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What’s the deal with Sirius Minerals and what I’d do now

Sirius Minerals (LSE: SXX) is a future UK potash miner with high hopes of making a bundle of money by creating fertiliser from the salts it will dig out from under the Yorkshire Moors. Its ambition is not in doubt and the potential has seen the loss-making company catapulted into the FTSE 250, making it worth over three-quarters of a billion pounds. But is it a worthwhile investment?

The opportunity

Sirius’s potash deposit is apparently one of the largest in the world and taps into a growing global market based on the need for fertiliser to feed expanding populations. The company has begun constructing its mine and has agreements in place for 8m tonnes, for when it does eventually start extraction in 2021 (hopefully). The promise of huge future profits has certainly excited many investors but over the last 12 months, that enthusiasm has waned dramatically and the share price has been falling.

The concerns

Investors have a number of concerns when it comes to the potential of the company. The most recent fundraising shows the huge investment needed to get this project up and running and the fact that it diluted existing shareholdings will have alienated some investors. Sirius recently raised $425m to which was part of a larger fundraise worth approximately $3.8bn. The downside was it meant the company issued a further 2m shares. Who’s to say that won’t happen again in future? 

As well as concerns that the miner may ask for more cash, there are also worries that its partners who have agreed to buy its product may not be as enthusiastic as we would hope for given that Sirius had to buy a stake in its Brazilian distributor. If this is a sign that demand for the product is not as strong as anticipated the company could face serious problems within a few years when it tries to sell the potash it has mined. 

A further concern centres around whether Sirius will even be able to mine potash by 2021, and if not, will it need to raise more cash and/or take on too much debt?

What I’d do now

A product that can help feed the world sounds like a no-brainer and a surefire money-maker, but I think the picture is more complicated picture than that. Sirius needs to get there first, it needs to compete with other fertilisers and as it is a company built solely around one mining project, there is no safety net if something goes wrong at the Yorkshire Moors mine.

To me, diversified miners such as Rio Tinto look far more investable than Sirius if mining is an industry an investor wants to put cash into. The bigger market-leading players tend to be hugely cash generative and profitable. That is even though they are at the mercy of global markets and are notoriously cyclical, meaning the industry goes through booms and busts. Sirius to me look the opposite of them, at least for the next couple of years, it will burn through cash and remain loss-making and I think that makes it too risky.

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Andy Ross 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.