Sirius Minerals: clock is ticking
Sirius Minerals is in talks with a new potential backer that could fund its huge mine development in North Yorkshire, but time is not on its side.
The next month will be a pivotal period for Sirius Minerals, the company striving to build the world’s largest polyhalite mine in North Yorkshire. The company has struggled to secure the debt it needs for the second stage of its plan to expand the mine and, despite announcing it has found a potential new backer willing to stump up the $3 billion it needs, the market is aware that time is not on their side. Sirius is set to exhaust its existing cash by the end of June and no details or guarantees have been released about its new mystery supporter, although it has said it will give investors answers by the end of April. There is a lot at stake and for the next month investors as well as those betting against the company will be feeling anxious.
According to daily data from the UK Financial Conduct Authority’s Short Selling Regulation, 7.4% of Sirius shares are in the hands of short sellers that are betting against the firm and banking on the company’s share price tanking. ShortTracker, which aggregates the Financial Conduct Authority's (FCA) data, says this makes Sirius the UK’s 12th most shorted stock.
Funds with disclosed short positions on Sirius Minerals
|Fund||Net short position||Date of position|
|Citadel Europe LLP||0.63%||2019-01-24|
|Ennismore Fund Management||0.80%||2019-03-12|
|Highbridge Capital Management||2.80%||2019-03-19|
|JPMorgan Asset Management (UK)||0.82%||2018-10-11|
|Lombard Odier Asset Management (Europe)||0.60%||2019-02-28|
|Marshall Wace LLP||0.70%||2019-03-20|
|Och-Ziff Management Europe||1.04%||2018-11-08|
(Source: FCA, as of 26 March 2019. Only takes into account positions over 0.5% by funds, meaning the total number of shares held in the short sellers could be higher once smaller positions and non-fund investors are taken into account).
For now, the devil will be in the detail of whatever financing deal – if any – Sirius secures. Finance costs have already ballooned over the past two and a half years, amounting to over £150 million in total, and many investors, particularly those who invested early on, have been significantly diluted from the amount of equity Sirius has issued to fund its ambitious plans.
|Sirius Minerals: Key figures (£Mn, unless stated)||2010||2011||2012||2013||2014||2015||2015*||2016||2017||H1 2018|
|Loss per share (pence)||1.00||1.00||5.60||0.60||0.50||0.50||0.30||0.90||182.00||210.00|
|Share price Yr-end (pence)||3.88||11.63||20.00||20.00||11.00||8.14||14.75||19.25||23.50||33.08|
(Source: Company reports. *financial year represented the 12 months to the end of March for 2010, 2011, 2012, 2013, 2014 and 2015. 2015* represents the nine-months to the end of December 2015. 2016 and 2017 are aligned with the calendar year, as is H1 2018.)
Here is a list of contents outlining what we have looked at in the analysis of Sirius:
- What you need to know about Sirius Minerals: a snapshot
- A year-by-year timeline of Sirius Minerals
- Sirius Minerals first stage financing
- 2019: Has Sirius found its saviour?
- Sirius share price: a technical analysis
- What is polyhalite?
- Woodsmith mine: what you need to know
- Conclusion: where next for Sirius Minerals?
What you need to know about Sirius Minerals: a snapshot
Sirius Minerals listed on the Alternative Investment Market (AIM) in 2005 but the company we know today began to take shape in 2011, when it acquired York Potash, the owner of what is now known to be a huge potash deposit in North Yorkshire.
The founder of the project Chris Fraser – a finance veteran who had held senior positions at KPMG, Rothschild and Citigroup – became the chief executive officer (CEO) of Sirius and quickly launched what would be the first of many equity raises to fund its initial plans for the deposit. Sirius gained traction quickly: within about a year it managed to declare a maiden resource that already made it the 'largest and highest grade resource of polyhalite in the world', and that was from just 2% of the total project area. Sirius had managed to take the £20 million it raised from investors (spending £13.5 million on exploration) and delivered the foundations of a project that it said boasted a net present value of $6 billion after-tax, immediately rising to $11 billion when production started.
