The mining sector has enjoyed a stunning 2016 thus far. Commodity prices have risen and the share prices of mining stocks have generally been well ahead of the wider index. However, even against this backdrop of capital gains, Sirius Minerals’ (LSE: SXX) 137% year to date gain stands out.
The company has become increasingly popular among investors despite being a long way from production and profitability. As such, its valuation may already price-in its long-term prospects.
Growth potential
Clearly, Sirius Minerals has the potential to deliver excellent financial results in the long run. Crop studies have shown the polyhalite fertiliser it plans to produce has a positive effect on crop yield. At a time when world population growth is rapid and food production could become an even bigger challenge in future years, Sirius Minerals could enjoy high demand for its fertiliser.
Furthermore, Sirius is expected to have relatively low costs when it enters the production phase. This could provide it with a competitive advantage over a number of other potash miners and mean that it offers greater sustainability than its peers. It also has the required permissions for infrastructure development, which reduces its overall risk profile.
Bid target
Part of the reason for the share price rise is its bid potential. A number of large mining companies have struggled in recent years with declining iron ore and copper prices. They are therefore seeking out ways of reducing their reliance on such commodities – especially with the Chinese economy transitioning away from being capital expenditure-led and towards a more consumer-focused economy. As such, a bid for Sirius Minerals can’t be ruled out, although Sirius Minerals remains a long way from production and this could put off potential suitors in the near term.
Financial outlook
Sirius Minerals’ major risk is project financing. It has undoubtedly made progress in this regard and due to the growth opportunities it presents, there has been significant interest in financing the project. Furthermore, its two-stage plan could make it easier to obtain the necessary capital to develop its project.
However, the sheer scale of the £1bn-plus project means that it may prove difficult to finance. This is especially the case since investor sentiment towards the wider resources sector is still relatively weak even after its improvement in 2016. As such, delays to the project could be felt over the medium term and this could have a negative impact on its share price.
Looking ahead
Sirius Minerals remains a relatively high risk mining company. It lacks diversity, is a long way from production and financing its project remains a major risk. Therefore, even though it has strong long-term growth potential from a growing market, it may be prudent to await a lower share price before buying it. That’s especially the case since a number of peers offer high growth at low prices.
