As crunch time approaches, is Sirius worth a look?
Sirius Minerals took a beating in the market last week when it announced that it was suspending a $500m bond issue due to market conditions. The firm must complete the issue to unlock a $2.5bn credit facility with JP Morgan. This cash will both fund the construction of the company’s flagship Woodsmith Mine potash project and – most importantly – stop it from going under when it runs out of cash at the end of next month. With shares sitting at record lows and several weeks remaining until Sirius’ funds run dry, could the former AIM darling represent a decent buying opportunity?
Funding story
To recap, Sirius has become a favourite stock among investors in recent years due to the potential offered by Woodsmith, which is based Yorkshire. The project will access 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. First polyhalite production is expected from the project in 2021, with output set to rise to 10Mtpa by 2024 and 20Mtpa in 2029.
However, as it stands, Woodsmith remains in the construction stage. As you might expect, developing one of the most significant civil engineering projects in Europe is no mean feat. 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.
Building such a large project is also expensive, and it is this point that has created major issues for Sirius’s share price over the past year. Last September, the business dropped by a quarter in a day after announcing that it would need an extra $400-$600m to get Woodsmith into the production phase. Then, in April, the company launched its $3.8bn stage 2 financing round, designed to fund Woodsmith’s development to the point at which it is generating positive operating cash flows.
The package consists of a $400m placing, a $400m convertible bond offering, a $500m secured guaranteed bond offering and, finally, a $2.5bn revolving credit facility from JP Morgan. The placing has already completed, with Sirius raising a total of $425m at 15p a share to give it the necessary financial power to continue operating at full speed until the end of September. However, both the $400m convertible bond offering and the $2.5bn facility from JP Morgan can only be unlocked following the successful completion of the $500m bond offering. This is where things get concerning.
After announcing plans to issue the notes towards the end of July, Sirius revealed earlier this month that it has decided to suspend the proposed offer due to ‘current market conditions’. Media coverage suggests that the firm is worried about raising against a backdrop of investor concerns surrounding the escalating trade disputes between the US and China. Indeed, according to Proactive Investors, one analyst in London said: ‘One could make a strong case that this was the worst week of the year to attempt to issue high-yield debt.’
Whatever the reason for the suspension, the real concern is that Sirius risks going under if it cannot cough up the cash in the next several weeks. Indeed, as the business highlighted in the announcement of stage 2 financing:
‘Unless the Company was able to secure alternative funding (if any such alternative funding was available to the Company, which it may not be) or a merger or acquisition transaction involving the Company by the end of September 2019, the Company would cease to operate as a going concern and the Board would be required to place the Company into administration or liquidation, which could result in Shareholders losing part of or all of their investment in the Company.
‘There can be no assurance, however, that the Company would be successful in securing any such alternative funding or completing any merger or acquisition transaction on commercially acceptable terms, or at all, and the Company is not confident either could be achieved.’
All or nothing?
This is scary stuff, and the growing risk that Woodsmith and its potential will never be realised has not gone unnoticed. On the day the bond issue suspension was announced, Sirius’ shares tanked by more than a third and broker Berenberg said the risks associated with the business are more significant than the potential rewards.
Over the short-term, this decline looks disastrous for long-term Sirius shareholders – many of whom are locals to the area in which Woodsmith is being developed. But with shares now sitting at or near to record lows, it could be worth sitting tight and even looking at topping up.
Funding-wise, the project is not a write-off – Sirius still has weeks to get funding over the line and – as broker Liberum points out – it is likely that the firm has been conservative with its forecasts. Meanwhile, with Woodsmith looking set to create 2,000 jobs at its peak, Sirius continues to enjoy a great deal of community support. Just this week, Stockton North Labour MP Alex Cunningham called for a government funding guarantee on the mine and associated Teesside plant.
As such, if Sirius can put its funding concerns to bed, then there is a good chance that its share price will fly. Let us not forget the financial potential offered by Woodsmith – according to Motley Fool, Sirius could be worth $10bn-$20bn over the long term if the mine goes as planned. With the company’s market cap currently sitting at just £641.4m, this suggests a great deal of upside potential if financing is secured. However, it may be worth exercising caution before going all-in – after all, the downside could be even more significant if funding is not achieved.
AGM 2019: project update video
The author was remunerated but does not hold shares
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