Shares in Sirius Minerals (LSE: SXX) have always been a high-risk, high-return bet. My own calculations show the company could be worth a multiple of its current market capitalisation if it manages to get its flagship North Yorkshire potash mine into production.
However, and this has always been the main reason why I haven’t invested, getting the mine into production was always going to be a tremendous challenge. Most mining projects take far longer than expected and come in over budget. For this reason, it was never going to be easy to figure out with any degree of certainty if Sirius would be a success.
Under threat
Unfortunately for shareholders, the company’s very existence is now under threat because it’s struggling to raise the finance required to complete the construction of its mining project.
Management has previously stated the company could run out of cash in the third quarter of 2019 if financing didn’t materialise over the summer. After pulling the issue of its high-yield bond, (required to unlock the bulk of the next stage of financing) at the beginning of August, Sirius only has a couple of weeks left to lock in extra capital, if management’s cash flow forecasts are to be believed.
I wouldn’t want to be exposed to that risk. Instead, I’d invest my money with mining group Breedon (LSE: BREE).
Highly profitable
Sirius and Breedon are both UK-based mining companies, but that’s where the similarities stop. Breedon is not reliant on just one large project. The company owns and operates mines and processing facilities across the UK, which produce construction materials.
For 2018, the group’s revenues topped £862m and City analysts reckon they will hit £949m this year. The City is forecasting a net profit of £83m for the full-year. Not only is Breedon highly profitable, but the firm also has an impressive track record of creating value for shareholders.
In the past six years alone, the company’s book value has grown at a compound annual rate of 39% as management as has reinvested operating cash flow back into operations. This reinvestment has helped the enterprise grow profits at a compound annual rate of around 47% since 2013.
Over the past 10 years, the company’s track record of value creation is even more impressive. The stock has produced a compound annual return of 15% since the end of 2009, turning every £1,000 invested into £4,440. At this rate of return, it would take just 15 years to turn a £100,000 investment into £1m.
Underperformance
However recently, shares in Breedon have started to underperform. The stock is down 21% over the past 12 months. I think this could be a fantastic opportunity for investors to buy into this millionaire-maker stock.
After recent declines, shares in Breedon are currently dealing at a forward P/E of just 12.4 even though City analysts reckon earnings per share can grow by 10-12% in the next two years. At this rate, it’s only going to be a matter of time before the stock price catches up to earnings growth.
Considering Breedon’s track record of value creation, I think the stock could go back to producing double-digit annual returns for investors. That’s why I would buy shares in Breedon over Sirius Minerals any day.
