Is Sirius Minerals plc's 35% share price slump a great buying opportunity for 2018?
I bought some Sirius Minerals(LSE: SXX) shares in December 2016, and I fully expected a rocky ride in the years to come. And sure enough, the price surged to a 34p peak in June 2017, before losing 35% to today's 22p price levels.
I'm slightly ahead since I bought, but at this stage that's meaningless, as I expect a lot more volatility from this high-risk stock over the next few years.
My Foolish colleague Ian Pierce has pointed out the risks facing Sirius shareholders, and I agree with him on every one. In particular, we're looking at at least three years before the company's targeted first production from its polyhalite potash source in Yorkshire in 2021, and there's a lot of debt funding needed to bring that to fruition.
"On time and on budget"
The latest progress update in January revealed a two-month delay in diaphragm walling. That's due to delays in commissioning equipment, and adverse weather conditions -- in Yorkshire, who'd have thought?
Sirius says it's confident the delay will be recovered, and says it "remains on track to deliver first polyhalite and commercial production on time and on budget." Still, I'd be very impressed if the project does reach maturity on time and within budget, as that's a pretty rare achievement in any engineering project.
It's risks like these that normally turn me well away from 'jam tomorrow' stocks, but for once I do think I'm seeing one where the potential rewards are enough to justify the risk -- with a relatively small investment. And the increasing number of committed off-take agreements that Sirius is signing really do convince me that we're at a buying opportunity.
Balance the risk
As a safer mining investment, a FTSE 100 giant like Rio Tinto(LSE: RIO) could be a good partner for a successful balancing act.
I've always like the company, and the whole sector, even through the commodities downturn. It's a cyclical industry which needs to be looked at from a decades-long perspective, and is not for short-term investors. Full-year results for 2017 indicate an impressive upswing as commodities demand and prices have strengthened, and Rio reported operating cash flow of $13.9bn.
Cash of that level allowed the firm to make record dividend payments of $5.2bn during the year, and a new share buyback of $1bn was announced, expected to complete in 2018. Total cash returns to shareholders declared for 2017 have reached $9.7bn.
The inconsistency of dividend payments is something that keeps a number of income investors away from the big mining companies, as for some it's a steady stream of cash that's most important.
But even over the past five erratic years, Rio Tinto has managed to smooth its dividend payments out a bit while EPS has gyrated more wildly. And over the long term, cash payments have been impressive.
The current forecast of a 5.3% dividend yield for 2018 looks reliable to me with the levels of cash flow just reported. And forecast earnings would cover the payment around 1.6 times, which I think looks easily safe enough.
The next down cycle could well see cash dry up again and mining dividends pared back, so if that bothers you then I'd say look elsewhere. But if you have a 10-year horizon or more, I reckon Rio Tinto could reward you well.
Another growth candidate
If you're still nervous about the risks of Sirius Minerals, one possible approach would be to offset it with a safer growth stock at a more sustainable price level.
The company selected in our Top Growth Share From The Motley Fool report has already provided handsome rewards, our analysts think it has a lot more to give, and it looks a safe pick to me.
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Alan Oscroft owns shares in Sirius Minerals. 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.