In many ways investing in Sirius Minerals (LSE: SXX) can be compared to taking the plunge with another favourite among risk-taking share pickers: fossil fuel giant UK Oil & Gas (LSE: UKOG).
Diverting your savings into fledgling commodities producers with little or no revenues is always risky business. No sales means needing to raise cash via alternative methods. UKOG has been forced to pester shareholders for money to keep operations running, something which Sirius Minerals is, of course, no stranger to either.
Both businesses can also lay claim to hold some of the world’s most exciting natural resources assets. For Sirius, its Woodsmith Mine on the North Yorkshire Moors contains the kinds of polyhalite levels that it believes will make it “a world leader in the fertiliser industry.” But there’s plenty of bad news coming out of the FTSE 250 business over the past year that have taken the shine off its investment appeal. And the continued flow of information remains pretty concerning, to put it mildly.
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Financing worries
Fears over the total cost of getting Woodsmith up and running, and building the critical infrastructure to get its material exported to the coast, have been doing the rounds ever since it released its pre-feasibility study almost three years ago.
So you can imagine the reception Sirius got in September when it revealed the double-whammy of increased cost estimates to the tune of hundreds of millions of dollars, as well as a reduction in its project expansion targets.
News on the financing front has remained concerning since then, too. Sure, it hasn’t hiked its cost forecasts, nor announced plans to tap shareholders for further cash. But an update last week that it was adjusting terms for its $3bn stage 2 debt financing package to cut the risk to taxpayer has raised the possibility of further complications down the line.
The new arrangement, comprising three tranches of debt linked to the company hitting key construction milestones, has cast doubts on whether Sirius can meet its goal of completing financing by the close of the current quarter. Any failure to do so could send the digger’s share price sharply southwards again.
Will it dive again?
It’s a worry to see Sirius’ share price start 2019 on the back foot following the crushing decline which characterised the second half of last year. In that period its market value shrunk 40%.
Things haven’t all been bad at the fertiliser specialist in the past several months, of course. It’s signed a number of fresh off-take agreements with major customers in South America and Asia, meaning that it’s secured sales commitments worth a total 8.2m tonnes per annum. Meanwhile, construction at Woodsmith and other related infrastructure has also rattled along nicely ahead, bringing planned maiden production in 2021 that little bit closer.
There still, however, remains plenty of trouble that could hammer its share price this year and potentially beyond. From securing stage 2 (and later down the line, stage 3) financing, to facing additional operational delays that could smack cost and timing targets, there’s no shortage of factors that could hammer the company’s profits outlook and its balance sheet. It’d take a braver man than me to invest in the commodities colossus today. For now, I’m happy to sit on the sidelines and watch, rather than invest my hard-earned cash.
