I’ve been bullish on the outlook for the Sirius Minerals (LSE: SXX) for some time. The company has a bright future ahead of it if management can bring the flagship North Yorkshire potash project in on time and budget.
However, even though Sirius looks as if it’s on track to achieve all of its goals today, mining is a highly unpredictable business, and there’s still plenty that could go wrong for the firm.
So, while I have been bullish on the outlook for Sirius in the past, I’m going to take a look at the bear case within this article.
Protect the downside
The biggest risk to its operations is the potential for cost overruns. As mentioned above, Sirius looks to be on track at the moment, but the company is yet to begin construction of the mine. So far, construction on the site has been limited to preparation work and infrastructure development, both of which are relatively straightforward tasks compared to building an underground mine.
The big problem with mine development is that costs can quickly spiral out of control. Building a mine is not a cheap or simple process, and things are bound to go wrong. Unfortunately, if something does go wrong, especially in an underground mine shaft, it could cost millions to fix the problem and delay the project by weeks.
Hopefully, Sirius management has considered cost overruns in the construction budget, which should provide a financial cushion. Still, the odds are stacked against the company. Around 60% of mining projects exceed initial cost and time estimates, and as Sirius is trying to develop a mine in a national park, the likelihood of the company having to make costly last-minute adjustments is high.
That said, operating in a national park may turn out to be advantageous for Sirius. If the company finds itself in a dire financial position during the construction process, authorities are unlikely to let it collapse. Sirius has only been granted planning permission on the condition that the mine fits in with the natural environment when finished. With this being the case, authorities are unlikely to let the firm collapse halfway through the construction process, leaving an area of natural beauty looking like a construction site.
So if the company finds itself in a sticky position, authorities may step in to help the business. However, this will likely be bad news for shareholders. Rights issues and placings to raise as much cash as possible will likely precede any such state takeover.
Of course, this is the worst case scenario and investors will have plenty of time to dump their shares in Sirius as the company’s troubles build.
The bottom line
Overall, Sirius still looks like a great long-term investment, but as with any business, the company’s future is not risk-free. Investors need to keep an eye on the firm as its construction progresses to make sure they don’t get caught out by a sudden cash call.
