The Sirius Minerals (LSE: SXX) share price has dipped again, losing 40% in a little less than three months.
But the only thing I find surprising is that people are surprised by it. When I bought Sirius shares, the one thing I was pretty much certain of was that I’d be facing a volatile share price ride.
Can you think of any resource-based company that has had a smooth ride in its net-spending development phase? I can’t.
I expect Sirius shares to spike when news is good, drop when it’s less good, and probably wander slowly downward when there’s no news at all. This time, it’s been the revelation of increased development cost estimates that’s done the damage.
How much more?
The bulk of the share price dip came in September, when the company updated its estimate of the capital needed to get its potash mining operation to the first stage of production. The new figure comes in at between $3.4bn and $3.6bn, and that’s $400m to $600m more than earlier predictions.
Let me pose another question. How many major engineering/infrastructure development projects of this scale can you think of that have ever come in on budget? I’m sure some do, but I can’t put my finger on one right now. In fact, I’ve seen suggestions that between 80% and 90% of development projects come in over budget, and in my 30-year software development career, just about everything I’ve ever worked on took longer and cost more than expected.
Really no surprise
There will always be unexpected costs, and humans are notoriously bad at accounting for them, even when they know they’re likely to happen. Then there’s always pressure to keep cost estimates as low as possible — even when there’s no explicit pressure, there’s an innate human tendency to err on the optimistic side.
I’ve always expected surprises from Sirius Minerals as its development progresses, but the one thing I’m absolutely not surprised by is that its cost estimate has been lifted. And I say that even though I’m convinced that Sirius has done, and is doing, a much better job in its forecasts than is typical for major engineering projects.
I’d go as far as to suggest that anyone who thinks total cost estimates at such an early stage in a project can really be anything more than reasonably well-informed guesses should, well, perhaps reconsider their investment strategy.
What do we do?
I expect to see Sirius shares continuing on a jittery path over the next few months, as the company seeks to finalise its funding some time during the first quarter of 2019. In theory, we’re heading into a make-or-break period, as the securing of funds should see Sirius financially sound right through to production. But if it can’t get the cash, we can’t be sure whether it will even be able to survive beyond 2019.
But with so much at stake, I really can’t see major investors letting such a long-term opportunity slip through their fingers.
I reckon that means we’re now in a new buying opportunity, and it’s making a Sirius top-up look increasingly attractive as I’m considering what to do with dividend cash that has built up in my SIPP.
