Why I believe Sirius Minerals could return to 40p by the end of 2018
2017 was a transformational year for Sirius Minerals(LSE: SXX) and it looks as if 2018 is going to be an even more critical year in the history of the firm.
Progressing towards the target
Last year, Sirius moved from being a company with an idea and some plans, to a funded business with full permission to get started on the construction of its flagship potash mine in Yorkshire.
With the first phase of funding now secured, management has pushed ahead with development of its mine. A progress update, published at the beginning of this year, declared that the site preparation was nearly complete and "the project remains on track to deliver first polyhalite and commercial production on time and on budget."
The one bleak spot in the update was the revelation that the diaphragm wall shaft construction was running around two-months behind schedule, although management is confident that contractors can make up lost time over the rest of the project schedule.
This week Sirius went on to announce that it had signed a contract with DMC mining services to design and build the four mining shafts required. So all in all, the company is making good progress on the construction of its North Yorkshire mine. The next step is to lock in the next stage of financing required to push the project through to its final stage.
Cash is king
Last year it raised $1.2bn to commence construction from various parties including £370m from shareholders. This money is only designed to last until around the first half of 2019 when management expects to begin drawing down on its second stage of financing, which should last until the first production in late 2021. If all goes to plan, the firm is planning to have commitments in place during the second half of 2018, and if it manages to do this, then nothing is stopping it from achieving production.
Ever since I first started covering Sirius, I have cautioned that a lack of cash is the single biggest reason why most early-stage miners fail to get significant projects off the ground. The company proved that it was heading in the right direction last year after it completed the first stage of financing, and if it can repeat this success with phase two, then its chances of survival are high.
Winning support from stakeholders
With cash in the bank, Sirius can push on with production, and even though the company has already signed several offtake agreements, its financial stability should attract additional partners.
What's more, financial security should lead to a re-rating of the stock as investors pile in to take advantage of the de-risked opportunity. Indeed, as I've written before, if Sirius can achieve its production target of 20m tonnes a year, it could produce an annual profit of more than $2bn or approximately £1.4bn compared to the firm's current market cap of a little over £1bn.
Still, while the company has enormous potential, plenty could go wrong between now and production, which is why I only expect the price to return to previous highs, not exceed them. However, as construction progresses, and risks diminish, I believe the stock could be worth more than six times its current value.
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Rupert Hargreaves owns no 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.