Can Sirius Minerals rescue Woodsmith or do its financing issues run too deep?
Former AIM darling Sirius Minerals has been developing a £4bn mine called Woodsmith near Whitby in Yorkshire to access a vast deposit of a fertiliser called polyhalite. First polyhalite production is expected from the project in 2021, with output set to rise to 10Mtpa by 2024 and 20Mtpa in 2029.
The plan is for the mine to create thousands of jobs and generate vast profits for both Sirius and the local area. This ambition has proved highly popular among British investors, with Sirius boasting around 85,000 individual shareholders.
As you might expect, developing the world largest and highest-grade polyhalite deposit is not the sort of task that can be funded through a whip-round at the local pub. For example, the project involves building a 23-mile tunnel and conveyor belt to transport fertiliser to a nearby processing plant and sinking two 1,500m shafts to allow for production.
Indeed, even after completing a $400m equity placing in March, Sirius still needs to raise a whopping $3.4bn to construct the project. As part of this, the business revealed plans earlier this year to access $2.5bn worth of financing from US investment bank JP Morgan. However, to get its hands on this, the business had to complete a $500m guaranteed bond placing by the end of September. It is this requirement that has been the source of much concern for the company’s shareholders over the last few weeks.
Poor Market Conditions
Firstly, after initially indicating that it would issue the notes towards the end of July, Sirius revealed in August that it had opted to suspend the process due to ‘current market conditions’. Media coverage at the time suggested that the firm was 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.’ The news prompted a 37.4pc crash in the company’s shares.
Unfortunately for those who expected funding plans to remain in place in spite of August’s delay, Sirius went on to scrap the $500m note issue entirely last week due to ‘ongoing poor bond market conditions’. As a result, the business said it would terminate its commitment to the JP Morgan credit facility ‘in the coming days’.
What’s more, to make matters even worse, last week’s announcement also saw Sirius reveal that the UK government has decided not to provide any financial support to the project. The company has planned for the government to provide it with a $1bn loan guarantee in recognition of the project’s potential to boost the local area’s ailing economy.
As a result of these two developments, Sirius no longer has the financial firepower to develop Woodsmith as previously planned. This has forced it to reduce the asset’s development rate to allow more time to establish alternative arrangements and ‘preserve the significant amount of inherent value in this world-class project’.
Last week’s news altogether as being akin to a death knell for Sirius and its investors and the company’s share price sank by a devastating 58.27pc to 4.66p on the day of the news. It continued to hit new record lows in the days that followed, currently sitting at 4.3p as at writing.
With many thousands of local Teeside residents piling their savings into Sirius, wanting exposure to a project that had the potential to boost their local economy, the firm’s recent performance is particularly upsetting and unfortunate. For example, a recent BBC article quotes one Nigel Howard, a retiree who cashed in his entire £30,000 pension pot to buy shares only to their value decline.
Rather worryingly, an article in the Sunday Times this weekend reports that Sirius’ chief executive Chris Fraser even went so far as to suggest that many of these investors were misled when they invested into his company.
These investors are now left with two options: cut their losses or stick things out and hope they can better. Given the sheer scale of Sirius’ decline, the latter would be a bitter pill to swallow. So, is recovery an option?
If it is, then it will all come down to a strategic review launched by Sirius last week. As it stands, the company has uncommitted cash reserves of £117m (as at 31 August), which it expects to provide it with sufficient liquidity to explore all the strategic options for Woodsmith’s future for up to six months.
During this period, the company will explore alternative financing arrangements to determine if there is a way to structure the financing of the project’s development to enable either the existing development plan or a revised development plan to be financed through different means. In particular, Sirius said it would look at the possibility of securing a strategic partner who may want to acquire part of the project, adding:
‘The company believes that the compelling economics of the project provides a strong basis for a revised financing plan but this will require time to bring together the components of such a plan and to assess investor appetite for a revised financing plan.’
Hoping For The Best
According to Liberum, the chances that a third-party will step in to rescue Woodsmith at this stage rest on Sirius’ ability to annex high-risk and expensive items like its shaft and tunnel. The broker added that ‘plausible’ solutions remain in place that could boost Sirius’ net present value to 40-50p.
However, the more brutal – and unfortunately more-than-likely – outcome is further losses for investors. This view was summarised by a source quoted in the Daily Mail, who said that Sirius only has a 20pc chance of survival if it is unable to find a white knight investor by the end of the year.
To end on a more positive note, another source quoted in the same report said that the strong links held by Sirius’ chairman Russell Scrimshaw to miners BHP Billiton and Fortescue Metals could open up the possibility for a new deal on the project. However, for the most part, things are looking too risky for both existing investors and those thinking of taking a punt on some recovery.
Sirius Minerals was recently covered by our friends at IG TV.
The author was remunerated but does not hold shares in the company