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Why I’d Buy AFC Energy plc, But Sell Sirius Minerals PLC

While smaller companies generally come with greater risk than their larger peers, some have more risk than others. For example, AFC Energy (LSE: AFC) and Sirius Minerals (LSE: SXX) are both smaller companies, with them having market capitalisations of £116m and £431m respectively. However, while the former has the potential to tap into growing demand for cleaner fuels, the latter’s future appears to be very much in the balance.

A Growing Market

AFC Energy is making superb progress and this has been reflected in its share price, which is up by almost 300% since the turn of the year. Strong news flow has included a deal to develop a fuel cell park in South Korea which, in time, is set to generate up to $1bn of revenue for the joint venture. In addition, AFC Energy is gearing up for the demonstration of its KORE system in Germany, which could boost its share price even further.

Profitability

Furthermore, AFC Energy is a profitable company. In its most recent set of half-year results, AFC posted a £1.5m pretax profit, which is a vast improvement on the £2.2m loss from the same period a year ago. This is a major step for AFC, with it having made a loss in each of the last five years, and shows that its excellent news flow is starting to bear fruit and turn a great idea into a very viable business with long term growth potential.

Uncertainty

This contrasts markedly with Sirius Minerals, which has a future that remains highly uncertain. Certainly, Sirius Minerals appears to have a great product available, with crop studies showing that the York potash mine that it hopes to build should be able to considerably improve the yield on potatoes. The problem is that there remains a huge amount of uncertainty regarding the company’s future.

In fact, it appears to hinge on the planning approval decision for the proposed potash mine. While the market appears to believe that it will be approved (hence the 93% surge in its share price since the start of the year), this should not be taken as fact. It may well be rejected, which could put Sirius’ future as a business in severe doubt. Furthermore, there may be a delay to the decision, or else Sirius may struggle to attract the appropriate financing in order to construct the mine – all of which are real risks to the business.

Then there is the prospect of lower than expected demand for Sirius’ product. Although trials appear to indicate that it will be successful, there is no guarantee that it will sell as much as it is currently planning on doing.

Looking Ahead

So, while Sirius Minerals does have considerable future potential, there appear to be a number of major risks that make it worth watching, rather than investing, in. And, while AFC is a small, high risk company, it is profitable and has a number of development plans in the pipeline. Moreover, it is not dependent upon the outcome of one decision, which makes its risk/reward ratio more appealing at the present time than that of Sirius Minerals.

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Peter Stephens has no position in any shares mentioned. 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.