The belief that Sirius Minerals (LSE: SXX) could well be the next big thing in the commodities space now seems to be a distant memory.
The potash play is now dealing at a 60% discount from the peaks of 45.5p per share struck last August. Investors were encouraged to sell after Sirius Minerals began offering ordinary shares at just 20p at its latest financing round in November and their enthusiasm has not returned yet.
Market appetite for Sirius Minerals went gangbusters last March after the miner released definitive feasibility study results for its colossal North Yorkshire polyhalite project. This revealed that the project could have a net present value of $27bn upon first production, and could therefore make the company “a world leader in the fertiliser industry .”
While not doubting the sincerity of Sirius Minerals’ proclamations, the history of commodities investment is littered with companies finding the next big thing only to run out of money as project delays smash revenues projections and push up costs.
And Sirius Minerals does not expect to pull any material out of the ground until at least 2022, by which time the potash market’s supply/demand picture — and consequently the price of the fertilising material — is anyone’s guess.
Indeed, the raft of new mines scheduled to come online from industry giants like K+S Group and PotashCorp could keep the market swimming in unwanted material long into the future.
Now don’t get me wrong: Sirius Minerals could still provide handsome returns in the years ahead, and last November’s successful fundraising — combined with the critical approval received in July to build critical harbour facilities in Teesside — should provide investors with some peace of mind.
Still, as we have already seen, stocks like Sirius Minerals can plummet as quickly as they explode. So while the firm’s plans to provide three-month development updates from later this month could shake out fair weather investors and cut volatility, I reckon the fledgling digger can still be considered far too risky for more conservative investors.
Bank in bother?
But Britain’s big caps are not without their fair share of risk either and I reckon Lloyds Banking Group (LSE: LLOY) also faces an uncertain future, certainly in the medium term.
At face value such a proclamation may seem absurd, after all, last year Lloyds saw pre-tax profit hit levels not seen for a decade, at £4.24bn. The spritely result was due to the business stashing away far less to cover the cost of PPI-related complaints.
However, the number of claims made to the Financial Ombudsman is back on an upward tilt, the body receiving 78,000 fresh cases during the latter half of 2016. And the number is likely to keep rising as a now-confirmed 2019 deadline for new complaints looms into view.
Meanwhile, Lloyds also faces a slowdown in revenue growth as economic conditions in the UK likely become more challenging in the months ahead. Business investment is already showing signs of stress while consumer spending is also falling. And rising pressure on household finances could see bad debts rise at the Black Horse Bank.
I believe profits at Lloyds could find themselves under pressure again despite 2016’s blockbuster result.