At last, the time has come. After tracking Yorkshire-based potash miner Sirius Minerals (LSE: SXX) for around 18 months, the time has come to dig in. I’ve been holding off for a reason, and now that reason has come to fruition. To delay would be daft, and cowardly. I’m finally going to buy it.
Mine’s a mine
I’m hardly alone in following the Sirius star. The stock has been a firm favourite among private investors for some time now, and with good reason. This is one of the world’s potentially most lucrative mining projects, and for once it’s physically located (rather than just listed) in the UK. Of course, that has been one of the problems, as it’s based under the North Yorks Moors National Park, and has had to clear some of the most stringent planning hurdles in the world. It cleared them all several months ago, but still I waited.
That’s because the next step was to secure $3.7bn required to dig the mine in an environmentally sensitive way and bore a 23-mile tunnel to a purpose-built export berth in Wilton, Teesside. Coming up with that kind of money isn’t easy in today’s uncertain world. Bizarrely, it came up with $2.6bn of stage 2 financing first. That still left it needing $1.09bn of state 1 financing, which it has finally secured.
Late in October, chief executive Chris Fraser announced $300m of funding from the UK subsidiary of Australian group Hancock Prospecting, controlled by iron ore heiress Gina Rinehart, Australia’s richest woman, who looks like she has lived up to her reputation as a tough negotiator.
Wise Fools
Fraser swallowed what seems to me like a costly deal for Sirius by announcing that the remaining money would come from a placing of new shares and convertible bonds. Several Fool contributors had warned this might happen, happily alerting me to the danger of purchasing before stage 1 financing was complete. So I held off and I’m glad I did, because Sirius estimated that the new shares will be priced between 20p to 30p, well below their market value at the time. When the news broke, the company’s share price plunged from around 40p to 25p. That is a real pain for existing investors and I feel for them, but it’s an opportunity for Johnny-come-latelies like me.
I would like to say we’ve found a floor for the share price, but of course this is no such thing. There may be more dilution further along the line, say, if £400m of convertible bonds aren’t paid in full, or it has to raise further funds over the next two or three years, during which time it will incur large development costs while generating no income at all. As a private investor, I can afford to take a position now and hold on for the longer term, in the hope that management claims that the project has a net present value of $15.2bn (against a market cap of just £561m) will ultimately be realised.
Again, there are no guarantees Sirius Minerals will succeed, but Chris Fraser has jumped through so many hurdles, I wouldn’t bet against him now. Within five to 10 years, the shares may be worth a lot more than 25p, and I’m willing to dig in now and wait.