If you’ve been tempted by polyhalite fertiliser miner Sirius Minerals (LSE: SXX), I hope you went shopping for its shares a week ago. The stock crashed earlier this month after the FTSE 250-listed company increased its Stage 2 funding requirements by $570m to almost $4.2bn, spooking many investors.
Tunnel of trouble
The share price crashed more than 26% as Sirius blamed higher-than-expected costs of building its mineral transport system. This was due to changes in the design of the tunnel, and the move to transfer construction and delivery risk to contractor Strabag. At 24p, the share price is now well below its 52-week high of 39.78p.
My Foolish colleague Rupert Hargreaves explains the nitty-gritty of the slump here and rightly says we shouldn’t be surprised. Investing in Sirius Minerals offers potentially big rewards, but was never going to deliver easy money. There was too much early euphoria about the company’s long-term prospects, which was perhaps useful in getting the whole enterprise off the ground. But unless you are a trader, it should be approached in the spirit of endurance instead.
Management has come a long way, securing all the necessary permissions for drilling a massive mine under the North Yorkshire Moors national park, then burrowing sideways to make a 23-mile tunnel to export facilities at Teeside. The estimated $4.6bn total cost is big money for a £1.36bn company that will not have any revenues until 2021 at least. And those costs are getting bigger all the time.
As I have said all along, my best advice is to avoid buying on the highs, because all you are doing is setting yourself up for the next fall. The time to buy Sirius is when it’s down in the dumps, as it was a week ago, as that brings in the buyers. The stock has climbed 20% since then to 29p, although this is still a third below its year-high.
Another reason why it’s better to buy when Sirius has fallen is that it’s easier to set aside the hype, and view its prospects with a clear eye. Those prospects remain hugely promising, but distant. It will not produce any polyhalite until 2021, and has postponed its 13m tonnes-per-year target a year to 2026, which is eight years away. There are no dividends while you wait.
However, investors have sunk too much time, hope and money into this project to lose it all for the £463m they are being asked to raise now. I suspect there will be more bumps along the way, and more buying opportunities. The biggest worry is shareholder dilution following a rights issue. That could inflict more pain on investors, but may present another opportunity to hop on board.
Bad = good
Remember, endurance is the key. As Peter Stephens points out, Sirius owns the largest and highest-grade deposit of polyhalite in the world and has been regularly striking supply agreements. The demand is there, so Sirius just needs to supply it. Buy on the bad news, not the good.
harveyj has no position in any of the shares 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.