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Sirius Minerals shares pop higher on funding plans

Sirius shares increased after the miner revealed new plans it hopes can save the company and its polyhalite project, but it is not yet out of the woods.

Sirius Minerals unveils new financing plans

Sirius Minerals shares popped higher on Monday after the company unveiled new financing plans that it hopes can save the company and its vast polyhalite project in North Yorkshire.

Sirius Minerals has been in trouble since it pulled a $500 million bond sale in September, which in turn made it lose a much larger credit line from JP Morgan. Debt investors refused to bite despite Sirius offering a coupon of 15%, mostly because they perceived the project as far too risky an investment. The biggest risk was attached to the mining shafts, which must be sunk 1.5km underground.

Read more: Sirius Minerals share price plunges after pulling $500 million bond sale

However, Sirius has now said it is looking to raise $600 million from strategic investors and the debt market to fund a new development plan that removes some of the riskier aspects of the project in the hope to make it more appealing.

“We are in discussions with potential strategic partners and debt investors with the aim of securing the best route to finance our revised initial scope of work and will update the market and our stakeholders on the progress of those when appropriate,” said managing director Chris Fraser.

It warned shareholders that they could be diluted down, stating a deal with a strategic or a debt investor 'may incorporate the issue of new equity or an equity-like component to the financing package'. It previously said it had received feedback that issuing loan notes 'could potentially be successful should the offering include warrants'.

It has suggested it favours finding a strategic investor because a formidable partner may help convince the banks to provide the debt it needs to get the project to full capacity.

The new development plans involve sinking the shafts and finishing off its transport system so it can produce polyhalite – which is used as a type of fertiliser – 'as soon as possible'. This will mean the riskier parts of development, mainly the shafts, will have been completed by the time it looks to raise the much larger sum to complete the project. If it can do that, Sirius thinks it can get a better deal when negotiating terms for the $2.5 billion worth of debt it will need to ramp production up to ten million tonnes per year.

Sirius hopes to secure funding before cash runs out

Sirius has said it intends to secure the initial $600 million before the end of March 2020 – when its existing cash will be exhausted - so development can restart at the beginning of April, having been slowed over the past couple of months whilst it sorts out its financial predicament. It intends to secure the $2.5 billion of debt within one to two years of work restarting. It hopes to secure a debt package similar to the previous one offered by JP Morgan.

Who could be interested in Sirius?

A string of big names have already been touted to rescue Sirius. It has already secured significant support from wealthy investors – with Australian mining billionaire Gina Rinehart and the sovereign wealth fund of Qatar among its largest shareholders. Those that have an interest in the project are more likely to come to the company’s aide if their investment is at risk. Other potentially interested parties include one of the handful of mining companies that produce fertiliser, such as ICL or K+S.

BHP Group or Rio Tinto have also been touted by Sirius’s house broker, Shore Capital. Shore has also said Archer-Daniels Midland could be interested because it has already signed offtake deals for Sirius’s product and agreed to supply the binding agent used in Sirius’s granulation process.

Fortescue Metals could be another contender. The current chairman of Sirius, Russell Scrimshaw, used to be an executive of the Australian mining firm and Fraser’s relationship with the company stretches back to his days as an investment banker.

Sirius has said its new financing and development plans will only have a minor impact on the value of its project, and says it still expects an internal rate of return of 29% to 35% depending what development option it ultimately pursues. It still hopes to achieve first production before the end of 2021, and hit full capacity in 2024, but again this may depend on what development plan it chooses.

“Sirius' project development and financing strategies to date have been built around two key objectives; first, to achieve first polyhalite as soon as possible due to the transformative effect that this will have on the Project's risk profile and, second, to be in a position to ramp up to full production as quickly as possible to generate returns for shareholders,” said Sirius.

Read more: How to buy, sell and short Sirius Minerals shares

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