Why I’m Avoiding AIM Movers And Shakers Sirius Minerals Plc And 88 Energy Ltd

They may be popular, but danger lurks beneath the surface at 88 Energy Ltd (LON: 88E) & Sirius Minerals Plc (LON: SXX).

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If such an award existed, Sirius Minerals (LSE: SXX) would be the odds-on favourite to win ‘most talked about company that has yet to do anything’. The Sirius plan to mine a close relative of potash under the North York Moors National Park has been in the works for well over a decade now with construction yet to begin.

Backers of the ambitious project are positive that a corner has been turned, however. Sirius received permission to go ahead with the project from local authorities last summer and last week released its most detailed feasibility study yet.

Despite this good news, enough major issues still loom over the tiny miner to make me wary. The latest feasibility report suggests the company will need to raise $1.2bn in debt and equity for the first stage of construction, with a full $3.5bn needed to reach first production.

Raising this capital is certainly not out of the realms of possibility, but the technical and logistical issues facing the project add an unwanted wrinkle to plans. In order to not disturb the national park, Sirius will be constructing a 23-mile-long, 4.5-metre-wide extraction tunnel from the mine to an off-site processing facility. If this were a major player such as Rio Tinto or BHP Billiton, the plan would still raise eyebrows, much less when attempted by a £350m market cap company.

Furthermore, Polyhalite, the fertilizer that the company is targeting, is still not widely used around the world. Although company-funded studies have produced solid results and orders are coming in, basing a £3.7bn project on a product that lacks a robust market worries me. These problems combined with the company itself not forecasting first production until 2021 at the earliest are enough to leave me seeking better places for my capital.

Long road ahead

With shares up 750% year-to-date, 88 Energy (LSE: 88E) certainly would have been a great place to park my cash. Unfortunately, my crystal ball was in the shop and investing in an oil producer that has yet to produce a barrel of the black stuff kept me away from shares.

After failing to strike it rich at home in Australia, the company has moved its sights to the slightly colder climes of Northern Alaska, where it holds the leases to some 200,000 acres. Shares have risen dramatically due to positive drilling results suggesting that the area holds significant crude reserves.

This was never in doubt, as several large oil majors have interests in the region, but the problem remains execution. Alaska remains a costly place for oil drillers, due to its weather and geographic isolation. 88 Energy would need Brent prices of $35/bbl to break even on any conventional wells, and $55/bbl for unconventional oil.

These prices are feasible in the long term, but the company remains many years away from being able to actually exploit these resources. It’s still in the process of drilling exploratory wells and the AIM is littered with small oil companies whose shares have rocketed on one good well and subsequently disappointed. Until there are more concrete plans about the size of reserves, how construction will proceed, and how much it will cost, I’ll be staying on the sideline.

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.

Ian Pierce 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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