Why Sirius Minerals plc has all the hallmarks of a multi-bagger

The Motley Fool
Sirius Minerals
Sirius Minerals

Shares in Sirius Minerals(LSE: SXX) could double or even treble over the next few years as the company finally begins the construction of its North Yorkshire Potash mine.


Sirius Minerals has always been a highly speculative story stock, and like all such stocks, the company was given a wide berth by the majority of City investors. But now, the company and management have proven themselves. Over the past year, Sirius has got all the permissions in place to begin construction, lined up financing for the mine and buyers for the finished product. Now all there is to do is build the mine and start selling potash -- arguably the easiest part of the whole process.

Hurdles ahead

However, even though Sirius has overcome multiple obstacles this year, the company still faces many challenges before it can start generating revenue. For example, most mining projects overshoot their budgets and take longer than expected to build. Sirius operates in the relatively stable UK, so unlike many other early stage mining projects there's little in the way of political risk and gaining access to additional capital shouldn't be hard considering the company is based near one of the world's financial centres. Nonetheless, timing will remain an issue, and there's still the risk that the firm has low-balled construction estimates to appease potential investors at this early stage.

Still, Sirius management has shown over the past year that it can be trusted to navigate the company through stormy waters and achieve the best outcome for investors -- the first mark of a potential multi-bagger.

The second indication that Sirius could be a potential multi-bagger is the value of the company's mine. Based on updated budget forecasts, management estimates the project now has a net present value of $15.2bn and an internal rate of return of 28% if everything goes to plan. If Sirius hits this target, it will mean that the company owns one of the most lucrative and productive mining assets in the world. Not bad for a company with a current market value of £540m.

The third indication is the potential returns on offer here. Current estimates show the mine could generate annual earnings before interest, tax, depreciation and amortisation ranging between $1bn and $3bn through variable volume and price outcomes. This indicates a tremendous upside for the shares even at the bottom of this range. Potash Corporation of Saskatchewan is one of the world's largest potash companies by market cap. At the time of writing the company is trading at around 10 times EBITDA, assuming shares in Sirius attract this valuation, and based on current exchange rates, its market cap. could exceed £8bn or £3.30 per share when the company starts producing.

The bottom line

So overall, Sirius has all the hallmarks of a multi-bagger, but as I mentioned above, the company still has some hurdles to overcome before it reaches this point.

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Rupert Hargreaves 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.