But since then it has not been a smooth ride and Sirius has been a prime example of the risks and rewards on offer to investors willing to take a punt on new mining ventures. The company originally said production would start in 2017 but now envisions it won’t kickstart things until 2021, mainly because convincing planning officials to it give the green light was not as easy as expected. Investors have had to grapple with severe levels of dilution as Sirius has raised over £600 million in equity – mostly by selling shares at a discount - and, when convertibles are taken into account, the sum rises closer to £1 billion. Now, eight years down the line, both the government and the banks are not being financially supportive as first hoped and Sirius is struggling to secure the debt it needs to continue development before its remaining cash runs out.
Understanding Sirius: a timeline
Below is a timeline of events at Sirius Minerals leading to the situation today.
2011: Sirius Minerals acquires York Potash
In its financial year to the end of March 2011, Sirius Minerals acquired York Potash. It issued 150 million new shares to the owners, including Fraser, who became CEO of Sirius. It valued the deal at £25 million with debt included. Fraser and his team launched a £20 million placing at 13p per share.
2012: Sirius earns serious value from drilling
Sirius used most of those funds to start drilling the deposit in 2012, resulting in a maiden inferred resource. Sirius raised £55 million from 70 institutional investors at the discounted price of 18p, and outlined plans to take a phased approach to financing the construction. It said the first phase would cost $2.7 billion and take three years, allowing first production to start in 2017. It’s initial plan was to largely fund the second phase, costing $3.3 billion, using internal cashflow from the project once it had been launched.
2013: Sirius secures major customers for polyhalite
Although it needed vast sums, Sirius continued to throw justification behind the project in 2013. Exploration continued to cover 5% of the project area and the resource was upgraded to 2.2 billion tonnes graded at 82.4%, and a Pre-Feasibility Study (PFS) outlined plans to initially produce five million tonnes of polyhalite per year. It also secured its first sales agreements, signing a marketing deal for KEYTRADE, one of the world’s largest fertiliser trading firms, to take 1.75 million tonnes of initial annual production to sell in a wide variety of international markets. China’s Yunnan TCT Yong-Zhe Co also agreed to take one million tonnes a year under an offtake deal.
2014: Sirius starts to suffer setbacks in planning process
The following year, in 2014, Sirius continued to make progress but things did not go exactly to plan. The resource was further upgraded (to 2.7 billion tonnes graded at 85.7% from 7% of project area), results of crop studies validated polyhalite as an effective fertilizer that 'outperforms traditional potassium chloride in some circumstances', and virtually all its initial production capacity was sold after more marketing and sales deals were signed. It branded its product and trademarked it under the current name, ‘POLY4’. However, Sirius began to suffer delays in securing the key planning approvals under its original timeline and made it a key priority for the business. Sirius raised £25 million through a convertible security at the start of the 2014 financial year and raised £43 million in equity later on, at the discounted price of 12p each, plus further warrants that, if exercised in full at 18p, would raise a further £32 million.
2015: Sirius finally gets green light for construction
The company’s fortunes didn’t change in the financial year to the end of March 2015, when it suffered further setbacks in securing planning approval and was forced to readjust its application to try to win over officials. In need of more money, it raised £15 million by issuing shares at a discount yet again, priced at 7p. Sirius changed its financial year to run with the calendar year and, in the nine months to the end of 2015, it finally secured the approvals it needed to allow construction to begin.
2016: Schedule is scrapped but hope of a bigger opportunity
Progress accelerated in 2016 when Sirius published a Definitive Feasibility Study (DFS) that outlined the framework to build a project capable of producing ten million tonnes per year before expanding to 20 million tonnes. The study suggested Sirius could earn earnings before interest, tax, depreciation and amortisation (Ebitda) of $1-$3 billion per year depending on volumes and prices, at 'industry leading cash margins' of 70%-85%.
