extremely quiet since announcing in early March it was entering discussions to offload its Markco Media division, a unit it acquired for £55m just two years ago.
There’s already plenty of uncertainty swirling around the future of Monitise as the likes of Apple and Google take a chunk out of the firm’s market share by launching their own mobile payment systems. Card giant Visa has also torn up its relationship with the company as it seeks to go it alone.
Monitise’s customers are also rejecting the firm’s decision to stop developing bespoke applications in favour of generic software solutions, with revenues slumping 21% during July-December, to £33.4m.
The City expects full-year sales to June 2016 to register at £66.3m — down from £89m in 2015 — and to slip again to £64.5m next year, a situation that’s likely to keep Monitise locked firmly in the losses column. Like Sirius Minerals, I reckon the company is a perilous investment destination right now.