Is Sirius Minerals PLC The Perfect Partner For Rio Tinto plc In Your Portfolio?

While Rio Tinto’s (LSE: RIO) (NYSE: RIO.US) share price has fallen by 3% since the turn of the year, Sirius Minerals (LSE: SXX) has seen its shares rise by 21%. The reasons for this are clear: the iron ore price has fallen to a ten year low and, with the vast majority of Rio Tinto’s profits coming from the sale of iron ore, investor sentiment in the company has declined. Meanwhile, Sirius Minerals has been the subject of takeover speculation and has announced positive news flow regarding its crop trial results, which has boosted its share price.

Differing Futures

Clearly, the recent past has been very different for investors in the two companies, with Sirius Minerals having been a better company to hold than Rio Tinto since the turn of the year. However, that could be about to reverse over the medium term, since the outlooks for the two companies are very different.

For example, Rio Tinto has a very bright future ahead of it and evidence of this can be seen in the fact that it is forecast to increase its bottom line by 23% next year, as increased production and efficiencies start to make a positive impact on its bottom line. And, looking further ahead, the price of iron ore could increase substantially from its ten year low, since the global economic outlook is improving and there is potential for further Chinese stimulus.

Meanwhile, Sirius Minerals has a far less certain future than Rio Tinto. In fact, the next few months are set to be crucial in determining whether Sirius Minerals ever becomes a viable business, since a decision regarding planning permission for its proposed potash mine in York is set to be taken. This could happen as soon as next month, although delays to the process would not be a major surprise. Should it be approved, then the company’s share price is likely to soar and a bid could be on the cards, while a rejection (or even delay) could cause the value of shares in Sirius Minerals to fall significantly.

A Combination Play?

This, then, could lead investors to decide that a combination of the two companies is a worthwhile approach. After all, they provide exposure to different commodities, are of very different sizes and have very different risk profiles. However, Sirius Minerals remains a very difficult company to invest in – even if it is paired up with one of the largest mining companies in the world.

That’s because it has no revenue, is burning through cash and seems to be wholly dependent upon one decision from one planning authority to determine whether or not it will ever fulfil its goal of developing a potash mine in York. Certainly, it could gain approval and see its share price soar, but it seems to be a bet rather than an investment at the present time. And, with Rio Tinto having such a bright future ahead of it, the most logical option could be to simply buy Rio Tinto and leave Sirius Minerals on your watch list.

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Peter Stephens owns shares of Rio Tinto. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.