Its underestimation of the planning process meant it was forced to push back its initial production target from 2017 to 2021, and said it wouldn’t hit its ten million tonne capacity until 2024 before expanding to 13 million tonnes in 2026 and 20 million in 2029. The project’s value was revised to $15 billion, rising to $27 billion upon commencement of production. The Definitive Feasibility Study (DFS) allowed Sirius to outline how it would pay for what is clearly a vastly expensive project for such a small company, one more akin to the budgets of giants like Rio Tinto. The original idea was to fund development of the initial ten million tonne project in two stages, the first amounting to $1.63 billion with the second totalling $1.93 billion for a total of $3.56 billion. However, after picking its preferred contractors for construction it lowered the total amount of the two-stage financing to $2.9 billion, with initial financing declining to $1.1 billion. Sirius secured that first tranche through three separate sources:
Sirius Minerals first stage financing
- $300 million from Hancock British Holdings, comprised of a $250 million revenue royalty (paying 5% up to 13 million tonnes per year and 1% thereafter) and $50 million in equity. It is the largest ever UK royalty transaction. Hancock is owned by Australian mining billionaire Gina Rinehart
- $400 million from a convertible loan note charging 8.25% interest per year, paid quarterly. It is the largest convertible note to be issued by an Alternative Investment Market (AIM) listed company
- $370 million from a placing and open offer. The placing was priced a 20p per share and was the largest equity transaction conducted by a UK listed miner since 2012
Sirius then made a breakthrough by securing the last approval it needed to have the project fully permitted and decided to rename the project the Woodsmith mine, combining the two surnames of the geologists that helped find the deposit.
2017: Sirius begins construction of Woodsmith mine
Construction of the project began in 2017, the year when Sirius thought it would be producing its first product. Sirius also moved from AIM to the Main Market after its market cap breached £700 million, immediately entering the FTSE 250 index. Attention turned to keeping construction on schedule and on budget and, more importantly, securing the larger second stage financing needed to finish the project. Sirius said it would have all the financing in place by the end of 2018, but investors are still waiting.
2018: Sirius budget is blown and clock begins to tick
Pressure starts to build in 2018. The firm deals a massive blow to shareholders by announcing the second stage financing will be significantly higher than previously thought, in the range of $3.4 billion to $3.6 billion. Although it said it still wanted most of that, about $3 billion, to be debt it became likely that Sirius would need to plug the cost-overrun with equity, meaning shareholders could be in for further dilution to the tune of $400 million to $600 million.
It also set the clock ticking by announcing it wouldn’t secure the financing until the end of March 2019, just three months before existing cash is exhausted. Although it has remained steadfast about its future, its auditor flagged the precariousness and uncertainty of the stage two financing last year as an ‘emphasis of matter’ (something that warrants special attention), warning the 'conditions indicate the existence of material uncertainties which may cast significant doubt about the group's ability to continue as a going concern'.
Sirius has tried to change the structure of the $3 billion debt several times but was hoping at least $1 billion of would be commercial debt with the rest being debt guaranteed by the government under a UK Treasury scheme that helps build infrastructure projects, such as the Hinkley Point nuclear power plant. However, it has since struggled to turn verbal support (including from prime minister Theresa May) into money.
2019: Has Sirius found its saviour?
That has continued to push Sirius toward trouble. It has sensibly explored other options amid the lack of interest and urgency being shown by its existing lenders and the government, but potentially at a cost. Sirius has announced it has received a conditional proposal for its stage two financing from an unnamed 'major global financial institution' that would 'completely replace' the existing $3 billion it had hoped to secure from numerous institutions beforehand. Although unconfirmed, reports from the Financial Times (FT) suggest JPMorgan, the company’s broker, could be the backer because of its knowledge of the project, but says, given the size, it would likely look to syndicate the debt (when lenders look to spread the risk of loans simply too big for one entity to burden alone).
The firm has said the proposal 'potentially offers a more flexible and attractive solution' and, as a result, was 'pausing discussions' with the lenders it was already talking to – potentially closing one door to open another. Sirius has said it says it intends to have 'firm commitments' in place before the end of April 2019 but its room for negotiation is slowly closing.
For investors, aware they may need to stump up for the cost overruns already, will be cautious the company may need more sums to tie it over if financing discussions drag on. For now, investors are relying on Sirius to deliver a sound and affordable financing deal as soon as possible which, if delivered, will take substantial weight off the company. Time is starting to favour those who doubt Sirius can secure the funding it needs in time, but the short sellers are far from out of the woods yet.
Sirius Minerals share price: technical analysis
Until the details of any financing become known, the outlook for the stock remains unclear. The firm has looked to get a deal with overall costs around 6%-7%, but until these are decided the valuation is difficult to determine. The firm will also likely embark on an equity dilution, which could be substantial, putting further downward pressure on the share price.
