Why I'd buy Johnson Matthey plc ahead of Sirius Minerals plc
Progress is continuing well for Sirius Minerals (LSE: SXX) and its target of beginning production from its Yorkshire mine by 2021. Late last month it disclosed a large new offtake agreement for its polyhalite fertiliser and updated the market on positive construction news.
The company's management team continues to prove doubters such as myself wrong as its successfully won planning permission for its mine complex while offtake agreements suggest its product could be a winner.
That said, I'm not much closer today to investing in Sirius than I was a year or more ago when its plan appeared to be a pie in the sky dream. My main issue continues to be that investing in a prospective miner at least four years away from first production is simply too risky. In between now and then the firm will need to raise billions in debt financing and oversee an incredibly complex construction project involving a huge mine and 37-kilometre transport tunnel underneath a national park.
And while signed offtake agreements are a positive, so far there remains no liquid and public market for polyhalite. This is a situation that will improve as production comes on-line but for now it's difficult for retail investors to price polyhalite against more traditional competitors.
Likewise, Sirius is having to fund dozens of studies the world over to prove to investors that polyhalite will deserve a premium price compared to the likes of potash. I'll be eagerly awaiting the results of these studies, but for now looming question marks over funding, its product and construction schedule make Sirius simply too risky for my taste.
Gearing up for growth
I'm much more interested in Johnson Matthey(LSE: JMAT), the FTSE 100 giant that brings in most of its earnings from emissions control devices for diesel-powered vehicles but also has substantial fine chemicals and platinum trading operations. What interests me about the company is its strong position in the market for emissions control devices and long-term prospects for growth in developing areas such as electric vehicle batteries.
In the year to March, underlying sales, which strip out the effects of the weak pound and precious metals sales, rose 3% to £3,578m while pre-tax profits rose 1% to £481.7m. Much of this growth was driven by the core emissions control technology, but the company's other business lines are also starting to come into their own.
Underlying sales from its new businesses rose 10% in during the year to reach £191m, and losses narrowed as years of investments in growing the business are finally paying off. Given the global impetus to develop electric vehicles that offer longer driving ranges and use fewer precious commodities, management recently announced a £200m investment in beefing up its battery technology division.
The company intends to bring to market the world's first cobalt-free battery that it promises will cut costs (cobalt is very expensive) and also increase the range of electric vehicles. Needless to say, this has the potential to be a game-changer for Johnson Matthey if it can leverage its automotive expertise to gain a market position as impressive as it has in emissions control.
With this long-term growth prospect, a steadily growing and highly profitable core business, healthy balance sheet and attractive valuation, Johnson Matthey is definitely on my watch list.
Ian Pierce 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.