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Is Sirius Minerals plc’s 50% share price slump set to continue?

Image: Sirius Minerals: Fair use

In the last six months, the share price of Sirius Minerals (LSE: SXX) has slumped by over 50%. At the same time, a number of mining shares have recorded stunning gains as commodity prices have enjoyed a much more prosperous period than in recent years. As such, Sirius Minerals’ performance is arguably even more disappointing on a relative basis. However, with construction of its mine set to start later this year, could its shares recover? Or are more declines ahead?

No man’s land

At the present time, Sirius Minerals appears to be in something of a no man’s land. Its ambitious potash mine has already been approved and financed. Both of these steps are extremely challenging for any company. And while Sirius Minerals faced challenges, it was able to overcome them to place itself in a very strong position.

However, it has not yet started work on building the mine which is expected to eventually produce polyhalite fertiliser. Therefore, many investors may have lost interest in the company. Or they may have decided that after the gains of 2016, which saw its shares rising to a high of 45p, it is sensible to take profits. Either way, there has been a lack of news in 2017 regarding the company. As with any smaller business in particular, this can lead to a gradual decline in investor sentiment.

An important period

Just as the period where Sirius Minerals was seeking approval for its potash mine was crucial to its long-term outlook, the remainder of 2017 could be highly important to its share price performance. As mentioned, work is due to start on the potash mine near York and this could send the company’s shares one of two ways.

If it progresses on time and on budget, it could lead to improved investor sentiment in the stock and result in a higher share price. However, history tells us that smaller mining companies rarely enjoy such a smooth ride, and so there is a reasonable chance that there will be delays and/or revisions to the costs involved with the project. While there is a chance they may end up with a higher net present value (NPV) for the project, the likelihood is that with the mining industry picking up once more and financing already in place, future costs may prove higher than previously anticipated.

A difficult decision

Clearly, Sirius Minerals has long-term profit potential. Global demand for food is increasing and polyhalite fertiliser could be in high demand in order to improve crop yields. However, production is still years away for the company. There is a wide range of potential challenges ahead which could cause further declines in its share price between today and when revenue first starts to be realised.

Since the mining sector offers a number of stocks which have growing bottom lines and trade on low valuations, there may be better options available elsewhere which have superior risk/reward ratios for long-term investors.

Long-term potential

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Peter Stephens 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.