Is £1,000,000,000 too rich a valuation for Sirius Minerals?

When you write down the market capitalisation of Sirius Minerals (LSE: SXX) in full, it looks like a lot of money: £1,091,810,000.

At first glance, that’s a hefty valuation for a firm with zero revenue, earnings or incoming cash flow. In fact, one well-known share research website unflatteringly labels the share a ‘Sucker Stock.’ However, I don’t think the stock market is the collective idiot that the label suggests because Sirius Minerals is all about the potential for future earnings.

Potential customers queuing up for the product

The firm has signed several offtake agreements with potential customers for its proposed Poly4 polyhalite potash product. One example is this week’s announcement of a strategic investment in the Cibra Group Companies, linked to a supply agreement for the supply and resale of POLY4 into Brazil and “certain other countries in South America.”

Many exciting-sounding deals have been announced by the company over the past few years, but it’s hard to quantify what effect they will all have on the eventual revenue, profits and incoming cash flow. In the meantime, Sirius is focused on the development of its Woodsmith Mine, which will access “the world’s largest and highest grade polyhalite deposit.” Who’d have thought you’d have found that under the North Yorkshire moors? But there it is, and Polyhalite is a unique multi-nutrient fertilizer, according to the company, which can be used to increase balanced fertilization around the world.

But the vast construction project to build the mine and infrastructure is a significant hurdle to overcome before any money flows into the coffers. In fact, big money has been flowing out, and the requirement for finance has been vast. Last month I reported on how the potential for cost-creep reared up and bit the firm when it announced its stage two funding requirement had increased by between $400m and $600m. I reckon the ongoing potential for delays and cost overruns remains high.

Major procurement complete

Meanwhile, on 12 November, Sirius told us the procurement process is complete for the major construction packages with the announcement that it has varied its existing mineral transport system (MTS) tunnelling contract with STRABAG AG to include the “engineering, procurement and construction of the fit-out of the MTS.” The works include the MTS conveyor, the maintenance railway, electrical and communications infrastructure, and all other services in the tunnel essential to the operation of the MTS.

This one aspect of the construction project is mind-boggling in its proportions. The MTS will carry the mined polyhalite from 360 meters underground at the Woodsmith mine to the materials handling facility at Wilton, Teesside, “on a 37km underground conveyor system.” Thirty-seven kilometres! You could walk along that tunnel all day and still not make it to the end of the conveyor It’s going to cost a lot of money. The firm expects the capital funding requirement of the project to be between $3.4bn – $3.6bn, although it previously thought $3bn would be enough to see it off, so that’s another example of cost-creep. The financial close of the firm’s stage 2 financing should happen in the first quarter of 2019.

The financial stakes are high and there’s no accurate way to determine if the firm is worth its £1bn-plus price tag. I see the shares as speculative.

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Kevin Godbold 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.

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