Since the turn of the year, shares in Sirius Minerals (LSE: SXX) have risen by 7%. While that may seem like a good return at first glance, it’s worth considering that the wider resources sector has enjoyed significantly better returns over the same time period. For example, oil producer Tullow Oil (LSE: TLW) is up by 27% and precious metals miner Fresnillo (LSE: FRES) has soared by 33%.
Clearly, Sirius Minerals has been held back by a delay to the release of the definitive feasibility study for its potash mine in York. However, that was released last week and since then the company’s shares have fallen by 30% as the sheer scale of the project becomes clear to investors.
Although Sirius Minerals stated that the project could deliver billions in earnings in the long run and create a world leader in the fertiliser industry, the cost of reaching that point is relatively high. In fact, Sirius Minerals is proposing to initially build a project which is capable of producing around 10m tonnes of polyhalite per year and the cost of this is expected to be just over $1.6bn. It then plans to ramp-up production to double the initial level for a further cost of just over $1.9bn.
In terms of financing for the mine, Sirius Minerals is currently engaged with potential partners and expects the process to be completed in a number of months’ time. While the outlook for the resources sector has improved, investors are still rather more uncertain about the future than they were a couple of years ago. Therefore, Sirius Minerals, while having the potential to generate billions in earnings in the long run, may find it more difficult than anticipated to generate the financing required to deliver on its plan.
For this reason, it may be prudent to await further information regarding the company’s financing situation, especially since investor sentiment in Sirius Minerals is on the decline. And with other resources companies such as Tullow and Fresnillo offering compelling reasons to merit purchase, they seems to be more appealing at the present time.
Brighter prospects
For example, Tullow is expected to ramp-up production this year when Project TEN in Ghana comes onstream. This has the potential to transform the company’s bottom line and could lead to not only a higher share price, but improved cash flow and a rapidly rising dividend too. With Tullow trading on a price-to-earnings growth (PEG) ratio of 0.2, it appears to offer excellent value for money.
Similarly, Fresnillo is likely to benefit from interest rate rises which are slower than previously anticipated. This should aid the price of gold since competition from interest-producing assets is likely to be lower than expected. And with uncertainty among investors regarding the global macroeconomic outlook set to remain high, gold could be seen as a relatively safe asset over the medium term. With Fresnillo trading on a PEG ratio of just 0.2, it seems to offer excellent value for money and could continue its recent capital gains in the coming months and years.
