Can investors trust Sirius Minerals plc's management?
2016 was a transformational year for Sirius Minerals(LSE: SXX). The company received all remaining approvals for its flagship Yorkshire potash project and completed a successful fundraising for the first stage of the project's development. And this year promises to be another landmark year for the company as the diggers move in to begin construction.
It will take as many as five years for the Yorkshire mine become fully operational, which means there's an enormous amount of execution risk here. While the mine may be able to generate as much as £1bn per annum in profit when it's fully operational, such large projects are notorious for taking longer than expected and running over budget. This is why execution over the next five years is crucial. Even though Sirius has been able to reduce the overall cost of the potash mine from its initial estimate, there's no certainty the project will be executed without a hitch.
Unfortunately, there's not much the individual investor can do to ensure Sirius remains on track and on budget over the next five years -- that job falls to the company's management. And with five years of uncertainty ahead, investors need to be sure that they can trust the team running the Sirius operations.
Sirius has an experienced management team behind it, led by Chris Fraser, a veteran mining industry financier. However, aside from the senior management team's experience, one thing that stands out about Sirius management is the level of 'skin in the game.'
In theory, when management is also a shareholder it's more likely to act with the company's best interests in mind and create shareholder value in the long term. This aligns the interests of shareholders with management, thus benefitting everyone. All too often managements that didn't own an interest in the company failed to act in the best interests of shareholders.
Sirius management owns a small portion of the company, which gives me confidence that the team will work to achieve the best results for shareholders over the next few years.
Chris Fraser owns 124m shares in the company, around 2.97% of the outstanding shares and non-executive chairman Russell Scrimshaw owns 43.5m shares, around 1.04% of the firm. In total, management owns just over 4% of Sirius, which means the team has £31m of their own cash on the line.
While option grants may constitute a small percentage of this total, a significant amount is direct investment from managers. When the company conducted a placing as part of its first round of financing last year, management stepped in to acquire more than 3m shares.
The bottom line
Overall, Sirius management is heavily invested in the company's success, and with this being the case, it looks as if investors can trust the team to generate the best results for shareholders over the next few years.
Sirius has plenty of work to do before its Yorkshire potash mine is operational and profits are flowing, but at least investors can rest safe in the knowledge that management also has millions at stake here.
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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.