When I've written about Sirius Minerals(LSE: SXX) in the past, I've always concluded that the company has enormous potential. It's flagship North Yorkshire potash project could generate billions in income for the firm, and shareholders should be well rewarded.
Here are the three top ways investors are set to profit as the company builds up its operations.
When the firm's production hits full scale, I estimate it will be able to book a profit margin of around 400%. This assumption is based on the fact that the company already has many agreements in place with companies around the world to buy its polyhalite at a price of $145 a tonne, hence a gross profit margin of nearly 400% on estimated production costs of $30 a tonne.
"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."
Considering the initial production costs of the mine are estimated at $3bn, it won't take Sirus long to pay down its debt obligations, move to a net cash position, and look for ways to return cash to investors.
Sirius' current market value is $1.1bn, so if it pays out only 10% of its profit when production is in full swing, investors could be set to receive a dividend yield of around 16% based on today's prices.
Even if management does not return cash to investors if Sirius hits the profit target of $2.4bn per annum, the shares are deeply undervalued today. For example, one of the company's competitors, Potash Corporation of Saskatchewan, currently trades at an EBITDA multiple of 11.3. Placing the same multiple on estimated near-term EBITDA of $960m for Sirius gives a potential market value of $10.8bn, or £8.3bn, 650% above current levels.
As well as the company's income and growth potential, Sirius also looks to be an excellent takeover candidate. As I've already covered throughout this article, shares in Sirus look exceptionally cheap compared to the firm's long term potential. It's highly likely that a competitor has spotted this potential already... and even more likely that a competitor will consider a bid now that Sirius has received all the necessary approvals and has started construction.
If the firm can produce a profit of $2.4bn in the future, any buyer would be getting a great deal if it made a move today.
The bottom line
All in all, there are several ways investors could profit by owning Sirius if the company manages to start production without a hitch. However, having said all of the above, I should note that while the potential returns are enormous, the list of miners who've collapsed in the development stage is long and growing by the day. There's no guarantee Sirius will remain off this list.
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Rupert Hargreaves has no position in any share mentioned. 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.