Sirius Minerals (LSE: SXX) seems to be the company everyone loves to hate. 2016 was a momentousyear for the company, as the final approvals for its Yorkshire potash mine were granted and management secured Phase one financing. However, it seems investors werent that impressed with the companys progress, and the shares ended the year up a measly 14%, after rising as high as 48.3p at one point.
Its unclear why the market has failed to re-rate Sirius, although after recent declines it does look as if the company is one of Londons most undervalued and under-appreciated stocks.
Undervalued and under-appreciated
Trying to place an exact value on Sirius today is almost impossible. It will be years before the companys mine is up and running, and the chances of the project falling behind, running over budget or not yielding the desired results are high.
That being said, while theres still a lot of risk in Sirius shares, the companys potential upside, even if things dont go to plan, could be massive. In various scenarios, the companys shares could be worth multiples of their current value.
Considering Sirius current market capitalisation is 770m, the potential uplift possible if the company hits its most optimistic could be as much as 30x.
As Ive written before, based on updated budget forecasts, Sirius management estimates the firms potash project now has a net present value of $15.2bn and an internal rate of return of 28% if everything goes to plan. Current estimates show the mine couldgenerate annual earnings before interest, tax, depreciation and amortisation (EBITDA) ranging from$1bn to $3bn, based onvariable volume and price outcomes.
Placing a value on growth
Assuming shares in Sirius attract a valuation of 11 times EBITDA (peer average), based on current exchange rates, itsmarket cap could exceed 26.4bn at $3bn EBITDA when the company starts producing. This forecast is clearly very optimistic, so lets cut it back a bit.
If Sirius hits the $1bn EBITDA watermark, a multiple of 11 times implies a market value of 8.8bn, thats still 10x more than the companys current market value. If were really pessimistic and assume Sirius completely misses the $1bn target and instead only manages to produce EBITDA of $500m per annum, even this low-ball target implies a market value of 4.4bn when the company gets its mine up and running.
Plenty of upside available
So, even in the most pessimisticscenario Sirius looks undervalued at current levels. One thing to consider is that even if Sirius market value only doubles over the next five years, investors will still pocket a return of around 20% per annum, more than three times the market average annual return of 6%.
To put it another way, considering all the risks and the potential upside available here, an investment in Sirius seems extremely likely to beat the market over the next five years.
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