Why I believe the SXX share price is too low

Considering its potential, Sirius Minerals plc (LON: SXX) is still seriously undervalued.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

The Sirius Minerals (LSE: SXX) share price could be about to take off as the company prepares to complete the second stage of financing for its flagship North Yorkshire potash mine.

For the past few years, the share price has languished as the company, despite its prospects, has produced little in the way of tangible progress on its mine development. This started to change last year when the firm finally began substantial work at its North Yorkshire site. And there should be further progress in 2018, as the firm works towards its target of producing 10m tonnes of potash per annum by 2024 and 20m tonnes by 2026.

Finding the money

Aside from planning, the most prominent speed bump this project was always going to face was financing. Sirius management agreed on the first stage of project financing last year, a $1.2bn mix of debt and equity to pay for the sinking of two 1,500 metre shafts at its site on the North York Moors. Now it needs to raise a further $3bn this year to fund the next stage of the project, which includes the construction of a 23-mile tunnel linking its mine with a port on Teesside.

To help convince backers, management is seeking $2bn in debt guarantees from the UK Treasury under the Infrastructure Project Authority. The company believes that it has already done all it needs to qualify for the scheme and is waiting for confirmation.

Even though there will still be plenty of work to do before the project is complete after financing is received, when the company has passed this final substantial milestone, the group will have a clear runway to its ultimate objective.

Undervalued? 

The substantial progress the company has made over the past 12 months is why I believe that the SXX share price is too low. 

As well as putting in place the initial funding required to get the project off the ground, management has already secured supply agreements for more than 4m tonnes a year of output from the mine. It is looking to increase that figure to between 6m and 7m tonnes this year, which will cover as much as 70% of initial production. 

To some extent, this de-risks the project as, now that the company has customers to sell to, financiers are more likely to back it.

As I have covered before, some of these agreements suggest that the company will be able to sell its potash polyhalite at a price of $145 a tonne, compared to production costs in the region of $30 a tonne. Based on these figures, it is not unreasonable to assume that the firm can generate over $1bn (£714m) per annum in annual earnings before depreciation, admin, interest and tax costs. Compared to its current market value of £1.3bn

These are only ballpark estimate figures, but they show just how much potential the company has and why I believe the SXX share price is too low today.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Rupert Hargreaves owns no share mentioned. 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.

More on Investing Articles

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »

Investing Articles

Are HSBC shares a FTSE bargain? Here’s what the charts say!

There are plenty of dirt-cheap FTSE 100 banking stocks for investors to choose from today. Our writer Royston Wild believes…

Read more »

Three signposts pointing in different directions, with 'Buy' 'Sell' and 'Hold' on
Investing Articles

Just released: Share Advisor’s latest ‘Hold’ recommendation [PREMIUM PICKS]

In our Share Advisor newsletter service, we provide buy, sell, and hold guidance for our universe of recommendations.

Read more »

Investing Articles

Investing £5 a day could help me build a second income of £329 a month!

This Fool explains how £5 a day, or one less takeaway coffee, could help her build a monthly second income…

Read more »