Why the Sirius Minerals share price could outperform this FTSE 100 stock

Sirius Minerals plc (LON: SXX) could generate higher returns than one of its FTSE 100 (INDEXFTSE: UKX) industry peers.

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The long-term prospects for Sirius Minerals (LSE: SXX) received a boost on Monday, with the company announcing its biggest-ever supply agreement. This helped to push its shares slightly higher, but it is still some way off its recent high.

In the long run, the prospects for the business seem to be risky-but-upbeat. Already this year, the company has delivered capital growth of over 20% while a number of its peers have declined in value. One such company is a FTSE 100 industry peer which could continue to underperform Sirius Minerals over the long run.

Risk/reward

BHP Billiton’s (LSE: BLT) shares are marginally lower since the start of the year. The company, and the wider mining sector, has been weighed down by a stronger dollar which has caused a degree of uncertainty across the industry. There are concerns that demand for commodities may come under pressure – especially with there being the potential of a full-scale trade war between the US and China.

Given the prospects for US interest rates and the risks for the world economy from an uncertain political outlook, BHP Billiton’s share price could underperform the wider index in the near term. However, it remains one of the most financially stable and most diversified shares in the FTSE 350 resources sector. It has operations in a number of different countries, and its balance sheet appears to be relatively sound. This could mean that it offers lower risk than many of its sector peers, including Sirius Minerals.

Growth potential

Of course, Sirius Minerals may offer higher returns in the long run than BHP Billiton. Monday’s news was the latest in a series of deals that have boosted its aggregate contracted take-or-pay sales volume to 8.2 Mtpa (million tonnes per annum). The latest deal is a long-term supply agreement with Cibra, which is Brazil’s sixth-largest fertiliser distributor group. As part of the agreement, Sirius Minerals will take a 30% stake in Cibra, in return for 95m ordinary shares in the company.

Investors seem to have reacted relatively positively to the news. However, the stock is still down from its 2018 high after it recently announced an increase in the total cost of its project. Further ups-and-downs could be ahead for the stock, with its large project and long-term timescale leading to investor uncertainty at times.

In the long run, though, the company appears to have high demand and the right plan to deliver the supply required to meet it. Financing uncertainty remains, but the latest deal seems to put it in a stronger position to find the required funding to complete the project.

As such, the company’s stock price could continue to outperform that of BHP Billiton over the coming years. The FTSE 100 diversified resources company offers less risk and impressive return prospects. But with greater risk having the potential to lead to higher returns, the outlook for Sirius Minerals may be more positive. Due to this, both shares could have investment appeal depending on an investor’s risk tolerance levels and timeframe.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Peter Stephens owns shares of BHP Billiton and Sirius Minerals. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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