Why do shares in fertiliser group Sirius Minerals (LSE: SXX) keep falling, even after the company releases good news?
The SXX share price has now fallen by about 55% over the last year, giving shareholders a tough ride. Today I want to consider a couple of issues that may be contributing to the current share price weakness.
Distant peaks
Over the last year, the company has released details of a number of future sales agreements. The latest deal was signed earlier this month, and commits Indian farming co-operative IFFCO to an 11-year deal, buying up to 1m tonnes per year (1Mtpa).
Sirius says that it has now has supply agreements for 11.7Mtpa, based on peak volumes.
These deals should be good news. But I think it’s worth remembering that these figures refer to peak volumes. These will only be reached many years after production starts.
To some extent, this is inevitable. According to the latest investor presentation, Sirius doesn’t expect production to reach 10Mtpa until 2024, nearly three years after production starts. Another 18 months will be required to expand capacity to 13Mtpa.
However, some contracts won’t reach peak volume until seven or eight years after production starts. I think anyone forecasting future sales using these peak volume figures is likely to overestimate future cash flow.
A second risk is that pricing is hard to understand. Industry insiders may know what prices are likely based on a “nutrient linked formula on a CIF India basis”. But I suspect that most of us won’t understand this. I certainly don’t. And even if I did, I wouldn’t be able to predict what it would mean in five or 10 years’ time.
Short attack?
The reason the shares keep falling is because selling volumes are outweighing demand from buyers. Sale volumes since the end of April have been much higher than average. This has forced the Sirius share price down until buyers can be found.
I don’t know who is selling or why. But one possible explanation might be that short sellers sold stock when the stage two financing was announced in the expectation that they’d be able to buy it back more cheaply in the placing that followed.
Short-selling pressure is still building. According to FCA data, the amount of stock sold short has risen from 4.2% to 5% over the last month.
Are the shares cheap?
If I was a long-term shareholder, I wouldn’t be too concerned about factors like this. I think it’s more important to focus on fundamentals.
Although I’m reasonably comfortable with the mine itself, I have concerns about the financial risks faced by shareholders. Sirius has won an agreement for the $3.2bn of debt funding it needs, but the costs and terms for most of this debt have not yet been set.
I expect this financing to be quite expensive. This means that future interest payments and dilutive share issues could reduce the future returns available to shareholders.
In my opinion, Sirius is unlikely to make a profit for at least another five years. During that time, equity investors will be exposed to the risk of cost overruns, delays, changing market conditions and financing problems.
I think the current share price might be a reasonable entry point for a 10-year timeframe. But Sirius Minerals remains far too speculative for me.
