Why I Am Still Bearish On Sirius Minerals PLC

Sirius Minerals PLC (LON:SXX) still has to prove that it’s worth half a billion pounds, argues this Fool.

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Alessandro Pasetti 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.

It’s party time today for Sirius Minerals (LSE: SXX) — but it won’t last much longer, in my view. Here’s why. 

A Big Breakthrough

The potash developer announced today that the members of the North York Moors National Park Authority “have resolved to grant permission for the project’s mine and mineral transport system planning application subject to the finalisation of the section 106 agreement and final wording of conditions“.

This is a big breakthrough, but questions remain.

Reaction

In early trade, its stock went through the roof (+94.8%), setting a new 52-week high of 29p, which was not far off its previous multi-year highs (January 2013, November 2011), valuing its equity equity capital at £626m.  

So, we had been there before, although a lower number of shares were outstanding in the past.

Consider that if you had invested in Sirius only three months ago, when its shares traded at 9p, and you had sold at the highs of today’s trading session, you’d have recorded a 224% pre-tax capital gain – hats off to you! 

Expectations

Given that any future event is very hard to predict, the obvious question — “what’s next?” — was soon replaced by a “sell, sell, sell” statement, at least judging by its share price movement, however. 

As is often the case in these situation, value hunters would focus on the next few steps of development (production) and financial matters. 

With regard to the former, its chief executive, Chris Fraser, said that “this is really just the beginning for the company – we have made a major step forward and now have a pathway to reaching production and unlocking ever more value for our shareholders“.

Then, paying attention to its financials makes a lot of sense, and suggests two possible scenarios: a) a takeover (unlikely at present); b) an additional rights issues (my preferred scenario).

Financials

During the six month ended 30 September 2014, Sirius reported a consolidated loss of £6.7m (£8.5m for the same period in 2013) — most of the operating losses were represented by administrative costs. Cash stood at £27.4m, compared to £13.1m one year earlier and £48.4m as at 31 March 2014.

Towards the end of last year, Sirius had total current assets of £31m and non-current assets of £112m (£2m of PP&E and £110m of goodwill), which combined represent between 22% and 27% of its market share, assuming a share price of between 29p and 24p, respectively — or about 6.6p a share. 

Since 30 September 2014, Sirius has issued 41 trading updates that financially have little changed the complexity of the investment case in terms of book values, even including £15m of cash proceeds from a placing that took place earlier this year.

Once those proceeds are taken into account and the value of its assets is inflated, according to a best-case scenario, SXX stock is unlikely to be worth more than 12p a share in my opinion. This methodology does not even consider goodwill risk, although goodwill represents 76% of the group’s total assets. 

Equity & Debt

So, its stock must continue to rise at a very fast pace if its shareholders want to avoid meaningful losses associated to dilution stemming from additional equity financing rounds.

In fact, its income statement will unlikely be able to support hefty interest payments, which are obvious for a borrower at this stage of business maturity, assuming debt can be raised at all. Meanwhile, a takeover is not a scenario that points to value at present, I’d argue, and is hardly a good reason to invest. 

Consider that its stock trades at 24p at the time of writing (1.33pm BST), some 18% below the record high that it reached in early trade — a level in line with its price at the end of May. 

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.

Alessandro Pasetti 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.

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