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Why I believe the SXX share price is too low

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.


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.

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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.