This year has been a hugely successful period for investors in Sirius Minerals (LSE: SXX). The mining company which aims to produce polyhalite fertiliser in North Yorkshire has seen its share price soar by 72% since the start of the year. It has also entered the FTSE 250 and become increasingly popular among a growing number of investors.
Certainly, the company has growth potential. However, there may be better opportunities based on risk/return ratios within the wider resources sector.
Potential challenges
Based on the projections for the company in the long run, its investment appeal is relatively straightforward. Given current prices for polyhalite fertiliser, it should become increasingly profitable once production begins. However, this is not expected to be for around four years, during which time the production and investment landscape could change dramatically.
For example, production costs could increase, while the price received for polyhalite fertiliser may fall. There could be delays to the company’s planned production, which may put it under increasing financial strain. These changes may not only affect the company’s financial performance, but could also cause a decline in investor sentiment following a strong period for investors.
Relative appeal
Due to the length of time until Sirius Minerals is due to receive its first sales, it could reasonably be viewed as a high-risk stock. Certainly, financing for the project is in place, and this is a major hurdle which has been overcome. However, there could be a lack of potential catalysts between now and 2021. Even if its project goes to plan, at least a portion of its long-term potential may now already have been priced-in by the market at a time when valuations across the resources sector remain at a low ebb.
Therefore, there could be lower risk and higher reward opportunities available elsewhere within the resources sector. For example, commodity prices have been under pressure in recent years, and this has caused a number of mining shares to reduce leverage, cut costs and simplify their business models. They may offer greater resilience than the Sirius Minerals share price over the coming years, while also generating a higher profit.
It’s a similar story in the oil & gas sector, where a low oil price has meant a period of change to business models. With profitability at a number of oil companies forecast to rise over the medium term, there could be more obvious catalysts in place over the medium term. That’s especially the case since OPEC has agreed to extend its oil production cut for a further nine months.
Takeaway
Clearly, Sirius Minerals has significant long-term potential. If commodity prices and production costs meet forecasts and the process of developing the mine goes to plan, it could prove to be a shrewd investment. However, a lot can change in respect of these variables within a four-year timeframe. At a time when other resources stocks have de-risked their businesses and could offer high returns, there may be better opportunities elsewhere for the long term.
