Investing in a company which has no revenue and is not forecast to have any sales for a few years may sound like a poor opportunity. Making it even less attractive is the fact that it is expected to report a loss of £10m this year, followed by a further loss of £28m next year.
With there being a range of companies with high forecast returns and low valuations, it may seem unclear to many investors why the company in question, Sirius Minerals (LSE: SXX), has investment potential. However, over the course of this year and in future years it could generate high returns.
The progress made by Sirius in recent months has been steady, rather than spectacular. It is on track to deliver its polyhalite production facility on time and on budget, while it has also signed a deal with Wilmar Group. It is for the resale of up to 750,000 tonnes per annum of POLY4 fertiliser over an initial seven-year period.
While positive, the news has failed to excite investors. Buyers of the company’s shares in recent months are likely to be sitting on losses, and this situation could continue in the near term. After all, more news of offtake agreements and the project being on time and on budget may fail to catalyse investor sentiment – especially with first production a number of years away.
However, the appeal of the company remains high. Its valuation has the potential to rise significantly if it is able to meet its forecasts. Its valuation could rise by several hundred percent if it is able to start production on time and generate sales of its POLY4 fertiliser as per its business plan. And with demand for fertiliser expected to remain buoyant across the world, the prospects for further marketing agreements seem high.
Whether or not this leads to a doubling of the Sirius Minerals share price in 2018 remains uncertain. In the long run, though, such a rise is very much on the cards.
Share price growth
Another lossmaking mining company which could have investment appeal is Bushveld Minerals (LSE: BMN). It is a vanadium producer which has additional investments in coal, power and tin. It is due to record a loss of £5.1m in the current financial year and yet its share price has risen by 180% in the last year as investor sentiment has continued to improve.
On Monday, the company reported that it continued to make progress in the fourth quarter of 2017. It benefitted from a buoyant vanadium pricing environment which boosted revenue by 44%. It continues to invest in its expansion projects, which could help it to deliver improving financial performance in future years.
Clearly, Bushveld is a speculative investment and comes with relatively high risks. However, with the company’s performance seemingly on track and it having the potential to build on the improved performance, the potential rewards also seem to be high.
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Peter Stephens owns shares in Sirius Minerals. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.