With the Sirius Minerals PLC (LON:SXX) (SXX.L) share price having made gains of around 21% since the start of the year, investors may be wondering if the stock is due a pullback.
Judging by its past performance, a correction seems likely. After all, the company has usually made fast gains, only for them to gradually be reversed as investor sentiment comes under pressure. Because of this, I’m slightly cautious about the company’s near-term outlook.
However, I still feel that Sirius Minerals has upside potential in the long run. The company appears to have a solid strategy which is moving along as expected. There is even the potential for first production to commence up to six months earlier than previously expected. This could mean that the company’s financial outlook is more upbeat than previously anticipated.
But it is the company’s valuation where I think there could be significant investment appeal. The stock has a net present value of around $15.4 billion and yet its market cap is less than 15% of that figure. Although there are major risks to the project which could cause its ultimate operational and financial performance to disappoint, so far the business is on track to deliver on its estimates.
This means that the SXX share price may offer a large margin of safety. This could propel the Sirius Minerals valuation higher in my view, with its current price level of 28p undervaluing its long-term prospects to my mind.
Sure, there are other resources stocks which offer upside potential over the next few years. And in many cases they are already highly profitable and may therefore come with lower risk.
But with a strong long-term investment outlook Sirius Minerals remains one of the most exciting shares in the resources industry in my opinion. I think there could be further capital gains to come after what has been a strong start to 2018.