The Motley Fool

Why I think the Sirius Minerals share price could be worth 47p

Image source: Getty Images.

Whenever I have covered Sirius Minerals (LSE: SXX) in the past, I have always tried to make it clear that this is a high risk, high reward opportunity. And even though the company has recently sealed the deal for the second phase of funding for its flagship North Yorkshire potash mine, I continue to believe that this is the case.

In the worst case scenario, the equity value of the company could be nothing, but on the other hand, if everything goes to plan over the next 10 years, Sirius could be worth significantly more than it is right now, and today I’m going to explain why I believe the enterprise could eventually command a multi-billion dollar valuation.

5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!

According to one leading industry firm, the 5G boom could create a global industry worth US$12.3 TRILLION out of thin air…

And if you click here we’ll show you something that could be key to unlocking 5G’s full potential...

Building a business

Sirius believes that the economics of its potash project could help it become the world’s most profitable fertiliser business. A historic investor presentation from the company suggests that at maximum output, the enterprise will be operating with an earnings before interest, taxes, depreciation and amortisation (EBITDA) margin of between 67% and 80% above the industry average of 25%.

The good news is, the company has already inked agreements with potential buyers agreeing to take up to 8.2m metric tonnes per annum (mtpa) of its polyhalite production. The average sale price on these agreements is reported as being $145 per tonne, while management is predicting production costs of around $29.40 per tonne when production hits 10m mtpa.

For the sake of this article, and to give a margin of safety, based on these numbers I’m going to assume that the company can generate an operating profit margin of $100 per tonne when production hits this level, which gives a rough operating profit of $1bn per annum.

This target assumes that the company meets its cost forecast and doesn’t encounter any problems along the way. Considering the fact that the group has already increased its capital costs by $500m in the past 12 months, I think it is highly probable that the final production cost figure will come in higher than initial estimates.

Still, the firm wants to increase output up to the 20m mpta level by the late 2020s, which, management believes, will lead to further cost efficiencies. Overall, management’s own numbers suggest that the company could generate $1bn to $3.3bn in EBITDA at full production, which at an EBITDA margin of nearly 80% would make the business the second most profitable potash producer in the world.

Number crunching 

Because there are so many variables to consider with this number, I think it’s probably better to try and place a value on Sirius using revenue projections instead.

On this basis, assuming the company can reach production of 10m mpta, at an average price of $145 per tonne, we get total possible revenues of $1.5bn. At the time of writing, BHP, the world’s largest mining group, is dealing at 2.8 times sales. Using the same valuation for Sirius gives a possible market cap of $4.2bn or £3.3bn at current exchange rates.

Following the recent fundraising, the company currently has just under 7bn shares in issue so, on a per share basis, the stock could be worth as much as 47p, a gain of 210% from current levels. That’s why I believe the Sirius Mineral share price could be worth 47p, although I should make it clear that these are only rough figures.

“This Stock Could Be Like Buying Amazon in 1997”

I'm sure you'll agree that's quite the statement from Motley Fool Co-Founder Tom Gardner.

But since our US analyst team first recommended shares in this unique tech stock back in 2016, the value has soared.

What's more, we firmly believe there's still plenty of upside in its future. In fact, even throughout the current coronavirus crisis, its performance has been beating Wall St expectations.

And right now, we're giving you a chance to discover exactly what has got our analysts all fired up about this niche industry phenomenon, in our FREE special report, A Top US Share From The Motley Fool.

Click here to claim your copy now — and we’ll tell you the name of this Top US Share… free of charge!

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.

Where to invest £1,000 right now

Renowned stock-picker Mark Rogers and his select team of expert analysts at The Motley Fool UK have just revealed 6 "Best Buy" shares that they believe UK investors should consider buying NOW.

So if you’re looking for more top stock ideas to try and best position your portfolio in this market, then I have some good news for your today -- because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply enter your email address below to discover how you can take advantage of this.