Thanks to rapid population growth and the need to produce sufficient quantities of food, fertiliser is big business. As a result, it's no surprise that companies like Sirius Minerals capture investors' interest, even more so now that funding has been secured for building the potentially highly lucrative mine in North Yorkshire. However, while those already invested in the now substantially de-risked project continue to ponder the '2 shares for 25' open offer, I think there's another opportunity that also warrants their attention.
In the first few weeks of August, shares in Brazilian potash and phosphate exploration company, Harvest Minerals(LSE: HMI) jumped almost 500% from 4.75p to 23.25p when the economic potential of one of its four principal fertiliser projects became clear. A scoping study at the £14m cap's Arapuá site revealed an abundance of material rich in minerals that the company now plans to extract and crush to produce a 'stonemeal soil conditioner' which can then be sold to local farmers.
Importantly, Harvest has already obtained an environmental licence and landowner permissions for the project. It's now focused on getting the aforementioned remineraliser registered and securing a trial mining permit (now due by the end of the month). Should all go to plan, the company expects to have its first output by the end of the year. Assuming that demand is sufficiently robust, production could then be ramped up in 2017.
"So far, so what?", you may be thinking. Why should investors (including those already invested in Sirius) sit up and take notice of this company more than any other? Let me explain.
Brazil is the world's fifth largest consumer of fertiliser and yet, thanks to its poor quality soil, almost entirely dependent on importing the former from abroad. If, as has been predicted, demand for fertiliser in the country grows twice as fast as overall global demand, those companies able to produce it domestically and save on the significant import taxes and freight costs will be seen as highly attractive by investors.
Another positive is just how insignificant the costs of the project will be compared to the relatively high price the product could sell for. If all general and administrative expenses are included, it's been estimated that total operating costs of $7.34 per tonne could be achieved. Estimates of the potential selling price however, are far higher and range from $30 per tonne for the first few years to as high as $60 per tonne once production hits its stride. Ultimately, this means that Harvest Minerals could generate substantial amounts of free cash flow in the medium term. That's cash that could be returned to investors as dividends, retained for further acquisitions or a combination of the two.
These reasons, coupled with executive chairman Brian McMaster's recent comments that progress on the project "continues to exceed the company's expectations," are making me give serious consideration to adding Harvest Minerals to my portfolio. Indeed, as less patient investors appear to be disposing of their holdings in response to the slight delay in securing the trial permit, I think now might be a perfect opportunity for risk-tolerant investors to grab a slice of the company. While there may be bumps in the road ahead, I think this might be a journey worth taking.
Sirius or Harvest? Why not both?
Risk vs Reward
While both Sirius Minerals and Harvest Minerals have the potential to reward shareholders handsomely, buying shares in companies at the lower end of the market spectrum is traditionally seen as far more risky than investing in your standard FTSE 100 blue chip. It's therefore absolutely vital that prospective investors thoroughly consider their attitude to risk, time horizons and required rate of return before even thinking of clicking the buy button.
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Paul Summers owns shares in Sirius Minerals. 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.