Since the start of the year, Sirius Minerals (LSE: SXX) has risen by 132%. That’s a stunning return even though a number of other resources companies have made gains thanks to rising commodity prices. However, Sirius Minerals’ incredible run may not be repeated in future.
Clearly, Sirius Minerals has huge long-term potential. World population growth means that demand for food is expected to grow significantly over the coming years. More efficient and higher yielding farming methods are in high demand and Sirius Minerals’ polyhalite fertiliser has achieved successful results in crop studies. This means that demand for the fertiliser is likely to be high over the long run.
However, Sirius Minerals faces challenges in moving from its present position to being a fully operational potash miner. One of the major difficulties it faces is with regard to the financing of the project. That’s because it’s a £1bn-plus project that’s due to be completed in two stages. With the outlook for commodity prices being bright, but still highly uncertain thanks to major losses incurred across the sector in 2015 and prior years, Sirius Minerals may find it more difficult to obtain the necessary financing for the project.
Although it has made good progress thus far and recently announced details of multiple financial institutions that could take part in financing the project, Sirius Minerals still needs to obtain the cash to build its potash mine.
While financing is a risk for the company, so is project delivery. The project is clearly large and while its delivery isn’t in question, there could be delays and unforeseen challenges ahead. Investor sentiment could be hurt by them in the short term, as well as share price volatility being relatively high.
Look for diversity?
Sirius Minerals also lacks diversity. That’s why it may be prudent to favour a more diversified resources stock such as BHP Billiton (LSE: BLT), especially with the outlook for the wider resources segment being uncertain. BHP offers diversification across multiple sites, multiple geographies and a wide range of commodities. This compares with Sirius Minerals’ single site operation that won’t start production in the short-to-medium term.
As well as a lower risk profile, BHP is highly profitable and is forecast to increase earnings over the next couple of years. For example, its bottom line is due to rise by 123% in the current financial year, which puts it on a price-to-earnings growth (PEG) ratio of just 0.2. In contrast, Sirius Minerals will not generate revenue in the next couple of years.
Although Sirius Minerals has huge long-term potential and is making good progress with its strategy, the risk/return profile of BHP is far superior. That’s especially the case given the continued uncertainty in commodity markets. As such, Sirius Minerals’ share price rise of 132% in 2016 may not be repeated in the next nine months, while BHP is the better buy at the present time.