At just over 17p today, Sirius Minerals’ (LSE: SXX) shares are well down from the 25p or so they touched around 28 May. So is it time to top up or buy into this investment?
I’m not, and here’s why.
Managing risk
My previous article on Sirius Minerals was back in early May with the shares at 14p. Back then, we’d seen a rise from an early-in-the-year nadir of about 7p, as the market appeared to sniff the scent of yet-to-come positive planning news in the air.
I argued that the rise gave shareholders opportunity to take most of their investment in Sirius off the table, perhaps running a smaller ‘free-carried’ portion of their profits to capture any further upside.
Such tactics can help manage the risk of holding speculative shares like Sirius. After all, the firm has yet to generate any profits — or even to build its potash mine. The directors fleshed out the magnitude of challenges ahead in an update on 10 July.
Such challenges constitute a long and winding road to production — a road, no doubt, littered with obstacles, any of which could drive the share price down from where it stands today. The time to top up is when setbacks occur and the share price plummets — I don’t think we are there yet, even with recent share-price weakness.
Planning
There’s no doubt that a positive decision at the end of June by members of the North York Moors National Park Authority (NYMNPA) was a major hurdle cleared — the authority resolved to grant permission for Sirius’s mine and mineral transport system. However, Sirius reckons a number of steps remain before the company will receive final planning decision notices.
Sirius still needs final approvals from NYMNPA, from Redcar and Cleveland Borough Council and from Scarborough Borough Council for various aspects of the mine development project. Most outstanding applications are departures from local determining authorities’ development plans, the firm says, and as such could yet be subject to public inquiry.
Although Sirius is still working through the nuts and bolts of planning requirements with the various authorities, the company thinks it could receive most decision-notices around the end of September 2015. Harbour facilities at Teesside need rubber-stamping by the government, though, which could take until mid 2016. However, Sirius reckons it will be able to get on building the rest of the development while waiting for approval for the harbour facilities.
Feasibility and financing
Meanwhile, the firm is working hard on its feasibility study for the project, which it expects to complete around this autumn. We get a sense of the potential for Sirius’s proposed potash business as the firm talks of how it is figuring out how to increase the initial installed infrastructure capacity from 6.5 million tonnes per annum to 10 million tonnes, and considering how to make sure the infrastructure capacity can double to 20 million tonnes if things go well.
The feasibility study flags up potential, true, but it also gets the firm closer to figuring out exactly how much it’s all going to cost to build the works. Sirius reckons the project will require multiple financings, and the outcome of those, when they come, is an uncertain factor for existing investors holding shares in Sirius Minerals.
That said, the firm reckons it will take on debt for the majority of its financing needs during the construction process, “because the underlying economics of the project’s business model lend themselves to high leverage, and because that should be in the best long term interests of shareholders”.
Sirius Minerals aims to become a major multi-nutrient fertiliser producer, but there is a lot of potential for setbacks along the way, which could drive down the share price from here. If that happens, the shares could start to look attractive again.
