Why Sirius Minerals plc could be worth buying after falling 25%

G A Chester revisits popular growth prospect Sirius Minerals plc (LON:SXX).

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

I’ve written about Sirius Minerals (LSE: SXX) half-a-dozen times over the last year or so as an attractive higher risk/reward buy, at prices ranging from 15.5p up to as high as 26.5p in the last article I penned towards the end of July.

Sirius’s shares climbed to 45.5p during August, but have since fallen back 25%, trading at 34.25p, as I’m writing. Although well above the price when I last sang the company’s praises, is this nevertheless an attractive entry point?

News flow

News flow from the Yorkshire potash mine developer since the end of July has been good. Interim results were the precursor to the run-up in the shares to 45.5p, and the subsequent retracement has occurred in spite of judicial review periods for planning and development consent approvals expiring without any objections being tabled.

It’s clear skies ahead to start construction, subject to the company arranging suitable financing. And on this score too, there’s been encouraging news. Sirius has mandated six financial institutions as lead arrangers of senior debt facilities of up to $2.6bn for the stage two capital funding of the project.

We’re still awaiting news on stage one: a planned $1.09bn mix of debt and equity. This seems to be taking a little longer than management was anticipating, but I’m not too concerned. I can’t see raising equity being a problem, while experts in the debt field reckon the project is an attractive proposition for lenders. Of course, all sides will be after the best deal they can get, so it’s not too surprising it’s taking some time to hammer out.

Opportunity

I can’t claim to be qualified to put a current value on a mine that isn’t yet funded, that will take five years to construct and that has a potential life of over 100 years. However, everything I’ve seen from the company and independent analysts suggests there’s considerable upside from the current share price, based on the projected construction timescale, production volumes, costs and so on.

Furthermore, this remains the case under plausible conservative scenarios for the first-stage funding debt/equity mix and pricing, and lower-end production and cost sensitivities. Of course, this by no means guarantees super returns for investors.

Risks

One of the most obvious risks in the short-to-medium term is that the construction project could overrun on time and costs, perhaps substantially. It’s something we see time and again with infrastructure projects as large and complex as Sirius’s development undoubtedly is.

If there are major problems, it’s possible the company may need to raise significantly more equity further down the line, meaning current investors could possibly be diluted way above and beyond the dilution of the first-stage funding modelled by analysts. Effectively, that would make today’s shares less valuable than they currently appear.

While management has done a fine job in negotiating all the planning hurdles to get to this stage and has repeatedly said it’s focused on minimising shareholder dilution, the history to date on the latter score hasn’t actually been outstanding.

On balance, though, I see enough of a margin at the current share price to absorb some unplanned dilution and, as such, I continue to rate the stock a buy, albeit a higher risk one.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

G A Chester has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »