Why I'd sell Sirius Minerals plc to buy this stock

North Yorkshire polyhalite miner Sirius Minerals (LSE: SXX) believes that it will be able to produce its POLY4 polyhalite fertiliser for cash costs of $32.60/tonne by 2024. It expects to receive an average sale price of $158/tonne during the first 10 years of production. That's equivalent to a gross margin of 79%.

If the company's cost and price forecasts are correct, Sirius could be generating a gross profit of about $1.2bn per year by 2024, when production is expected to reach 10 Mtpa. With a market cap of about $1.7bn, it's easy to see why many investors rate the stock as a buy.

What could go wrong?

It's worth remembering that Sirius doesn't expect to generate any revenue or profit until at least 2021. The investment case for the firm is based on price forecasts for polyhalite which stretch many years into the future. It also assumes that this large and complex mine will be built on time and on budget.

In my view, both of these assumptions carry a lot of risk. One indicator of this is that Sirius has had to offer what look to me like fairly generous terms to its financial backers.

Investors funding the group's initial $400m bond issue will receive a coupon (interest rate) of 8.5%. Australian group Hancock Prospecting will pay Sirius just $250m to secure a life-of-mine 5% royalty on all production up to 13Mtpa. If Sirius's 10-year price forecast of $158/tonne is correct, that means Hancock could be receiving $79m per year in royalties by 2024.

Why have these early investors been offered such favourable terms? In my view, it's because they were the best deals Sirius could negotiate. As a one-trick pony with no other assets, I believe Sirius will remain a risky bet until cash starts to flow. And that isn't likely to happen for at least four years.

Start with an advantage

Investing often requires a long-term view. But history suggests your chances of making a long-term profit are better if you focus on companies with a proven ability to generate attractive returns.

One company I believe fits this description is Highland Gold Mining Ltd (LSE: HGM). This Russia-based business was founded in 2012 with the goal of building a portfolio of profitable gold mining projects in the Russian Federation.

Chairman Eugene Shvidler has a 12.5% stake in the firm. And while high levels of insider ownership can be a risk, in this case I think it's worked in favour of smaller shareholders. Highland Gold has paid regular dividends since its flotation, providing an attractive income for shareholders.

Progress looks good

The group's first-quarter gold output was 65,243 ounces, 14.7% higher than during the same period last year. Broker forecasts suggest the group will generate earnings of $0.18 per share this year, an increase of 24% on 2016. The stock also offers a forecast yield of 5.7%.

Despite this positive outlook, Highland Gold trades at a 10% discount to book value and with a 2016 forecast P/E of 11.5.

In my view, this undemanding valuation could be a good buying opportunity. It could open the door to long-term gains and should provide an attractive income. I recently added Highland Gold to my personal portfolio, and continue to rate the stock as a buy.

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Roland Head owns shares of Highland Gold Mining Ltd. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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