There is no doubt that Sirius Minerals (LSE: SXX) is one of the most exciting prospects on the UK stock market, generating massive investor interest… despite being five years away from turning a profit. However, investor enthusiasm does tend to wax and wane, as many have been lured in by short-term share price jumps, only to discover they lack the staying power this stock demands.
World-class
Interest is definitely waning today, with the share price down 5.11% at time of writing, following publication of the potash miner’s full-year 2017 results.
CEO Chris Fraser kicked off with a bullish reiteration of the group’s “world-class project” which he said “has the potential to disrupt the global fertiliser market and contribute substantially to the UK economy.” He said Sirius achieved a number of important performance milestones in 2017, including starting construction on the mine and signing incremental supply agreements bringing the total to 4.4m tonnes a year. Sirius also moved to London’s main market and is now a FTSE 250 company, despite its lack of revenues.
Dig deep
Enablement works, site preparation and shaft sinking continue apace, all of which is vital work. But investors have focused on the reported loss before tax, which tripled from £23.42m in 2016 to £79.25m. Funds spent on developing the project totalled £197.3m, before financing costs.
Sirius still has cash resources of £468.5m, with bank deposits and cash equivalents totalling £394m, plus restricted cash of £74.5m. This is down from £665.3m at the end of 2016. I cannot imagine this would come as much as a surprise to long-term investors. It was always going to spend big before it started earning. As I wrote here, the one thing Sirius Minerals definitely requires is patience.
Fair value?
Due to IFRS fair valuation requirements relating to elements of its stage 1 financing, the 22% increase in the company’s share price over the year has led to a total recorded loss of £78.9m. The fair valuation adjustments driving the loss are non-cash in nature, Sirius assures investors.
As far as I can see, the long-term story for this stock (which I hold) has not changed. Sirius has to pour billions into developing its mine and transport facilities at Teeside before it starts delivering fertiliser and making money, hopefully by 2022. It has a long haul ahead… and so do investors. My biggest worry has always been dilution. If it burns through its cash too quickly it could be forced into further fundraising, which could punish existing shareholders.
Taking time
There is also the opportunity cost of holding this stock, as you will not earn any dividends at the moment. There has been share price growth, though, with the stock 52% higher than a year ago, albeit with volatility along the way. My Foolish colleague Rupert Hargreaves reckons Sirius Minerals could return to 40p in 2018, which would mark a healthy premium over today’s 27p.
The time to buy Sirius is when it’s down, rather than when it’s up. Well it’s down today. It still looks a strong buy and hold to me, but only for far-sighted investors with bags of nerve and patience.Â