We are still waiting for planning approvals on Sirius Minerals’ (LSE: SXX) proposals for a mine and associated workings at its lead Yorkshire potash development project.
Meanwhile the share price looks perky today, up around 16% at 9p or so as I write. However, step back and take a longer view and we can see that the share has fallen a lot — so is it a bargain?
A lot to do
The share price is lower than the 32p it touched at the end of 2011, that’s for sure. But even now, the firm’s market capitalisation sits at around £147 million, and Sirius Minerals has a lot to do, and a lot of capital to spend, before it will see first potash production even when, and if, the planners rubber-stamp the project.
Meanwhile, with no revenues Sirius continues to eat its own cash. Back in September, cash stood at about £27 million and the firm consumed around £7 million during the first six months of its trading year.
The firm’s situation regarding cash burn and lack of revenues leading into a mine development project, with all the capital expenditure that entails, renders Sirius Minerals uninvestable other than as a highly speculative proposition.
Before investing in Sirius Minerals, I’d like to see these factors in place:
1) Planning approvals in
Without permission to build the mine, we don’t really have a serious business regardless of how many forward contracts the firm negotiates with potential customers.
If planning approvals come in as hoped, we’ll probably see the share price jump. However, planning permission is just the start and we could see a drift down as shareholders realise Sirius must then build the infrastructure of the potash mine, and that costs money. If the plans don’t secure planning permission, the shares will likely plummet. If there are further delays in the planning process, we could see the shares drift lower.
2) Fund raising for building
With permission to build secured, Sirius will need funds to build. Those funds will likely come either from shareholders, or by taking on debt, or both. The creation of new shares in a fund-raising event will dilute existing shareholders and new debt will increase the enterprise value of the firm. Both conditions could put downward pressure on the share price despite the firm’s improved prospects.
3) Substantially complete building of mine infrastructure
Building a potash mine and all its associated infrastructure is an uncertain pursuit. Who knows what problems the firm will face along the way that may create delays and budget increases. I’ve seen share prices wilt during the building process at other firms with a mine-development project and that could happen here.
Before investing, I’d like to see the mine substantially complete and clarity over whether another fund-raising event is necessary to fund the firm to early production and break even.