Over the past three months, the share price of Sirius Minerals (LSE: SXX) has risen over 25% in value. I believe the prospective fertiliser miner’s share price could continue to rocket in the coming months thanks to several potential positive catalysts in the works.
A catalyst looming on the horizon is the group’s long-awaited debt financing agreements that it needs to sign to provide funding for the construction of its North Yorkshire mine. While there has been little news on how discussions with lenders are progressing, we have heard recently that Sirius is seeking up to $2bn in government-backed funding out of the roughly $3bn it needs.
If Sirius management can use the current political environment, where politicians are desperate to invest in the economy post-Brexit and shift funding to northern regions, to strike a favourable deal, investors would surely react warmly.
This would also be true if we continued to see Sirius sign offtake agreements with future customers such as Singaporean agriculture giant Wilmar, among others. The recent string of deals has been important not only for the potential financial payoff they will bring, but also as a sign that customers do view the company’s polyhalite as a potentially useful fertiliser.
Likewise, further good news on the operational front would show the management team is up to the monumental task of not only constructing its huge mine, but doing so roughly on time and on budget.
However, while any combination of these actions occurring would likely serve as a short-term catalyst for further share price gains, I’m still sceptical of the company’s long-term potential. My biggest qualm remains the uncertain outlook for polyhalite. While it’s clear customers are willing to pay for it, we’re no closer to understanding whether they will eventually pay a premium for it over potash, on which Sirius management is banking to support the economics of its mine.
On top of this, we’re still several years away from first production and the company’s incredibly ambitious mining project is still exposed to the frequent cost overruns and delays that plague many such construction projects. With no current internal sources of funding to support potential issues, any such issues arising would mean management tapping shareholders or lenders for funds again, which is not a situation that appeals to me as an outside investor.
An established option
Instead, if I were to invest in the mining sector my clear favourite would be Rio Tinto (LSE: RIO). The company survived the recent commodity crash better than many competitors and has emerged from it a more focused, cash-generative firm.
The company has slimmed down its ops to just a few crown assets built around high-grade iron ore. This has boosted group cash flow to record levels, which together with billions in disposal proceeds from deals such as the recent $2.5bn sale of the Australian Kestrel coal mine, has allowed management to increase shareholder returns to their highest ever levels.
While miners will always be cyclical beats, Rio’s management team has proven that its plan to keep leverage low throughout the business cycle and to focus on generating cash rather than top-line growth can richly reward investors. With great assets and a stonking 6% yielding dividend, I think Rio could be the best buy-and-hold mining stock out there for retail investors.