Sirius Minerals plc slumps 35% in a month: is more pain ahead?

The Motley Fool
Sirius Minerals
Sirius Minerals

In the last month, shares in Sirius Minerals(LSE: SXX) have slumped by 35%. While at first glance it may appear as though the fall signals a deterioration in the outlook for the company, the truth is quite the opposite. Sirius Minerals conducted a placing to raise between £330m and £400m at an offer price of between 20p and 30p. While this helped to provide financing for its two-stage project, it also meant that the company's share price tumbled from over 33p a month ago to the current level of 21.5p.


A bright outlook

Certainly, the share price fall has been bad news for existing investors. It means recent buyers may be sitting on paper losses. But the positive news from the placing is that Sirius Minerals has now generated sufficient capital to finance both the first and second stages of its potash mine in Yorkshire. This should allow it to proceed with the development of the mine and to eventually become a producer of polyhalite fertiliser.

Clearly, that end goal is many years away, but the long term outlook for Sirius Minerals is very bright. The world's population is forecast to rise by a third to 9.7bn by 2050 and one key consequence of this will be a significantly higher demand for food. Sirius Minerals' polyhalite fertiliser has been shown to increase crop yields in crop studies, and demand could therefore rise in future years as farmers seek means of improving their yields. As such, it could be argued that Sirius Minerals is one of the most promising mining companies in the world.

Potential challenges

As mentioned, Sirius Minerals is a number of years away from being a producer of fertiliser. Between now and then, there could be a number of major challenges for the company to overcome. The project itself is large and ambitious. While its eventual delivery is very likely, there could be delays and difficulties during its development that push back the completion date. This could lead to cost overruns and even the potential for additional fundraising further down the line.

Similarly, Sirius Minerals may fail to make repayments on its convertible debt, which could lead to dilution for equity holders. And with production not expected for a number of years, the share price may struggle to make gains without clear catalysts during the development stage.

Looking ahead

With a number of other mining companies trading on low valuations, investors are spoilt for choice at the present time. Certainly, Sirius has long-term appeal and could be a stunning growth stock. However, it could be prudent to first invest in highly profitable, good value resources companies before considering this one. After all, as 2016 has shown with Brexit and Trump's election victory, the economic outlook can change quickly and so buying stocks that have a sound balance sheet and strong cash flow today could be the best move for long-term investors.

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Peter Stephens has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.