The Motley Fool

1 big reason I’d sell Sirius Minerals plc

Shares in Sirius Minerals (LSE: SXX) haven’t made a strong start to 2017. In fact, they’ve fallen by 6% since the start of the year. While not a major fall, it comes at a time when other resources companies have reported strong growth. For example, large-cap mining shares such as Rio Tinto and BHP Billiton have increased in value by 7% and 6% respectively during the same period.

Looking ahead, Sirius has the potential to turn around its performance. But since a number of larger, more financially sound, highly profitable and better diversified resources companies currently trade on low valuations, there appear to be superior risk/reward opportunities available elsewhere.

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Long-term potential

Of course, Sirius Minerals could become a hugely successful business. Its planned potash mine in Yorkshire is already approved and finance is in place to complete both stages of its development. The market for the polyhalite fertiliser the company intends to produce is buoyant and it’s likely to receive substantial interest in its product. After all, crop studies have shown it to add value and at a time when population growth is making higher crop yields increasingly desirable, the long-term outlook for the business is positive.

Opportunity cost

However, there’s more to investing than potential rewards. Risk is another key factor for all investors and while all stocks come with a degree of risk, Sirius arguably has more than most. A key reason for this is its lack of revenue, which is a situation set to last for a number of years. This means further fundraisings may be on the cards, which could dilute existing investors’ shareholdings. Furthermore, it means an absence of positive catalysts regarding profit growth over the medium term.

In contrast to this, a number of other mining and resources stocks are now starting to deliver profit growth after a challenging period. This could help their shares to increase in price faster than those of Sirius. Furthermore, a profitable company is likely to be lower risk than one which has no revenue. And since Sirius will be a single-site operator, it lacks diversification which the likes of Rio Tinto, BHP Billiton and other mining companies offer. This is relevant not only in a geographic sense, but also in terms of the commodities they produce.

Outlook

Although Sirius has high potential rewards, other resources companies could likewise see soaring share prices. In fact, larger miners are outperforming the company in the current year. Added to this is the better diversification and stronger financial standing of other miners, which reduces their risk profiles by comparison. Therefore, while it may perform well in the long-term future, a reason to sell or avoid it is the attractiveness of other mining and resources companies in the here and now and over the medium term. They could have a better chance of high returns in the coming years.

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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.