The resources sector has enjoyed a strong comeback in 2016 after a number of difficult years. Sirius Minerals (LSE: SXX) has been boosted by improved sentiment for the wider sector, with its shares rising by 28% since the start of the year. However, since the company has no revenue and isn’t expected to do so for a number of years, is it a stock that should even be considered for investment at the present time?
Huge potential
A lack of revenue means that Sirius Minerals is set to lose money for a number of years on an underlying basis. However, in the long term I feel it has the potential to become a highly successful and very profitable entity. Demand for fertiliser is likely to rise over the coming decades as food production becomes even bigger business. This is due to the forecast growth in world population, with some estimates stating that it will rise to almost 10bn by 2050.
Since Sirius Minerals’ crop studies have been generally successful, demand for the polyhalite fertiliser it plans to produce is likely to be high. And with financing now in place for both stages of the 10-figure project, its prospects appear to be relatively bright.
Potential weaknesses
While Sirius Minerals offers a sound long-term investment case, in the meantime there are a number of other resources companies that could soar in the next couple of years. For example, oil producers are likely to experience a strong 2017 as a result of the bright prospects for oil. The OPEC deal to cut production could mean there’s even an oil deficit, which would improve oil companies’ profitability and potentially their share prices.
Similarly, mining companies have been in favour of late, with a stronger US dollar boosting their revenue while not negatively impacting their cost bases. And with the wider sector offering low valuations and wide margins of safety, investors seem to have better risk/reward opportunities than Sirius Minerals available elsewhere.
While such companies may rise in the short-to-medium term, Sirius Minerals could disappoint. Although it trades well below the net present value of the project, as with any major project there are likely to be delays and difficulties ahead. On a relative basis Sirius Minerals may lack appeal at a time when the wider resources sector is very attractive on a short, medium and long term basis.
Outlook
That’s not to say that Sirius Minerals should be avoided, nor is it uninvestable. It could deliver stunning share price performance in the long run, but investors may have to be incredibly patient to realise those rewards. Therefore, there may be superior opportunities available elsewhere in companies which have revenues and growing profitability.
Missing out on those chances could be difficult to take for investors buying Sirius Minerals, which means that the opportunity cost of investing in the company may prove to be high over the coming years.