The best that can be said about Sirius at this point in time, from a fundamental perspective, is that the rate of decline has slowed, but the sequence of lower lows remains in place. Arguably, a bullish edge is now in place, as the shares rally towards 20.0p. A break higher targets 23.0p and then 24.7p. Further declines towards the bottom end of the wedge target 17.4p.
What is polyhalite?
Polyhalite is a mineral comprising of potassium, sulphur, magnesium and calcium – four of the six key nutrients needed for a good fertiliser. It was first recognised as a valuable mineral for the agricultural industry in the 1930s but the deposits that had been discovered at the time were either too small or of poor quality and, upon finding alternative potassium sources, polyhalite’s commercial development was thrown onto the backburner.
This is significant as it means Sirius has had the added, often underappreciated task of demonstrating the viability of its polyhalite as an effective multi-nutrient fertilizer. Sirius is not the only nor the first to commercially mine this mineral, but it is the only one trying to develop a deposit so large that it needs to gain worldwide recognition to sell it. Demonstrating its size, the average seam in a deposit is usually only a few metres thick but Sirius boasts one with a mean reserve thickness of 25 metres - with some sections as thick as 70 metres.
All the trials and roadshows seem to have paid off: it has sold peak annual volumes of 8.2 million tonnes of the stuff already, equal to almost all of its initial 10 million tonnes annual capacity, with the majority to be exported to international customers.
The Woodsmith mine: what you need to know
The Woodsmith mine is situated between the River Tees and Scarborough in North Yorkshire, covering an area of 750 kilometres squared both onshore and offshore. The current inferred and indicated mineral resource stands at 2.66 billion tonnes graded at 85.7% polyhalite with an ore reserve of 280 million tonnes at 88.4%. With such a large deposit and still so much ground that can potentially be covered, the Woodsmith mine could easily be operation for 100 years.
The Woodsmith mine is only one aspect of a potentially almighty operation. The operation is based approximately 1550 metres below surface level. Because of the potential size of the project and its awkward positioning that overlaps the North York Moors National Park, Sirius is having to take great effort to minimise the impact of the project – at least on the surface anyway. When operational, polyhalite will be mined in the underground Woodsmith mine and transported by a huge conveyor belt that means no material will be brought to surface until it leaves the national park and reaches the Materials Handling Facility (MHF) on Teesside. From there, the polyhalite needs to be transported just 37 kilometres to the deep water port on the River Tees, this time via an overland conveyor. Sirius has a deal in place with Redcar Bulk Terminal, the former import terminal for the now closed Redcar steelworks, for port and ship loading services to handle up to ten million tonnes per annum. Lockwood Beck is the transfer point along the mineral transport system route, which will also be used for ventilation and occasional maintenance access.
Conclusion: where next for Sirius Minerals?
Sirius Minerals is need of $3 billion before its existing cash runs out by the end of June and even if it does, investors are wary it may still need to raise a further $600 million to cover extra costs. Timing is a clear issue and it is understandable why some are questioning its future.
But it is not the first major mining project to be hit by setbacks or funding problems and there is good reason to feel confident it will go ahead. Serious sums have already been invested, including by investors, which is why many believed, coupled with the job opportunities up north, the government would guarantee debt for the project. Interestingly, that same argument applies to reports JPMorgan, already involved, could be the mysterious backer.
It already employs over 800 people in an area that has lost jobs and been neglected (using the spare capacity at Redcar’s terminal is an example of its effect on the area) and when in full swing it will account for over 2500 jobs, including those in the supply chain it would create. At peak production the project is forecast to add £2.3 billion to UK GDP, export £2.5 billion worth of material, pay £500 million in tax and make £100 million in local payments each year.
The project has cleared the major regulatory and planning hurdles that many considered a bigger threat to the firm’s ambitions rather than securing funding for a fully approved project. Plus, Fraser’s specialty is raising money for mining projects and, having come this far, is unlikely to be keen to falter at the final hurdle.
Investors will hope the matter will be settled within a month but, if not, we will know by June whether Sirius still has the ability to see it through. Until then, the confidence of short sellers will only grow as the clock ticks down.
This information has been prepared by IG, a trading name of IG Markets Ltd and IG Markets South Africa Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.
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