Sirius Minerals falls 11% on fears about Chinese Adavale partnership

I missed the significance of the Sirius Minerals  (SXX announcement) this morning in relation to the potential partnership with Sino-agri Mining on the Australian Adavale potash project. The implications are covered by the story on the iii.co.uk site below.

http://www.iii.co.uk/articles/14288/partnership-doubts-knock-shares-sirius

Partnership doubts knock shares in Sirius

Mon, 14/02/2011 - 11:06 | Esther Armstrong

Shares in AIM-listed potash developer Sirius Minerals (SXX) slumped on Monday after the firm cast doubt on the potential Chinese partnership for the Adavale project in Queensland Australia.

Back in August Sirius announced it had entered into a memorandum of understanding (MOU) with Sino-Agri Mining Industry to explore ways of working together to exploit Sirius’s wholly-owned Adavale project.

The 180 initial exclusivity period on the MOU is due to end tomorrow, but Sirius said it is continuing discussions with Sino-Agri about potential commercial agreements and that it is committed to building a long-term mutually beneficial partnership with the Chinese firm and more broadly with China.

In other areas, the group said the integration of the York Potash project was proceeding well, following the acquisition announced in January.

Sirius added that the project was moving forward on many fronts including the continued acquisition on mineral rights within the project area, analysis of extensive amounts of historical seismic data and selection of locations for the initial drilling campaign.

Sirius also updated on its operations in North Dakota and the Canning Basin project in Australia. It has acquired more land at its Williston Basin in North Dakota and continued its studies on the Canning Bain, but has yet to make any material progress in the region.

Today's Sirius Minerals action is par for the course for an AIM stock

If you trade in stocks on AIM (Alternative Investment Market) you need to accept that unlike investing in a FTSE 100 company, swings in the share price of over 10% in a day aren't an uncommon phenomenon. AIM stocks tend to have a large private investor base which can mean a lot of trading in and out on news flow, market makers setting the price and relatively low liquidity (because the number of sellers to buyers and vice versa can quickly move out of equilibrium) resulting in big price spikes up or down.

A wonderful illustration was Sirius Minerals (SXX) today. After rising 10% on Thursday and Friday, an RNS was released this morning with the analytical results from the North Dakota potash drill which has been awaited with great anticipation for the last 6 weeks. First thing the price moved up again to 22p, but it was downhill all the way to 17.25p, a fall of 17%. The shares have had a great run over the last couple of months, from the 8p level in early December (and even lower earlier in 2010) so there are undoubtedly many investors who have made 300%+ gains. So expectation for this latest North Dakota RNS was sky high. There has been talk of this potash reserve being worth $1 billion etc. etc. - i.e. massive hype and expectation. So when the RNS finally came out, the news was relatively underwhelming and probably raised more questions than it answered. Many private investors were probably anticipating confirmation of a massive potash find there and then.  So then the sell off started and gathered pace throughout the day.

Was the North Dakota RNS really so bad? The drill results released today were from the first drill with more to follow over the next couple of months. The depth of the Potash looks positive (over 30 feet) but the concentration looks to have raised concerns. It is interesting that Sirius management chose to release the results early since previous communication had confirmed mid-February as the period when the results from the analytical analysis of the seams would be available. The question is why release the results early when although they weren't bad, they weren't overwhelmingly positive either? Perhaps the board believe future news flow over the coming weeks will drive the share price much higher e.g. progress at York Potash or further updates after the Memorandum of Understanding (MOU) with with Sino-Agri Mining Industry Co. Ltd (a division of China’s second largest fertilizer distributor), to develop Sirius’s property overlying the Adavale Basin in Queensland, Australia. It was probably no accident that the York Potash deal was announced last week to take the pressure off news in North Dakota.

I was annoyed that one of my positions closed on a guaranteed stop at 18p today, especially as I don't usually use stops on AIM stocks. But I still have two significant positions running. I believe that North Dakota still holds strong promise (the company has only done one exploratory drill), there is the potential for a transformational deal with the Chinese in Australia, York Potash seems a sound acquisition and there was a fairly large director buy last week at 17p. Sirius seems to be serious about becoming a major global potash producer and step by step they seem to be moving in the right direction. Global potash use is forecast to grow strongly in coming years so the demand side of the equation doesn't seem to be an issue.

It's volatile and frightening at times to be in these AIM stocks but that's half the fun of it. If you do the homework on fundamentals, then the volatility shouldn't faze you as an investor. Although Sirius is not a "done deal" like Xcite Energy (XEL), it would be surprising if the share price wasn't a lot higher in 2012.