Sirius Minerals (LSE: SXX) has huge long-term potential. World population is expected to increase by a third between today and 2050. Therefore demand for natural resources, notably food, is likely to rise rapidly. Products that boost crop yields could become more sought after, with the company’s polyhalite fertiliser likely to be faced with high demand and rising prices in the coming years. However, despite this appeal there are two mining stocks which I’d buy before Sirius Minerals.
Risk profile
Sirius Minerals may have huge potential, but it’s also a high risk stock to own. Part of the reason for this is that it lacks diversity. It will become a single site operator that mines only one commodity. This means that an unforeseen event at its mine in Yorkshire, or a fall in price or demand for fertiliser could see the company’s financial performance severely damaged.
By contrast, other mining companies such as Rio Tinto (LSE: RIO) and Anglo American (LSE: AAL) offer their investors diversity. Both stocks operate in a wide range of geographical locations, which reduces geographic risk and means that if there are tax changes or other negative events in one location, other regions can pick up the slack. Similarly, both stocks have a number of different divisions which produce a range of commodities. This helps to smooth out their financial performance and offers a more robust business model.
No revenues
Another reason why Sirius Minerals isn’t as appealing as Anglo American or Rio Tinto is its lack of revenue. In fact, Sirius Minerals isn’t due to record any income for a number of years, while its sector peers are highly profitable today.
This puts Sirius Minerals at a distinct disadvantage. The market is already aware of the company’s net present value and the plan through which it intends to build its potash mine. Therefore, it’s more difficult to see a positive catalyst on the company’s share price than is the case for sector peers. In the case of Rio Tinto, improved profitability or a rising dividend could improve investor demand, while Anglo American could benefit from further progress in its turnaround strategy.
However, for Sirius Minerals it’s a case of the next few years being dedicated to constructing a mine. Therefore, its downside appears to be greater than its upside over the medium term.
Outlook
While Sirius Minerals has the potential to become a major mining company in the long run, its medium-term appeal is somewhat limited. Its lack of income, lack of diversity and the potential for challenges in the construction phase mean that other mining companies such as Rio Tinto and Anglo American have more appeal. They have lower risk profiles and while they may not offer the same level of potential rewards, their overall risk/reward ratios are superior to that of Sirius Minerals.