I've been wary of Sirius Minerals (SXX) ever since Chris Fraser, a former investment banker, acquired the York potash project and reversed it into Sirius in 2011 for £25.1m in shares and the position as chief executive. After all, his private company had only been set up in 2010 and had incurred an operating loss of just £362,000 by that time.
- See 'Sirius is a serious proposition' for the opposing view on this share tip.
- No big-name resources investors
- No domestic market for its product
- Huge mine development costs
- Environmental and regulatory concerns
Still, the market was mad for potash and the deal came hot on the heels of BHP Billiton's (BLT) failed $40bn (£25bn) bid for Canada's largest potash producer, PotashCorp (POT-T), and you can't fault a banker for astute deal-making.
But there are other reasons for selling the shares. For starters, none of the big-name resources fund managers, such as BlackRock, has a significant shareholding in Sirius. That's an immediate red flag, as a company with a market capitalisation as large as Sirius will have been on every fund manager's radar. Most of the key institutions will have looked at the company in detail and said "pass".
The main problem with Sirius, however, is the type of mineralisation it hopes to mine. Polyhalite, the type of potash found at the York project, may have a decent overall nutritional value but it doesn't have an established sales market in the UK. There's already a very similar product on the market, Polysulphate, mined just a few miles away, but no major UK fertiliser supplier I contacted sold it or knew much about it. So Sirius may have to sell its polyhalite at a deep discount to stimulate demand from wary farmers. It's other option is to convert the polyhalite into a more saleable form of potash, but that process is expensive and, as far as we know, there is no commercial-scale processing plant like it in the world.
Even if Sirius goes with the cheaper option, which it probably will, the company still has to raise £1.1bn to build its mine there. Sure, that figure has been reduced from £1.8bn, but that's still a monumental amount of money and banks have pretty much stopped lending to junior miners for large capital spending projects. Even if Sirius managed to raise the money through a mix of debt and equity, imagine the dilution to current shareholders that would be required to fund a project costing four times the company's current market capitalisation.
| SIRIUS MINERALS (SXX) | ||||
|---|---|---|---|---|
| ORD PRICE: | 21.5p | MARKET VALUE: | £288m | |
| TOUCH: | 21.25-21.5p | 12-MONTH HIGH: | 30p | LOW: 12.75p |
| DIVIDEND YIELD: | nil | PE RATIO: | na | |
| NET ASSET VALUE: | 6.7p* | NET CASH: | £36.8m† | |
| Year to 31 Mar | Turnover (£m) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
|---|---|---|---|---|
| 2010 | nil | -3.84 | -1.0 | nil |
| 2011 | nil | -7.67 | -1.0 | nil |
| 2012 | nil | -63.11 | -5.6 | nil |
| % change | – | – | – | – |
Normal market size: 60,000 Matched bargain trading Beta:1.4 *No profits forecasts available †As at 30 Sep 2012 | ||||
And the project is in a UK national park. The UK has an incredibly slow regulatory framework for new mines and there is no way the company will be able to keep to its ambitious timetable for development. Already, it has delayed its feasibility study and received an objection from the Ministry of Defence. And with the help of powerful environmental lobbying groups, enough locals will object to delay the project for years.
True, Sirius has a plan to minimise surface disturbances by designing a low-visual-impact mine head and burying pipelines for transporting minerals. But that could lead to increased costs, and Sirius already has to contend with high-cost underground mining since its seams of polyhalite are more than 1,500 metres underground - think South African gold-mine deep.
