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The Sirius Minerals share price jumped 17%. Should I now buy Anglo American shares?

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By the close of trading on Wednesday, the Sirius Minerals (LSE: SXX) share price was just shy of 5.50p (+17%), following the company’s acceptance of an offer from Anglo American (LSE: AAL). Since the buy out was for £405m, the share price of 5.50p makes sense, so there is unlikely to be any meaningful move from this level.

The question now turns to investors who have been observing the fate of Sirius, whether those who are looking to buy in as new investors or those who already own shares. For the latter, the price of 5.50p may consolidate a loss for if they bought at a higher level over the past few years. The steep share price drop over the past year as funding dried up did not help existing investors.

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In order to potentially recoup some of these losses, one idea may be to buy into Anglo American instead.

The polyhalite mine

At the core of the reason many investors bought into Sirius was the mine in North Yorkshire, which is believed to have huge revenue potential once fully operational. While different sources use different numbers, revenue from the mine is expected to be around $3bn a year. 

These kind of numbers would certainly have generated huge rewards for Sirius shareholders, and under the Anglo umbrella these are still large numbers. Anglo American’s 2019 revenue was just under $30bn, so a fully operational mine would be a solid boost to earnings.

The mine itself still needs significant funding in order to get it operational, which is one of the primary reasons Sirius could not see it through to completion without external help. The Sirius board said yesterday that Anglo would need to invest $3.1bn in order to fully complete the mine, on top of the estimated $1.5bn Sirius has already spent on it.

A long-term buy?

So what the events of the past couple of days amount to is that while Anglo will invest in order to get the mine up and running, this will still take some time (estimates vary but we are talking years not months).

But in the hands of a much larger firm with the muscles to flex in this industry, the mine could be an extremely profitable venture. Thus, I would seriously consider buying into Anglo American now to benefit from an uplift in income in the coming years.

Sure, investors could wait until the mine comes on-line, but given the recent sell-off in the market due to the coronavirus concerns, the Anglo American share price is down about 10% since the middle of February. 

While the firm may experience some supply chain disruption from the virus, I think 10% is a good enough discount to buy into for the longer term irrespective of the Sirius acquisition. When you add into the equation the accepted offer at 5.50p for Sirius and the mine potential, I think this looks even more attractive. 

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Jonathan Smith and The Motley Fool UK have 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.

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