Last Tuesday’s fourth-quarter progress update summed up recent events, but there hasn’t been any substantial company news from Sirius Minerals (LSE: SSX) since my last article about the firm at the end of November. Back then, I asked the question, “Is £1,000,000,000 too rich a valuation for Sirius Minerals?”
With the share price then close to the 22.5p, the market capitalisation stood a spit away from £1.1bn. As I write, the price has drifted down a little.
A mind-boggling construction project
I observed in my November article that the valuation looked “hefty” at first glance for a company with “zero revenue, earnings or incoming cash flow,” but acknowledged that Sirius is all about the potential for future earnings at this stage in its development. The long line of potential customers signing up to offtake agreements for its Poly4 potash product lends weight to the upside case when investing in the company.
Yet there’s a mine and infrastructure project to complete that I described as being “mind-boggling in its proportions” before any potash can be lifted from beneath the North Yorkshire Moors. My conclusion in November was that “the financial stakes are high and there’s no accurate way to determine if the firm is worth its £1bn-plus price tag. I see the shares as speculative.”
Three reasons to be fearful
My Foolish colleague Roland Head followed up in early December listing three reasons for being worried about the share price. He wondered if the firm may run out of cash and be unable to raise the $3.5bn it needs to build its mine. He explained that the mass selling of polyhalite is an untested market, and until now the commodity has only been sold in small batches. Finally, Roland saw the risk that bulk customers may decide to offer less than agreed up-front for the product if they view the fertiliser’s nutrient value to be lower than estimated.
At the end of December, Rupert Hargreaves punched out an article asking whether delays in receiving funding meant the company’s money lenders were starting to have doubts about the project’s viability. He also said delays and cost over-runs could lead to further money raising from the equity market, meaning further possible dilution of existing shareholders’ interests. He estimated that the share price could fall as much as 50% from where it is now. Although he believes the firm has “tremendous potential over the long term.”
What would Warren Buffett do?
Meanwhile, I doubt whether the great American investor Warren Buffett would invest in Sirius Minerals at this stage in its life. He’s well known for investing in ‘wonderful’ businesses and he needs strong quality indicators, a reasonable valuation and a way of recognising a strong trading niche or economic moat supporting a firm’s operations. But the dearth of financial fundamentals with Sirius Minerals now would probably rule the company out for him.
My own stance is that I’d want the mine-building and infrastructure project to be near completion before I’d consider investing in the shares. My guess is that the share price could be lower than it is today when the production of the product is imminent. If that sweet spot doesn’t arrive, I’m confident there will be plenty of opportunities for me to pounce on in the stock market. So I’d avoid the Sirius Minerals share price right now.