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What’s Next For Sirius Minerals PLC?

It has been a busy summer for Sirius Minerals (LSE: SXX). At the beginning of July, the company received the green light from the North York Moors National Park Authority to build its York Potash project, the UK’s first new potash mine in 40 years. 

And since this landmark approval was granted, Sirius has received planning permission for four out of five further planning applications for its flagship potash project.

These approvals include planning permission for the mine and mineral transport system from Redcar and Cleveland Borough Council, as well as the materials handling facility, the temporary construction accommodation and a park and ride facility from Scarborough Borough Council, and the operational park and ride facility from the North York Moors National Park Authority.

Management is expecting to receive the green light on the fifth planning application before the end of September. 

Next stages 

2015 has been a year of planning and marketing for Sirius. The company has signed offtake agreements, laid out its plans for the York Potash project and chased planning approvals from the relevant authorities throughout the year. But Sirius still has a long road ahead of it and the next 12 months could make or break the company. 

Indeed, Sirius’ main task during the next 12 months will be raising the cash required to finance the construction of the York Potash project. Management has stated that the company has been working with advisers since January 2015 to arrange structured debt capital for stage one of the project.

After stage one is completed, Sirius is planning to tap the debt markets to stage two. However, by this stage the company should already be turning a profit. The first phase of the mines development will see the company construct a facility capable of producing 6.5m tonnes of potash per annum. 

Sirius believes that funding for stage one of the project will be in place at some point during the first quarter of 2016. It’s at this stage that the company’s real work will begin. 

Risks ahead

It’s estimated that it will cost Sirius £1.8bn to complete the first phase of its York Potash mine. Unfortunately, historic trends suggest that this estimate is too low. 

The mining industry has the worst record of all industries for cost overruns and project delays. Since 1965, the average costs overrun has been 20% to 60% per project. During the mine’s construction period, Sirius won’t be generating cash and will have to fund interest payments, as well as cost overruns with more debt.

With such a mountainous pile of debt towering over the company before production has even begun, Sirius could struggle to keep its head above water in the long term. What’s more, banks and investors are becoming increasingly reluctant to lend to the resource sector as commodity prices plummet and the chance of an interest rate hike this year increases. 

So overall, Sirius has made solid progress this year but the company’s fate will be decided during the next 12 months as construction gets under way.

The bottom line 

I'm sceptical about Sirius' long-term outlook, but I strongly recommend that you do your own research before making a trading decision -- you may come to a different conclusion.

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Rupert Hargreaves 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.