When I last wrote about Sirius Minerals (LSE: SXX) back in June, the firm’s market capitalisation stood at a massive £1.44bn or so, which was quite a thumping valuation for a firm with no revenues. Today with the market cap lower at £1.136bn, I’m still not rushing to jump aboard the story.
A big task ahead
The company sits on the world’s largest and highest-grade deposit of polyhalite, used to make fertiliser, and many other firms have agreed to buy Sirius Mineral’s end-product when it gets some out of the ground. But there’s a hitch before that happens – it must build the mine and all infrastructure before operations commence.
Speculation drove the share price up, I reckon. The firm’s potential for generating cash flow and profits is undeniable, but the story remains early-stage. The building project is daunting and capital-intensive. As we’ve seen many times with construction projects of any kind, there’s great potential for things to go awry along the way. Even now, with the shares lower, I think Sirius Minerals is highly speculative.
The company updated the market today saying that the mine-building project is on time and on budget. Call me cynical, but I’d be amazed if that situation continues all the way through to completion. Perhaps I’m still too gnarly from my own days spent on the fringes of the construction industry trenches. I find the company’s whole building and development phase exciting, but would I risk my own hard-earned capital on the endeavour? At some point, yes, but not yet.
Construction ramp-up
Chief executive Chris Fraser tells us in today’s update that activity levels at the firm’s Woodsmith mine are increasing every month. A growing team of employees and contractors is expanding the execution capability of the firm as it starts diaphragm walling activities and he is “pleased with the progress being made and the positive attitude across the expanding team.” After the long planning phase, this is tangible progress and I’m following proceedings with interest.
In one mind-boggling statistic, the firm has almost put in one million man-hours of total project activity – a mine development proposition doesn’t come cheap. The final quarter of the year will see the company score a full 12 months of actual on-the-ground construction activity. But nipping and tucking is still ongoing when it comes to the plan. The firm continues to “identify simplification and capital reduction opportunities in parts of the Project,” such as the redesign of the mine infrastructure between the surface and 120 metres below ground, the refinement and optimisation of the granulation process in the materials handling facility, and simplification of the mineral transport system conveyor design. That’s all good stuff, but I reckon the firm will need to nail as many cost reductions as it can just to offset unforeseen cost overruns. We’ll see if I’m right about that in the fullness of time.
Meanwhile, the company is in advanced negotiations with potential customers in “multiple regions” to expand its commercial reach into new markets and is “hoping to conclude these soon.” In June, I suggested taking profits at the then 33p share price. Today, at a little over 25p, I remain cautious.