I last wrote about Sirius Minerals (LSE: SXX) back in February when the shares traded at 9p and the market capitalisation was around £147 million. Back then, the firm still needed most of its planning approvals for its Yorkshire potash development project.
Planning delight
A positive decision on planning was never certain, but I did think the shares might jump if the planning news was good.
In time-honoured fashion, the planners’ decision on some of the mine infrastructure works seemed to leak to the market and Sirius’s shares began spiking up from around 1 April. They now sit at 14p or so, valuing the would-be potash miner at a market capitalisation of £292 million.
The news followed the share-price action with the first of several positive planning reports arriving on 15 April. Yet, even now the firm still awaits endorsement from North York Moors National Park Authority for its ‘straddling application’ for the proposed mine and mineral transport system, and for approval for the harbour facilities from the Planning Inspectorate.
There’s still a lot to do
Planning risk remains, but even if Sirius Minerals gets the nod to proceed the firm still has a lot do, and still has a lot of capital to spend, before it will see first potash production. Lack of revenue means the firm needs to return regularly to the market to gain the funds to progress operations. The firm raised £20 million from shareholders in 2011, £55 million in 2012, £43 million in 2014 and, by issuing almost 226 million new shares, raised a net £15 million during March, which diluted existing shareholders by just under a further 12%.
I’ll be surprised if that’s the end of fund-raising by either taking on debt or by diluting existing shareholders. Building infrastructure for any new mining project takes vast sums and has huge potential for expensive delays, problems and setbacks. With other mine-development projects we are used to seeing share prices sink during the construction process and that could happen at Sirius.
To be sure of Sirius as an investment, rather than as a speculation, we need to see the mine substantially complete. Waiting for imminent production can sometimes coincide with a low point for the share price anyway — that’s certainly something we’ve seen with other mine development projects.
Managing risk
From here, we could see better-value entry points available along the way. Should I be sitting on a substantial capital gain now because of the positive planning news so far I’d be tempted to find ways of mitigating the forward risk to that position.
One way to deal with the uncertainties ahead might be to take most of my investment, and certainly my entire initial stake, off the table by selling the majority of my shares in Sirius Minerals.
Running a small amount of the capital profit for a free-carried trade would provide a sleep-at-night position with options to load up again at better value entry points in the future when the firm’s operations have progressed enough to clear more of the risk from the investment proposition. Sadly, I didn’t invest in Sirius minerals in February so don’t face the decision about how to best preserve my speculative gains!