Should you buy Sirius Minerals PLC shares while directors are buying?

If you like a roller-coaster ride, then Sirius Minerals (LSE: SXX) could be just the investment for you. Sirius shares have been up and down for years, but since the firm’s plans for its York Potash Project have been coming together, the price has picked up nicely — since late February 2015, it’s up 180%, to 20.25p.

The big attraction is the quality and quantity of the polyhalite form of potash that the company is sitting on, and the potential demand for it as a fertilizer — only this week we’ve heard of yet another encouraging trial result, this time in China on chili peppers, tea and oilseed rape. In fact, companies have been queuing up to put in their orders for it, even though first production is not expected until 2021.

How much will it cost?

The downside, though, is the time it’s still going to take to get the development off the ground and into profit, and the cost that is going to be incurred in doing so. While March’s Definitive Feasibility Study valued the development at a net present value of $15bn, rising to $27bn by the time production commences, and suggested margins of 70-85%, we have no idea by how much the interests of current shareholders will be diluted by time the first cash from sales rolls in.

But that hasn’t stopped the company’s directors from getting in on the act, and we’ve heard of two of them buying shares in the last week. First was non-executive director Elizabeth Noel Harwerth, who bought 49,608 shares at an average price of 18.12p on 28 April. The investment of a fraction under £9,000 is perhaps not a massive one, but it’s not to be sniffed at. Then a day later we heard that another non-executive director, Jane Ann Lodge, had made a more substantial purchase of 100,000 shares at 18.35p, for a total investment of £18,350 and taking her stake up to 200,000 shares.

And that comes after a spate of director purchases, including the exercise of warrants by chairman R J Scrimshaw to take his stake to 40 million shares, towards the end of 2015. But does it mean we should join them and buy Sirius shares?

Do they know best?

There’s a school of thought that the directors of a company are best placed to know its prospects, and that we can do well by following them in their buying and selling decisions. And there are statistics to back it up as a strategy, but with plenty of caveats. For one thing, you need to understand a director’s reason for buying or selling — they might just want a new car, or be moving house, or something like that, and a sale might not reflect any negative feeling whatsoever.

It’s also important to follow the aggregate of directors’ dealings. As individuals will buy and sell for their own reasons, what we need is significant net purchases over a decent length of time. On that, I think Sirius scores reasonably well — director dealings in the past couple of years have been predominantly purchases and warrant exercises.

Should you buy?

Of course, we shouldn’t be driven solely by what the directors are doing, and you should only buy Sirius shares if you’re prepared for a long wait for profits, you’re happy with what is likely to be a volatile share price, and you can stand the risk associated with the unknown future funding of the project. But if that sounds like you, then I’d take these director purchases as a little bit of extra encouragement.

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Alan Oscroft 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.