Why Sirius Minerals plc is a long-term play
I'm now the proud owner of shares in British potash prospect Sirius Minerals(LSE: SXX), having finally scooped up a handful last week. I've been following the stock for a long time waiting for a decent entry point, because this is a long-term investment. That offers both opportunities and threats for investors, as I've discovered.
Drill, baby, drill
Sirius is pursuing plans to build one of the world's largest polyhalite mines right here in Blighty under the North Yorks Moors National Park, then bore a 23-mile tunnel to a purpose-built export berth in Wilton, Teesside. This is clearly a massive job and management has worked hard to secure all the necessary planning consents and raise funds to start the diggers and drillers.
Sirius has taken on debts of around £3.7bn to fund the work but won't produce a plateful of potash until 2022 at the earliest. It has raised the money through a mixture of loans, placing new shares and convertible bonds, and there's the continuing danger of shareholder dilution if costs overrun and it needs to raise more funds from another share issue. That's a threat and it's a big one, although not big enough to dissuade me from digging in.
Another danger is that news flow is slow. Investors may hear little for months, during which time the share price is likely to drift downwards, as investors get bored, lose interest or spot more enticing prospects. I turned that to my advantage because after spiking to 45p in late August - up 239% over two years - the share price started to drift remorselessly downwards.
News that Sirius was conducting a placing to raise between £330m and £400m at an offer price of between 20p and 30p pushed the share price down to around 20p, which is when I pounced. I thought I was clever at the time but now I don't quite so smart, with the stock now trading at 18p. However, I'm not overly worried either because there's been no bad news to pin it on. In fact, there's been little news at all.
There are good reasons to think that Sirius Minerals could turn your pennies into pounds over the years ahead. The global population continues to rise and people will need feeding, and polyhalite fertiliser will help farmers do that, assuming no better alternative is found. Management estimates the project has a net present value of $15.2bn, with prospective annual earnings of between $1bn and $3bn, yet its market capitalisation is just £730m.
However, more share price volatility seems baked-in. Investors will take short-term profits and move on. Speculators will blow hot and cold. Some will simply lose interest and drift away. I plan to let my initial stake run, regardless of the news flow, because I believe that in five or 10 years time I will reap the rewards. The only question is whether the share price will fall even further to, say, 15p or 10p, and whether I should buy more if it does. I probably will.
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Harvey Jones owns shares in Sirius Minerals plc. 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.