The 3 questions every investor in Sirius Minerals plc must ask
It has been a dull start to the year for British potash prospect Sirius Minerals (LSE: SXX), confounding its reputation as one of the most exciting stocks around. After a spike last autumn its share price has gone nowhere. Today it trades at just 19p, well below its year-high of 51.75p.
Many investors will be frustrated but they shouldn't be surprised. I'm not. I wrote in November that this is a long-term investment and news flow would be slow. The company is still piecing together its ambitious plans to build one of the world's largest polyhalite mines under the North Yorks Moors National Park and bore a 23-mile tunnel to a purpose-built export berth in Wilton, Teesside.
I presciently wrote that: "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." Which is exactly what is happening. Does this sound like the right stock for you? Find out by answering these three questions.
How long are you investing for?
Sirius Minerals has drawn up a string of long-term contracts to supply multi-nutrient fertiliser, notably to China, yet it won't serve up a plateful of potash until 2022 at the earliest. That means no revenues for at least five years, while racking up hefty debts to build the infrastructure it requires. It has already taken on around £3.7bn and this could rise if costs overrun.
So you could be twiddling your fingers for some time, or nervously drumming them, as you hang on to see whether the project will succeed. There won't be any dividends while you wait either. I wrote in December that you will need the patience of a saint. Are you that saint?
Are you aware of the risk of shareholder dilution?
Personally, I'm happy to give Sirius time, but one thing would make me very unhappy. If the company needs to raise further funds, which I reckon is likely given the project's engineering complexity, shareholders could suffer further dilution, even though the company is trying to fund as much of the capital requirement as possible by debt.
Beggars can't be choosers, and the $300m chief executive Chris Fraser recently secured from the UK subsidiary of Australian group Hancock Prospecting was on highly favourable terms to iron ore heiress Gina Rinehart, who is Australia's richest woman for a reason. Dilution will hurt, although that should be more than offset by the long-term value of the project. Once the potash hits Teesside, the company will look a very different proposition, and its valuation should rocket. But your eyes could water along the way.
What is the opportunity cost?
There is no question that Sirius Minerals is a massive prospect, as it plans to initially produce 10m tonnes of polyhalite fertiliser a year, with the capacity to double output. 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 a paltry £791m.
However, you also have to factor-in the opportunity cost of investing in Sirius rather than something where the potential rewards will start flowing from day one.
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Harvey Jones 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.