Last month, I explained why I think the Sirius Minerals (LSE: SXX) share price fall has made me want to buy more shares. But when shares I hold fall in price, I always re-examine my purchase to try to work out two things — was my original decision to buy flawed, and has the company materially changed for the worse since I bought them?
The shares are still actually above my purchase price of 18p, but what else has changed since I bought in December 2016?
The size and quality of the company’s polyhalite potash resources in North Yorkshire looked impressive, and nothing much has changed there. If anything, confirmation of the potential motherload had surely improved confidence and lowered the risk. So that’s a positive.
Progress
Planning permissions were not all in place at the time, and opposition couldn’t be ruled out. That was a risk I was prepared to take, but all the necessary paperwork has since been signed, sealed and delivered. Another tick in the plus box.
Very little engineering work had taken place at the time. But since then, Sirius has made solid progress in getting the big holes dug and getting the needed infrastructure under way. Again, I’m seeing reduced risk on that front today.
Who would buy the potash? Over the past two years, Sirius has been signing major supply agreements with customers all over the world. China, Africa, South America… everywhere that agriculture is big, people want its high-quality fertiliser.
Funding
But now we come to the crux — the second phase of funding, which is needed to take the project from where it is today to actual commercial production. Sirius hopes to get it all sorted during the first quarter of 2019, but it could be a close-run thing as it’s dragging on a bit. Final costs are also now expected to be around $400m-$600m higher than earlier estimates, at £3.4bn to $3.6bn.
So is that a risk factor that’s worse now than when I decided to invest? Actually, no, as I always expected the project to take longer than initially planned and to come in over budget. In my experience, engineering projects always do and, as an investor, I would have been naive to expect otherwise.
There’s been significant dilution too, with the number of shares more than doubling from 2.3bn to 4.7bn. And there’s certainly more to come, and more debt to take on, too. But significant dilution was always inevitable and, again, I don’t see any real change from my original expectations.
What next?
What I think is likely to happen is that the necessary funding will be found, though probably at a higher cost than previously anticipated — I just don’t see investors pulling out now, not with all the positives already lined up.
My colleague Rupert Hargreaves is remaining cautiously on the sidelines at the moment (perhaps wisely), but he’s suggested that the company’s value could reach £18.5bn (from £1.07bn, as I write). And though a significant chunk of that will be diluted away from current owners by the next funding phase, I still see a multi-bagger here.
In my view, nothing has changed significantly since my original assessment, except that the overall risk is now actually lower.