Companies with developments in the pipeline can be rewarding investments but are definitely high-risk. Proving up an asset, securing funding and then developing the asset are three tough stages each project must go through. The companies below own two of the most exciting projects in the world and could richly reward investors who buy-in before development.
Yorkshire polyhalite
Sirius Minerals (LSE: SXX) is pushing ahead with its polyhalite development in Yorkshire. The company is planning to be a leading producer and sees this project as a world class resource. The headline numbers in the definitive feasibility study are very impressive. The project has a net asset value of £27bn at first production and the internal rate of return (IRR) is 26%. Due to the high margins it will also make between $1bn and $bn of annual EBITDA. The high IRR figure should attract lots of interest from private equity and other investment funds. I believe that the company will be able to raise the initial £2.5bn for development relatively easily.
City analysts agree that Sirius has huge potential and is undervalued at this point. Some analyst price targets are as high as 50p, which illustrates how undervalued the stock is. The company has been quiet on the news front in the last month or two. I would expect news on stage 1 funding to come soon and in the form of debt and equity. This is the key value lever in the short term and it could cause shares to sharply rerate and move closer to that 50p target.
Falklands development
Rockhopper Exploration (LSE: RKH) owns part of the Sea Lion discovery near the Falkland Islands. The company discovered the field in 2010 and is currently planning a development with partner Premier Oil. Sea Lion is thought to hold around 1.6bn barrels of oil, of which over 500m barrels are classified as contingent (potentially recoverable).
Unlike many oil companies the company is in a very strong financial position. The management team believes the company will finish 2016 with over $60m in cash after spending around $40m this year. Rockhopper is also carried for phase 1 and 2 of the Sea Lion development, which amounts to over $650m. Some analysts believe Premier doesn’t have the liquidity to pay for this itself so don’t be surprised to see a new partner as Premier farms out some of its stake. Rockhopper is in a great position to create real shareholder value over the long term. The company is obviously relying on the oil price and any increase would be good for the company. If we do see a significant increase in the next year or two then Rockhopper may become a takeover target.
These two companies have huge potential through the transformational projects each wants to carry out. There are obviously risks involved but brave investors should be richly rewarded if each company sees through its developments efficiently.
