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Why I’d Buy Sirius Minerals PLC, Hold Amur Minerals Corporation & Sell Gulf Keystone Petroleum Limited

Sirius Minerals (LSE: SXX), Amur Minerals (LSE: AMC) and Gulf Keystone Petroleum (LSE: GKP) do not carry the same amount of risk, and that’s become visible over last four weeks of trade. 

Sirius vs Amur

These two companies are at a very similar stage in their life cycles. Both miners are now trying to negotiate convenient terms with their lenders to fund their flagship projects. There’s a big difference between the two, though. 

Since volatility spiked one month ago, the market cap of Sirius has remained virtually unchanged, while that of Amur has fallen by almost 20%. Consider that the FTSE 100 is down 8% to 6,133p since 11 August.

Value

Now, it’d be great to delve into their fundamentals to assess the fair value of SXX and AMC, yet we’d need to make assumptions on so many variables that any calculation based on the net present value of future cash flows would just become a nice academic exercise. 

So, previous stock placings, the strike price of certain options, and market performances are all we have at our disposal to determine whether it would make any sense to commit to either company. On this basis, Sirius offers more value at 17p a share than Amur at 14p a share, in my view.

That’s not to say that you’d be completely safe with SXX, but one of its key latest updates on planning permission in late August was more effective than that of Amur earlier this week.   

Credits

The shares of Gulf Keystone are grossly overvalued, in my view, although according to the IEA’s oil market report released today, “the latest tumble in the price of oil, which hit a six-year low in August, is expected to cut non-OPEC supply in 2016 by nearly 0.5 million barrels per day (mb/d) – the biggest decline in more than two decades.”

GKP has held up well since early August, and its stock is flat over the period — but it’s stretched, and counterparty risk is out of its control. 

The oil producer announced on 7 September that a payment “of $15m gross ($12 million net to Gulf Keystone) has been authorised by the KRG to be wired to the company’s account during the next seven days.” The shares are down 14% this week, and one possible reason is that the market expected a higher payment for its Shaikan crude oil exports. 

Jón Ferrier, its chief executive Officer, acknowledged this week that this is a “critical time” for the oil producer and for “the entire oil industry in the Kurdistan Region,” but he welcomed the announcement of this payment, saying that GKP appreciated “the support from our partner, the Kurdistan Regional Government.

Very kind of him, really — however, there are not many others options when survival is at stake!

It's you call, so you may well decide to embrace risk. But then I'd strongly advise you to hold any of these three penny stocks as part of a diversified portfolio, where some of your core holding pay strong dividends. 

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Alessandro Pasetti 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.