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Sirius Minerals

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Is Sirius Minerals worth a look or does too much risk remain?

Sirius Minerals has fallen from 21.4p to 16.5p so far this year due to the ongoing impact of a major adjustment in its financing requirements, first announced towards the end of 2018. The firm’s decline comes in spite of a fair amount of progress at its flagship asset, the world-renowned Woodsmith Mine potash project in Yorkshire. Here, we look at whether Woodsmith’s long-term prospectivity makes Sirius well worth a punt at current lows.

Potash player

To recap, Sirius has long been a favourite stock among UK investors because of Woodsmith’s huge potential. The project is the world’s largest and highest-grade deposit of Polyhalite, a multi-nutrient fertiliser that can be used to increase balanced fertilisation around the globe. To construct the asset, Sirius is sinking two 1.5km shafts below a national park on the North York Moors to access the large deposits on offer. Ore will then be extracted and transported to a processing facility, where it will be granulated and exported to overseas markets.

This year has seen Sirius announce several key developments at the project. First-of-all, in April, the organisation entered an exclusive supply and distribution agreement with BayWA, a leading European agribusiness group, for its fertiliser product POLY4. BayWa Group distributes over 30Mtpa of agricultural goods across Europe, including sales of c.2Mtpa of fertilizers.

The deal provides for the exclusive distribution of a guaranteed minimum tonnes of POLY4 across most of Europe for a 10-year term, beginning from Woodsmith’s first production. The minimum volumes under the deal increase to 2.5 Mtpa in year five and the agreement also gives Sirius the option to elect for BayWa to purchase and distribute additional volumes above the guaranteed volumes. 

Following this, in June, Sirius announced another supply agreement for POLY4 with IFFCO, one of the largest co-operative societies in the world with access to over 55m Indian farmers. The terms of the deal are for 11 years, ramping up to 1Mtpa in year eight, with a mutual agreement option for an additional 250,000 tonnes per annum.

Finally, in a Q2 progress update released at the beginning of this month, Sirius said that Woodsmith’s construction was advancing well. The company added that it remains on target to achieve first polyhalite and commercial production on time and in line with its cost schedule.

Financing requirements

A great deal of Sirius’s decline over the past year can be put down to financing issues and delays associated with Woodsmith’s development. Last September, the business dropped by a quarter in a day after announcing that it would need an extra $400-600m to get the project into the production phase. 

The additional costs, which took Woodsmith’s stage two capital funding requirement to between $3.4-3.6bn, came after Sirius entered a contract to dig a 37km tunnel between the mine a processing plant in nearby Teeside. Sirius said it had decided to increase the diameter of the tunnel– in turn, slowing its construction – after learning more about the local geology since November 2018, when costs were first estimated. Alongside this, the firm said it now expects production at Woodsmith to reach 20Mtpa in 2029 rather than 2027 after revising its production capacity expansion plan to reflect expected senior debt facility terms. 

In spite of its decline, Sirius maintained that that the potential on offer at Woodsmith would offset the expected cost increases.  Indeed, Chris Fraser, managing director and chief executive of the company, said at the time: ‘The project’s economics remain extremely compelling and we are confident they support the expected additional funding requirement.’

Following this hit, Sirius’s share price endured another significant decline at the end of April, when it fell from 21.9p to 15.3p in a matter of weeks. The reason for this was the news that the company would be launching its stage two financing for Woodsmith through a combination of forms listed below (verbatim):

(i)    an underwritten Firm Placing and Placing and Open Offer to raise gross proceeds of approximately US$400 million (£310 million) at a price between 15 and 18 pence per New Ordinary Share (the “Issue Price”) launching immediately following the release of this announcement;

(ii)   an offering of guaranteed convertible bonds with an aggregate principal amount of approximately US$644 million (the “New Convertible Bond Offering”) launching in conjunction with the Firm Placing and Placing and Open Offer, of which up to US$244 million is expected to be applied by the Company entirely in purchasing an equivalent amount of the Company’s existing 8.5 per cent. guaranteed convertible bonds due 2023 (the “Existing Convertible Bonds”) through the Existing Convertible Bonds Buy-back (as defined below), (the detailed terms of which will be announced separately on the date of this announcement) such that approximately US$400 million of the New Convertible Bond Offering is fully underwritten at launch;

(iii) senior secured guaranteed bonds in a gross amount of US$500 million (the “Initial Bonds”); and

(iv)  a committed and secured revolving credit facility with a maximum commitment of US$2.5 billion, which will reduce as further senior secured guaranteed bonds are issued after the Initial Bonds (the “RCF”, and together with the Initial Bonds the “Stage 2 Debt”),

In spite of numerous positive releases since the dilution associated with the package has resulted in Sirius struggling to recover lost ground.

Uncertainty ahead?

The fundraising package has been troubling for long-term investors in Sirius. Indeed, despite the company’s market cap remaining above £1bn, its shares are down hugely as a result of the multiple cash calls and share issues.

For new investors, however, things could be different. In theory, the organisation now appears to have the money needed to see Woodsmith through to the production stage. Meanwhile, it has secured numerous supply and offtake deals and construction has continued apace. With this in mind, the long-term potential offered by the project could make now an interesting time for investors to get in. Indeed, according to Motley Fool, the company could be worth $10bn-$20bn over the long term if the mine goes as planned. These figures suggest very strong returns for new shareholders at current levels.

The key point here, however, is that the journey towards these profits is long, with much potential volatility remaining. For example, as Motley Fool once again points out, Sirius needs to raise a huge a great deal of debt by September to access its $2.5bn credit facility. If it cannot do this, then more cash calls could be on the cards.  At this level, perhaps Sirius is one for investors with a larger appetite for risk. Regardless, the firm continues to offer many opportunities and is well worth keeping an eye on.

Investor commentary – Jupiter Asset Management