The Sirius Minerals share price is rising: is it time to buy?

Sirius Minerals plc (LON:SXX) has promised news on funding by the end of April. Roland Head looks at the risks.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

The Sirius Minerals (LSE: SXX) share price has gained 10% over the last week and is up by 27% from March’s low of 17.3p. Should I be buying?

There’s still no news of a deal to provide the $3.5bn needed to fund the remaining build of the mine. The company has already warned that it could run short of cash by the end of June.

Management has previously said it hopes to announce a deal by the end of April. I suspect the funds will be found, but I fear that the cost to shareholders will be higher than expected.

Not so cheap

As I’ve pointed out previously, Sirius is already valued at nearly $5bn, if you include the money it needs to raise.

That’s roughly half the firm’s forecast net present value of $9.8bn. This represents the value in today’s money of the cash Sirius will generate over the mine’s life, based on mid-range predictions about fertiliser prices and production volumes.

In my view, a share price of 20p is about right at the moment. History suggests major projects like this usually cost much more than expected. As my colleague Rupert Hargreaves explained recently, Sirius has already increased its cost estimates several times.

I’m going to continue to avoid Sirius Minerals until funding is agreed. I’m more interested in the opportunities for value creation at this fast-growing oil and gas firm.

The shares are up by 1,200%

Shares in North Sea oil producer Serica Energy (LSE: SQZ) have risen by more than 1,200% over the last five years.

The firm went into the 2015 oil downturn with net cash and a production asset. In 2017, management used these advantages and its North Sea presence to agree a deal with BP to buy its share of the Bruce, Keith and Rhum fields, collectively known as BKR.

Serica has published its 2018 results today, giving investors their first chance to see how this deal is working out. The signs are promising. Although Serica didn’t become the operator of the fields until 30 November, my sums suggest that the resulting cash flow lifted Serica’s underlying operating profit from $14.1m in 2017 to $20.8m.

The accounting for this deal is a bit complex. But in my view, broker forecasts for 2019 revenue of $414m and a net profit of about $162m look reasonable. That means the shares currently trade on a forecast price/earnings ratio of less than 3, even after today’s gains.

What could go wrong?

It seems that the market is still a little sceptical about the long-term success of the BKR deal. So what could go wrong?

One risk is that Serica’s management will now use the firm’s cash flow to start empire-building, making too many expensive acquisitions.

Another risk is that the Rhum field is 50%-owned by the Iranian Oil Company. Due to US sanctions, production requires a US government licence, renewed annually. So there’s an ongoing risk of disruption.

Finally, it’s possible that the performance of the BKR fields will fall short of expectations over the next few years. So far there’s no reason to expect this, but I’m not an expert on these assets.

My verdict: I believe Serica Energy could continue to generate value for shareholders. To lessen the risks, I’d aim to buy on the dips from now on. I’d hold.

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.

Roland Head has no position in any of the shares mentioned. 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.

More on Investing Articles

Concept of two young professional men looking at a screen in a technological data centre
Investing Articles

After crashing 50%, is now the perfect time to buy this world-class FTSE 250 share?

The worst-performing share on the FTSE 250 over the last year is also the most exciting one of all. How…

Read more »

Illustration of flames over a black background
Investing Articles

Just released: July’s higher-risk, high-reward stock recommendation [PREMIUM PICKS]

Fire ideas will tend to be more adventurous and are designed for investors who can stomach a bit more volatility.

Read more »

Investing Articles

Is this one of the FTSE 100’s best-value growth shares?

Looking for great-value recovery shares to buy today? Based on City forecasts, this could be one of the best that…

Read more »

Investing Articles

Will the Tesco share price hit a 10-year high in 2024?

Up from 200p less than two years ago, the Tesco share price has enjoyed impressive growth lately. Now I'm considering…

Read more »

Man writing 'now' having crossed out 'later', 'tomorrow' and 'next week'
Investing Articles

Nearing its 12-year low, this FTSE growth stock could be the bargain of the year!

Harvey Jones has happy memories of owning this FTSE 100 growth stock. Now he's wondering whether to take a trip…

Read more »

Investing Articles

BT share price: a bargain or one to avoid?

This Fool has been keeping tabs on the BT share price. Despite looking cheap, he's steering clear of the stock…

Read more »

Electric cars charging in station
Investing Articles

Where will Tesla stock be in 5 years? Here’s what the experts say

The analysts' outlook for Tesla stock in the next few years seems to be all over the place, as the…

Read more »

British flag, Big Ben, Houses of Parliament and British flag composition
Investing Articles

3 reasons why I predict UK shares will soar over the next 12 months!

Our writer believes there are plenty of reasons why UK shares will do well over the next year or so.…

Read more »