Is the Sirius Minerals share price the bargain of the year?

North Yorkshire potash miner Sirius Minerals plc (LON:SXX) is in danger of running out of cash. Should you buy?

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.

After falling by almost 50% in 12 months, are shares in Sirius Minerals (LSE: SXX) a bargain buy That’s the question I’m asking today.

Why have the shares fallen?

Sirius boss Chris Fraser did a good job of selling the project to local communities. There’s widespread support for the mine in the local area and the project also appears to have decent political support.

However, Sirius still needs to raise about $3.5bn to complete the construction of the mine. Back in July, the company said it hoped to complete its financing arrangements by the end of 2018.

In September, news that an extra $400m-$600m would be required to complete the mine caused the shares to plunge. The deadline for financing was pushed back to the end of March.

Time is getting tight

We’re now just three weeks away from the end of March. And although Sirius has cash to continue operating into the next quarter, I think it’s fair to assume that the firm’s cash reserves are starting to run low.

Without a funding deal, this project could fail. Even if a new backer was found, I’d expect shareholders to experience a near-total loss. In my opinion, these risks are real. That’s why the shares have fallen so sharply over the last six months.

Why the delay?

We don’t know what’s preventing Sirius’s lenders from agreeing a deal. One problem may be the extra $400m-$600m of funding that’s now needed, on top of the $3bn originally planned.

The firm has said that this money won’t be added to its planned borrowing. This suggests to me that some of the money will have to come from shareholders, or from a new outside investor in the firm. Nothing has yet been announced, but I’d imagine lenders will want certainty here before signing up to $3bn of loans.

Whatever the problem is, it seems fair to assume that the lenders who are talking to Sirius have a pretty strong negotiating position. That may not be good news for shareholders, who could be forced to accept dilution or a lower share of profits in the future.

Is the price right?

Despite the Sirius share price falling from almost 40p in August to about 20p today, the company still has a market value of nearly £1bn ($1.3bn).

Is this a fair price to pay, based on what we know?

One way to value the firm is to compare the value of its shares and debt with the present value of the future cash profits the mine is expected to deliver.

In a recent presentation, Sirius claimed a net present value of $9.8bn. This is based on production from the mine reaching 13 million tonnes per annum. The current project schedule indicates that this should happen at some point after 2024.

If we include the firm’s stage 2 financing and the extra $400m-$600m, I estimate Sirius is valued at about $4.8bn today. So the shares are trading at a potential discount of about 50% to their potential value. That suggests a fair value of about 40p per share for the stock.

The problem is that it will take at least five years, probably more, to find out if the company can deliver on these promises. Personally, I think the shares look fully priced. I’d want to see a bigger discount before I’d buy.

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.

Roland Head 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.

More on Investing Articles

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

Why I think Rolls-Royce shares will pay a dividend in 2024

Stephen Wright thinks Rolls-Royce shares are about to pay a dividend again. But he isn’t convinced this is something investors…

Read more »

Investing Articles

1 of the best UK shares to consider buying in April

Higher gold prices and a falling share price have put this FTSE 250 stock on Stephen Wright's list of UK…

Read more »

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

The market is wrong about this FTSE 250 stock. I’m buying it in April

Stephen Wright thinks investors should look past a 49% decline in earnings per share and consider investing in a FTSE…

Read more »

Black father and two young daughters dancing at home
Investing Articles

1 FTSE 250 stock I own, and 1 I’d love to buy

Our writer explains why she’s eyeing up this FTSE 250 growth phenomenon, and may buy more shares in this property…

Read more »

View of Tower Bridge in Autumn
Investing Articles

The FTSE 100 is closing in on 8,000 points! Here’s what I’m buying before it’s too late!

As the FTSE 100 keeps gaining momentum, this Fool is on the lookout for bargains. Here's one stock he'd willingly…

Read more »

Investing Articles

3 ideas to help investors aim for a million-pound Stocks & Shares ISA

The UK has a growing number of Stocks and Shares ISA millionaires, and this plan may be one of the…

Read more »

Illustration of flames over a black background
Investing Articles

2 red-hot UK growth stocks to consider buying in April

These two growth stocks are performing well, but can they continue to deliver for investors through 2024 and beyond?

Read more »

Charticle

Is JD Sports Fashion one of the FTSE 100’s best value stocks? Here’s what the charts say!

The JD Sports Fashion share price remains a wild ride during the first quarter. Could it be one of the…

Read more »