Ive been keeping close tabs on AIM-listedpotash mining hopefulSiriusMinerals (LSE: SXX) because I feel this is one prospect that can go all the way. Its flying at the moment but is the sky the limit?
Mineral wealth
The last time I reviewed the stock, at the end of September, it had just crashed 25% in a month. At the time I wrote these prescient words: Its better to buy SiriusMinerals at times like now, when investors are bored and theshare price is depressed, rather than when its riding high on the back of goodnews. I hope somebody out there listened, because justover four weeks later, its up 20%.
The stock is very news flow-independent now. Its largely immune to wider macro issues, such as the state of the mining sector generally, as its carvingits own niche out of the North Yorkshire soil. The news investors arewaiting for is whether ithas successfully secured $1.09bn of stage one financing to help it exploitsome of the worlds largest polyhalite fertiliser reservesand constructa 23-mile tunnel to a purpose-built export berthin Wilton, Teeside.Bizarrely, $2.6bn of stage twofinancing has been securedfirst.
Hancocks half-hour
The big worry is that stage one financing would be a mixture of debt and equity, which would dilute the stakes ofexisting shareholders. OnTuesday it was announced thatHancock Prospecting,controlled byiron ore heiress Gina Rinehart, would provide $250m in royalty financing and $50m in equity funding. The deal, which is conditional on the company completing the remaining$630m stage one financing,will run for the life of the project or 70 years.
Markets welcomed the news, which drove the share price up almost 15% from 35p to 40p. AnalystYuen Low at Shore Capital was particularly optimistic, anticipatingstage onefinancing would be concluded this autumn with no further need to raise equity thereafter. Dilution would cease to be a concern, and we believe the resulting improved clarity on potential equity returns could trigger a significant rerating.
Difficult stage
Low says this will significantly de-risk the share and set a target price of 70p once stage one is complete. Given that Sirius has successfully overcome themany planning hurdles in its path, you would have to be optimistic that it can pass this one too.
However, Sirius still has to spend $630m on construction before it gets Rinehartscash, and we still dont know where it will find thismoney. Dilution therefore remains a danger. Also, the royalty financing agreement looks veryfavourable for Hancock, which gets5% of gross revenue on the first 13m tonnes per annum for 70 years. That makes mewonder how needymanaging director Chris Fraser must have been feeling to agree to such generousterms.
Sirius Minerals remains an exciting long-term project that could produce 20m tonnes of polyhalite every year for a century. Ithas already signed contracts with buyers mostly from China for a third of its projected output, giving investors further security. If it does secure stage one financing the share price could climb a fair bit higher, so you might want to hop on board now. Just remember,it isnt a done deal yet.
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Harvey Jones has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
