Why I believe the Sirius Minerals share price could soon return to 40p

As a Sirius Minerals (LSE: SXX) shareholder I was pleased to see my colleague Roland Head’s ‘‘The Sirius Minerals share price is rising: is it time to buy?” headline.

But no sooner did he speak that the share price dipped again. So what’s happening and when (if ever) will the shares finally get back to their upwards trajectory? Roland is currently cautious on Sirius, and I can understand why.

Nobody seriously doubts the desirability of the firm’s massive polyhalite potash deposits, and forecasts for the long-term cash value of its project look rosy. In fact, when I last looked at the practical aspects of Sirius and its project, I was still optimistic. So what’s the downside?

Fat cats?
The big question is which cats are going to get the cream? Will early shareholders see a good profit, or will later financiers be able to wangle a deal that wipes us out and lets them pocket all the profits?

It’s all down to the details of the next phase of the company’s financing. It was always known it would be needed, but there have been cost and timescale overruns. I don’t think those are anything to worry about in the long-term scheme of things. But it does provide potential lenders with an extra bargaining chip and could help them secure a better deal (for themselves, but a poorer one for shareholders).

The valuation of Sirius Minerals has always looked to me to provide a decent safety margin, but Roland has shown that maybe it’s not as safe as I’d thought. He puts the valuation of the company, after the necessary funding round, at approximately $5bn.

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Net present value forecasts of $9.8bn suggest twice the current value, but that’s perhaps not as attractive as it might seem once we consider the uncertainties that lie ahead and the long lead time to expected first production.

Risk
Those who have followed oil explorers in their early stages when valuations have been based on estimates of resource valuations will have seen many a big expectation collapse to near nothing. Sirius isn’t in the same high-risk category as early stage oilies, as its resources are pretty well proven and accessible, but some caution is called for.

So what’s the latest news and why does it make me a bit twitchy? The answer to both of those is that there isn’t any, and we’re getting very close to the firm’s target of the end of April for securing and announcing a deal.

The last we heard was that there’s an alternative financing proposal on the table, but that was more than a month ago and the newswires have since gone silent. And the more we don’t hear anything, the more investors will fear the worst.

But the apparent existence of competing financing plans surely works in our favour, and lessens the chances of a wipeout for current shareholders.

We had a brief share price spike a few days ago, which suggests investors could be sitting with their fingers on their ‘buy’ buttons. And if a favourable deal is announced in the coming week, I really could see a quick doubling of the share price.

Alan Oscroft owns shares of Sirius Minerals. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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Motley Fool UK 2019

First published on The Motley Fool

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