There’s no denying 2018 has been a transformational year for future potash miner Sirius Minerals (LSE: SXX). After locking in the first stage of financing for its flagship potash mine in North Yorkshire last year, the company has spent 2018 preparing the ground, awarding the final contracts and starting the construction of the mine. Management has also been working hard to ink new supply deals and put the financing in place for the next stage of the mine’s construction.
Unfortunately, getting partners to support the so-called ‘Phase 2’ financing has been harder than management would have liked, and the delay, coupled with the revelation that the whole project might cost more than initially expected, has weighed on the miner’s share price. Despite the progress the company has made this year, over the past 12 months, the stock is off around 7%.
High risk, high reward
Whenever I’ve written about Sirius in the past, I’ve always cautioned that this is a high risk, high return investment.
If the company’s colossal mining project is a success, my calculations show that its market value could surge to £18.5bn, up from approximately £1.3bn today.
As the firm’s share price has declined, the risk-reward ratio for the shares has only become more attractive. But there’s a problem, if the group can’t get the money it needs from backers, then the shares might be worth zero.
In reality, I think it is unlikely that Sirius’s backers, who’ve already put $1.2bn into the business, will let it fail. I reckon the company’s creditors, which include Australian mining magnate Gina Rinehart (who is currently worth nearly $17bn and contributed $300m to the first funding phase) will ultimately stump up the $3.4bn to $3.6bn required to finish the project, although it may not be on favourable terms.
Indeed, management has already informed the market that to lock in the final deal, the firm will be raising more debt and equity.
The prospect of further dilution is another reason why shares in Sirius have dived over the past few months. As my colleague, G A Chester recently pointed out, since August 2016 the number of shares in issue has already grown from 2.3bn to 4.7bn.
No guarantee
So overall, while shares in Sirius might look more attractive after recent declines, I don’t think it’s time to pile into the stock just yet. As the company rushes to get financing in place for the next stage of its mine, there could be further dilution for existing investors as more shares are issued. This would mean that while the enterprise would ultimately be worth more overall, each share would be worth less as it would have a smaller percentage claim on the underlying business.
With this being the case, I’m happy to sit on the sidelines until we have the details of the next funding round. The stock might pop after the funding is announced, but in my view, it is worth sacrificing this profit in favour of funding certainty. After all, by my estimates, when Sirius’s mine is fully up and running, the company could be worth 10 times what it is today. I reckon that’s a profit worth waiting for.
