With a 400% profit margin, Sirius Minerals is a dirt cheap future cash cow

Updated: 
Sirius Minerals

Sirius Minerals(LSE: SXX) might not be everyone's favourite company yet, but it's hard to criticise the firm's prospects. Its flagship North Yorkshire potash mine is a world-class asset, and now the company has planning permission and the financing in place to progress the development of this mine, the project is substantially de-risked.

Granted, there is still plenty that can go wrong. Mining and resource projects are notorious for running over budget and being delayed. Often this is due to factors completely out of management's control such as poor weather or unforeseen development obstacles, and there's no guarantee that Sirius will not succumb to one of these problems.

That being said, so far the company's management has been highly efficient in executing the planning process for the mine and raising the required financing, which was no small accomplishment. The company has already raised $1.2bn from various partners, from shareholders and by debt, giving it plenty of firepower to progress the initial stages of the mine's development.

As part of the fundraising process, management has moved Sirius's shares from the Alternative Investment Market to the main market, a move that should allow more funds to buy into the group's success story. Sirius needs to raise another $1.7bn to finish the construction of the potash mine, and the good news is, considering the prospective profit margins available here, the company should quite quickly be able to raise this additional finance.

Guaranteed profit

Sirius already has many agreements in place with companies around the world to buy its polyhalite (a premium version of potash that does more to boost crop yields than the basic version) at a price of $145 a tonne. Customers have agreed to buy 8.1m tonnes of the stuff every year at this price.

The good news for Sirius and its shareholders is that at $145 a tonne, the company is booking a gross profit margin of nearly 400% on estimated production costs of $30 a tonne. Based on these figures, Sirius already has contracts in place giving the company an initial $1.2bn in annual revenue.

To mine the required 8.1m tonnes, it would cost the company an estimated $243m at the price of $30 per tonne giving an estimated profit before depreciation, admin, interest and tax costs of just under $960m. Over the long term, the company is targeting production of 20m tonnes a year, giving an estimated profit of $2.4bn based on the above numbers.

Cash cow

These are just back-of-the-envelope estimates, but they show just how profitable Sirius could become. And even in the base case scenario of production of 8.1m tonnes per annum, the company could be a dividend champion.

Excluding the non-cash cost of depreciation, assuming a 5% interest bill on $3bn borrowing (an extremely pessimistic scenario) and that Sirius's management can keep corporate admin costs to under $100m per annum, the company is on track to report an estimated net profit of around $500m, or £380m per year. This estimate implies an earnings yield of around 29% on the firm's current market capitalisation of £1.3bn.

Want to retire early?

Do you want to retire early and give up the rat race to enjoy the rest of your life? Of course you do, and to help you accomplish this goal, the Motley Fool has put together this brand new free report titled The Foolish Guide To Financial Independence, which is packed full wealth creating tips as well as ideas for your money.

The report is entirely free and available for download today

So if you're interested in exiting the rat race and achieving financial independence, click here to download the report. What have you got to lose?

Rupert Hargreaves has no position in any 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.