Shares of Sirius Minerals (LSE: SXX) are down by 6% as I write, but that’s not why I’d sell them today.
Here’s why I’d be happy to lock in a profit today if I were a Sirius shareholder.
1. Buy the rumour, sell the fact
Markets are forward looking. When investing in speculative stocks, it often pays to respect the old stock market adage of buy the rumour, sell the fact. The biggest gains are often made ahead of the news, rather than after it.
We’ve known for some time now that Sirius is likely to get planning approval for the York Potash mine. This news is already reflected in the firm’s share price, which has risen by 180% over the last three months, from 8p to 23p.
Sirius now has a market cap of £500m, despite having almost no cash, no revenue and no saleable assets.
Assuming planning approval is granted on 30 June by the North York Moors National Park Authority (NYMNPA), as I expect, what will happen next?
Sirius has been investigating debt and equity funding options. If approval is granted, the firm will reveal the full scale of its funding requirements to shareholders.
2. Ignore the hype
On 19 May, Sirius issued a new investor presentation. In it, the firm makes the bold claim that its shares could be worth between 230p and 460p at the time of first production, which is targeted for 2018.
This projection may have encouraged investors, but this is simply a projection of net present value (NPV). This represents the total future cash flows expected from the project, once production starts.
The small print makes it clear that no allowance has been made for repaying debt or for shareholder dilution for project financing. Given that the firm is assuming debt of $1.5bn to reach first production, this is significant.
A more realistic view may be broker valuations for the firm, which range from £0.40 to £1.20 per share, according to Sirius. Although these figures still appear to offer attractive upside from today’s price of 24p, the fact they vary so widely indicates that there is a high level of uncertainty involved.
3. Uncertainties
Sirius still faces a number of risks. There is still a possibility that the NYMNPA will refuse to grant planning approval for the York Potash mine. A more realistic possibility is that the decision will be referred to the Secretary of State for approval. According to Sirius, this process would be likely to take around nine months, although I suspect approval would be very likely.
The cost and availability of funding are not known to investors, although the firm’s management probably has a fair idea of what will be possible. Interestingly, the firm’s chief executive, Chris Fraser, chose not to buy shares in March’s £15m placing.
Market demand and pricing for the mine’s fertiliser products could fall below expectations. Sales could take longer to ramp up than expected.
Finally, the reality is that single-asset resource stocks with no cash — like Sirius — rarely manage to move from the exploration phase to production without causing their shareholders some pain.
