Why I'd avoid shares in Sirius Minerals plc despite today's share-price surge
Sirius Minerals(LSE: SXX) is back on the front foot Thursday following news of a blockbuster offtake agreement with a major Asian client. The share was last dealing at 10-week high, thanks to a 6% rise on the day.
In the mega announcement, Sirius said that it had sealed a binding 'take-or-pay' offtake agreement to supply POLY4 product to PT Chemical Indonesia, a subsidiary of Asian agribusiness giant Wilmar Group.
The deal will allow for the exclusive resale of the fertilizer in major South East Asian countries including Indonesia, Malaysia, Vietnam, Thailand, Philippines and Myanmar. Prices of the product are to be calculated using a formula linked to the market price of certain nutrients contained in POLY4, Sirius said, and are broadly in line with its existing supply agreements.
The accord will last for seven years - from first production at its North Yorkshire mine, with Wilmar having the option to extend by a further three years.
Furthermore, Sirius will supply 750,000 tonnes of POLY4 by the seventh year, although Wilmar has an option to increase minimum shipment levels to one million tonnes per annum.
It is hardly surprising that Sirius' share price has leapt given the potentially-explosive revenue opportunities created by today's accord.
As the potassium powerhouse noted today: "Wilmar... is one of the leading agribusinesses in South East Asia with extensive distribution channels, a mature logistics network in the region, and over 250,000 hectares of its own farming operations."
And chief executive Chris Frase enthusiastically added: "South East Asia is a fast-growing market which provides Sirius with an attractive opportunity to further diversify and grow our current portfolio of customers." The company also paid reference to the territory's position as "one of the fastest growing fertilizer regions in the world", home to 650m people.
Many obstacles ahead
Today's release is not the only positive update from Sirius in recent weeks. Indeed, work to get production up and running at its gigantic polyhalite project on the North Yorks Moors is also ticking along nicely. Late last month, Sirius advised: "Activity levels at the Woodsmith Mine continue to increase every month and now step up significantly as we commence diaphragm walling activities". Work at the site remains right on schedule and within budget, it added.
With every new release, the investment case for Sirius becomes that little more compelling. But for me, I'm afraid there's still too much uncertainty between now and when first material is dragged from the bowels of Woodsmith to justify investment.
Sirius still has a lot of labour ahead to get the mine and all related infrastructure built and operational, meaning that the potential for significant delays and extra costs between now and initial production (currently slated for 2021) is not exactly insignificant. And of course, the business will not be profit-producing before then, leaving it will little balance sheet flexibility should work begin to disappoint.
On top of this, revenues projections may also begin to look a little fragile before maiden material even reaches the surface, as supply in the potash market steadily builds. Just this week, the first ship carrying product from K+S Potash Canada's new Bethune mine set sail for Asia, reflecting the rising competition Sirius faces in the years ahead.
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In light of these factors, I am more than happy to sit on my hands rather than splash the cash on Sirius. But while there remains a lot of uncertainty facing the potash play in the near-term and beyond, the investment case for the stock detailed in this special Fool report is much more compelling, in my opinion.
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Royston Wild has no position in any of the shares 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.