When Sirius Minerals (LSE: SXX) shares soared above 40p earlier this year, I confess to having felt a bit smug.
I’d tipped Sirius as a hot growth opportunity back in May 2015 at a price of 13.75p, and a trebling in the share price was more than I’d hoped for in such a short timescale. But I confess I was also rather surprised by the quick share price rise. I thought it was overdone at such an early stage while there was still plenty of risk.
Approval for the firm’s planned harbour facilities at Teesside was granted in July and, coupled with first-half results released in August, that attracted the growth investors. The company estimated a project capital funding requirement of $2.91bn, with stage one costing $1.09bn. It told us the project has a net present value of $15bn, rising to $27bn once production commences — that, apparently, represents an after-tax internal rate of return of 28%, which is very attractive.
Down again
The optimism helped make the firm’s November open offer a success, with existing shareholders offered two new shares at 20p apiece for every one they currently owned — and the offer was “modestly oversubscribed“.
But that big discount to October’s price levels helped push the shares back down again, and today they actually stand at 18.5p — below the offer price, and way down on the levels reached in August. My transitory treble is gone, though 18.5p still represents a gain of 35% on my original tip price — but it’s largely irrelevant at this stage.
The thing is, the biggest risks are still there, with the key one being that the first shipments of that lovely polyhalite potash sitting below the North Yorkshire moors aren’t expected to happen before 2022 at the very earliest. That’s a long time, there’s a lot of really quite challenging mining and engineering work to be done, and timescales and costs are notorious for overrunning — and we just don’t know how much dilution current shareholders will face.
I originally thought we’d be be in for a rocky ride, and that’s already come true. And there’ll surely be more of the same over the next few years, largely because of the way growth investors think. In the absence of any profits in the early stages of a development like this, many investors thrive on news flow.
Rocky road
Every time something good happens, they pile in and we get a share price spike. And then every time nothing happens, and keeps on not happening for weeks and even months, they lose interest and the share price drifts back down. The Sirius project is a long-term one, and now that the excitement of the approvals process and initial fund-raising is subsiding, we’re in for long periods of unexciting hard graft.
That, for me, makes it time to buy. I said back in 2015 that the risks were high, and they still are, but the potential is massive. With food requirements ever growing, fertiliser is in great demand, and Sirius’s polyhalite potash version is among the world’s very best — plenty of future customers have already signed up and are patiently waiting in line.
The other thing is the company’s valuation. It currently has a market cap of just £770m, and is sitting on an asset it values conservatively at $15bn.
