I’ve written about Sirius Minerals (LSE: SXX) half-a-dozen times over the last year or so as an attractive higher risk/reward buy, at prices ranging from 15.5p up to as high as 26.5p in the last article I penned towards the end of July.
Sirius’s shares climbed to 45.5p during August, but have since fallen back 25%, trading at 34.25p, as I’m writing. Although well above the price when I last sang the company’s praises, is this nevertheless an attractive entry point?
News flow
News flow from the Yorkshire potash mine developer since the end of July has been good. Interim results were the precursor to the run-up in the shares to 45.5p, and the subsequent retracement has occurred in spite of judicial review periods for planning and development consent approvals expiring without any objections being tabled.
It’s clear skies ahead to start construction, subject to the company arranging suitable financing. And on this score too, there’s been encouraging news. Sirius has mandated six financial institutions as lead arrangers of senior debt facilities of up to $2.6bn for the stage two capital funding of the project.
We’re still awaiting news on stage one: a planned $1.09bn mix of debt and equity. This seems to be taking a little longer than management was anticipating, but I’m not too concerned. I can’t see raising equity being a problem, while experts in the debt field reckon the project is an attractive proposition for lenders. Of course, all sides will be after the best deal they can get, so it’s not too surprising it’s taking some time to hammer out.
Opportunity
I can’t claim to be qualified to put a current value on a mine that isn’t yet funded, that will take five years to construct and that has a potential life of over 100 years. However, everything I’ve seen from the company and independent analysts suggests there’s considerable upside from the current share price, based on the projected construction timescale, production volumes, costs and so on.
Furthermore, this remains the case under plausible conservative scenarios for the first-stage funding debt/equity mix and pricing, and lower-end production and cost sensitivities. Of course, this by no means guarantees super returns for investors.
Risks
One of the most obvious risks in the short-to-medium term is that the construction project could overrun on time and costs, perhaps substantially. It’s something we see time and again with infrastructure projects as large and complex as Sirius’s development undoubtedly is.
If there are major problems, it’s possible the company may need to raise significantly more equity further down the line, meaning current investors could possibly be diluted way above and beyond the dilution of the first-stage funding modelled by analysts. Effectively, that would make today’s shares less valuable than they currently appear.
While management has done a fine job in negotiating all the planning hurdles to get to this stage and has repeatedly said it’s focused on minimising shareholder dilution, the history to date on the latter score hasn’t actually been outstanding.
On balance, though, I see enough of a margin at the current share price to absorb some unplanned dilution and, as such, I continue to rate the stock a buy, albeit a higher risk one.
