Sirius Exploration - have recent events changed the picture?

With the news out today that it has listed its American Depositary Receipts (ADRs) on OTCQX ^[1] and since I messed up the net debt figures for Sirius Exploration (LON:SXX) last time I wrote about it (apologies again), I thought I might put together a little piece on the most recent results, so that I can try to get all my ducks in a row this time. (Yes, I know it's taken me a while to get round to it; the results were out in December.)

Interims to September 2009 ^[2] showed the company busy at work raising finance and making acquisitions. It raised £2.8m of new funding, and acquired the remaining 49% of Dakota Salts to give full ownership. It also acquired 63.5% of AusPotash, giving control of the Queensland Salts exploration permits
After September, the company carried on with its acquisition spree, buying Adavale, with prospects adjacent to the Queensland Salts properties; Derby Salts, in Western Australia;  three technology companies focused on carbon sequestration; and an increased share in AusPotash taking its stake to 68.35%.

The company ended the period with £2.9m of cash and cash equivalents, but with a pretax loss of £656k - and increased operating expenses. Now I may be missing something but I'm not really that impressed by the results. It seems to me that the company has continued to buy things. Now, I'm quite good at that - just take me to a second-hand bookshop or an art gallery and watch me write cheques!

What Sirius doesn't seem to have done is to add substantial value to those assets. And the statement uses a lot of words like 'understanding the resource', 'establishing' and 'investigating'. It seems there are still no operations. I also noted that with regard to Adavale, the company doesn't appear to be certain that the operations will be commercially viable. Here's the quote:

“If proven viable, the Board believes the Adavale properties have the potential to provide a major facility for removing Australia’s future CO2 emissions from the atmosphere.”

So this is not a done deal, and I wonder about the quality of due diligence that has been done on acquiring a company that might not actually be worth anything, or am I missing something?

I've done a bit more digging on carbon sequestration, too. It's certainly got a following, but Emerging Energy Research believes its commercial viability has still not been demonstrated ^[3] . On the other hand, EER believes some USD 20bn has already been earmarked for sequestration, and points out that the oil and gas majors are leading the market. What's certain is that nothing has so far been proven, either way.

To its credit, Sirius is gearing up for the future. It has recently appointed Daniel Stewart as broker, and hired independent research house Edison to write quarterly reports ^[4] . Both Edison and Daniel Stewart are experienced operators and that might help communicate the story and get the share price up in the medium term.

My worry is that there could be something reminiscent of the dot-com era about this company. It's very active spending money buying up all kinds of assets, which may or may not amount to anything. And though I'm certainly not a potash expert, so I stand to be corrected, it looks to me as if it's paying pretty full prices for assets that presumably aren't going to justify the valuation just as mineral resources. (That would be about as smart as Shell buying a North Sea oil field just to create a large hole to store carbon in.) If I'm wrong, I wish the company would come out with some kind of way of valuing the resources on an as-is basis - instead of just lots of jam-tomorrow statements about the bright new world of carbon sequestration technology. And of course there's been a fair amount of dilution as shares have been issued for a lot of the acquisitions.

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To be honest, I also worry when I look at the bulletin board comments on this stock. They seem full of people saying 'This one will be huge', 'It's a tenbagger', 'Obama is green so this one will fly', and similar comments. I may have missed it but there doesn't seem to be much substantive discussion anywhere about valuation. The tone of the commentary suggests to me that there's too much hot air in the stock - and too few real forecasts. That will hopefully change once Edison start working on it, but I'm personally going to sit it out for now untill I see better evidence on a) valuation and b) the accretive nature of the acquisition strategy. This business might well be worth ten times its current share price; but then again, it might not.

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Addendum:

Well I have looked at the research suggested below, and it's interesting. But I still just get this uneasy feeling.  Let me explain. Back in 2001 I was a tech analyst. I was also a huge believer in the internet. I'd been a webhead since - well, since before the web really existed, and there were just bulletin boards and Compuserve. (I can still remember my Compuserve number!) I didn't think we'd even scratched the surface of what the web could do. I was working on hypertext literary criticism with some academics, I was working on interactive poetry, I was working on CAD/CAM systems and how they could integrate with accounting systems. I was evangelical about the internet. My colleagues told me I was becoming an internet bore.

And I still didn't like an awful lot of the ideas that were coming across my desk. They were very early stage ideas, with a lot of money and a lot of time needed before they would amount to anything. And some of them just didn't seem real. Buying a domain name or another loss-making internet business would drive the share price up ten or twenty percent, but none of them were making money.

It's the same here. I can see the potential value of the resources and I can see the potential technology play. But I don't think these resources are hugely valuable without the technology play. That's different from, say, Egdon, which was making money out of oil before it caught on to the prospects for gas storage.  Potash Corporation of Saskatchewan had a horrible Q4 2009 ^[5] , and in the analyst call management said that current prices do not justify greenfield investment ^[6] .

I think, too, there's an awful lot of political interference on carbon tech - look at the way solar power producers have yo-yoed as governments have subsidised, taken away the subsidies, reintroduced them, and generally flip-flopped over renewables.

So I'm sorry, I'm staying out of this one. I may be wrong, and I'm the first to admit it. This is a nicely built position and even if Sirius never makes money operationally, it could potentially sell those resources for a good price. But I don't need to buy this company. There are other growth companies in the universe of stocks, and there are other companies where I don't get this uneasy feeling that it's all cash burn and no revenue.