This Is Why Sirius Minerals PLC Isn’t Cheap Enough For Me

Sirius Minerals (LSE: SXX) shareholders can feel pleased with themselves. Their firm has gained a tricky planning approval to build a large mine in a national park. The value of Sirius shares has risen by 73% so far this year.

Yet something’s changed.

While the planning approvals are good news for Sirius, they represent the start of a new period of uncertainty. Sirius now has to successfully fund and build the mine and make it a profitable business.

The construction phase is expected to take 5 years and cost £2bn to reach commercial production. Sirius suggests that early production might start in mid-2018, but such large, complex projects tend to be prone to delays.

What’s more, although trials of the company’s polyhalite fertiliser have been very promising, the reality is that market conditions are likely to change over the next few years.

The firm’s competitors in the potash industry are also likely to take measures to try and protect their market share from Sirius.

A smart move for Shareholders

Sirius expects to fund the build of the mine with debt.

In my opinion, a smart approach for shareholders would be to consider how they would view the project if they were one of the investors lending Sirius £2bn.

Debt investors tend to be fairly cautious and expert, as they routinely deal with vast amounts of money.

My guess is that such lenders will see that they are the ones taking all of the risk, not Sirius and its shareholders. After all, Sirius has only spent £150m so far, and had a cash balance of just £23m at the end of June.

Realistically, Sirius is only contributing a team of experts, a design and the necessary licence and planning approvals for an undeveloped site.

I suspect that the investors who agree to lend Sirius the money to build the York Potash mine will ensure that they have a strong claim on the firm’s assets and future cash flow.

This will help to protect their loans if things don’t go to plan, but it could have the opposite effect for shareholders. Even if the mine is a success, repaying the firm’s vast pile of debt will take priority over dividends.

Two more worries

The management of Sirius is understandably bullish about the project, believing it can be a world-class, low-cost potash mine.

Personally, I’m not in a position to judge the accuracy of Sirius’s projected figures. However, I have noticed that some expert commentators are starting to suggest that operational costs at Sirius might end up being higher than expected.

When making a long-term investment, it makes sense to listen to both sides of an argument before deciding which view you agree with.

Press reports say that Sirius founder Chris Fraser was cheered by members of the public when he left the recent planning committee meeting. This suggests to me that some private investors may be getting too emotionally attached to this project.

This could be a costly mistake. Sirius may well create lots of jobs, but could still be a loss-making investment.

In my view, now is an excellent time to take profits on Sirius shares. As the situation unfolds, I’m pretty sure there will be better buying opportunities between now and 2018.

After all, it's no secret that timing is key when making profitable small-cap investments. Buy and hold isn't always the right approach, especially in the volatile commodity sector.

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Roland Head 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.