Shares in aspiring UK-based potash producer Sirius Minerals (SXX:AIM) have been oversold, claims Liberum Capital. Although its position as house broker could suggest some bias, its views are worth exploring.
Liberum believes the 70% drop in the share price from its 2013 peak 'incorrectly factors in a lower probability of project permitting and also misinterprets the impact of weaker MOP prices on project economics.'
It says the shares have 'significant upside' on a 12-month view if management can deliver permitting and initial funding to its expected time frame.
We looked at Sirius' situation in detail last month, concluding that its share price would stay weak until nearer the July 2014 planning application submission target. Getting permission to build the mine is the key hurdle to clear.
Liberum has a 29p price target based on the first phase of Sirius' project. It believes the share price could ultimately rise by six to 19 times the current level depending on the 'ultimate funding scenario' to achieve both phase one and two of the project.
It highlights three factors to support the near-term bull stance:
- Logical path to resolution of permitting issues
- Sirius targeting 2 million tonnes per year of 'firm contracts'. Liberum reckons these will be enough to cover interest payments on likely debt.
- The broker doesn't believe there's any impact to Sirius's project net present value from weak potash prices.
It reckons the biggest hurdle is the miner's ability to raise debt finance. Liberum believes Sirius could get an initial $400 million from issuing convertible bonds or bringing on board a strategic investor – or equity as a last resort. This graphic fleshes out other possible funding sources and timeline.
Although we presently have a negative view on the stock, that's centred upon the long wait to hear about planning permission.
Fundamentally we do recognise that it has a high-quality asset and there's significant economic benefits to the country – jobs and tax income – if the mine goes ahead. Nevertheless, getting the asset into production is unlikely to be a smooth ride and could take a lot longer than the company expects.