Sirius Minerals plc is flying again... is it time to hop on board?

I've been keeping close tabs on AIM-listed potash mining hopeful Sirius Minerals(LSE: SXX) because I feel this is one prospect that can go all the way. It's flying at the moment but is the sky the limit?

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Mineral wealth

The last time I reviewed the stock, at the end of September, it had just crashed 25% in a month. At the time I wrote these prescient words: "It's better to buy Sirius Minerals at times like now, when investors are bored and the share price is depressed, rather than when it's riding high on the back of good news." I hope somebody out there listened, because just over four weeks later, it's up 20%.

The stock is very news flow-independent now. It's largely immune to wider macro issues, such as the state of the mining sector generally, as it's carving its own niche out of the North Yorkshire soil. The news investors are waiting for is whether it has successfully secured $1.09bn of stage one financing to help it exploit some of the world's largest polyhalite fertiliser reserves and construct a 23-mile tunnel to a purpose-built export berth in Wilton, Teeside. Bizarrely, $2.6bn of stage two financing has been secured first.

Hancock's half-hour

The big worry is that stage one financing would be a mixture of debt and equity, which would dilute the stakes of existing shareholders. On Tuesday it was announced that Hancock Prospecting, controlled by iron ore heiress Gina Rinehart, would provide $250m in royalty financing and $50m in equity funding. The deal, which is conditional on the company completing the remaining $630m stage one financing, will run for the life of the project or 70 years.

Markets welcomed the news, which drove the share price up almost 15% from 35p to 40p. Analyst Yuen Low at Shore Capital was particularly optimistic, anticipating stage one financing would be concluded this autumn with no further need to raise equity thereafter. "Dilution would cease to be a concern, and we believe the resulting improved clarity on potential equity returns could trigger a significant rerating."

Difficult stage

Low says this will significantly de-risk the share and set a target price of 70p once stage one is complete. Given that Sirius has successfully overcome the many planning hurdles in its path, you would have to be optimistic that it can pass this one too.

However, Sirius still has to spend $630m on construction before it gets Rinehart's cash, and we still don't know where it will find this money. Dilution therefore remains a danger. Also, the royalty financing agreement looks very favourable for Hancock, which gets 5% of gross revenue on the first 13m tonnes per annum... for 70 years. That makes me wonder how needy managing director Chris Fraser must have been feeling to agree to such generous terms.

Sirius Minerals remains an exciting long-term project that could produce 20m tonnes of polyhalite every year for a century. It has already signed contracts with buyers - mostly from China - for a third of its projected output, giving investors further security. If it does secure stage one financing the share price could climb a fair bit higher, so you might want to hop on board now. Just remember, it isn't a done deal yet.

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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.