A year ago, Proactive Investors ran a festive article entitled ‘How Sirius Minerals achieved the impossible funding’.
It charted how boss Chris Fraser and his team secured a US$1.2bn funding package that gets underway one of the most ambitious mine developments ever in the UK.
This of course is the Woodsmith Mine, in North Yorkshire, host to an estimated 2.6bn tonnes of fertiliser rich in potassium, calcium and magnesium.
First production is expected to get underway in 2021, churning out an initial 10mln tonnes of POLY4 fertiliser a year.
But to get this point will require a further US$2.6bn.
This second fundraising round is expected to get underway in 2018, allowing the build-out of the shafts and a 23-mile tunnel to the River Tees.
Incremental additional value
Seasoned watchers of the mining sector were expecting investment interest to drop once the first tranche of financing was secured.
The story becomes about incremental additional value via the development of the Woodsmith site rather than binary events such as planning permission and funding decisions that can double the share price overnight.
Tracking the readership of Sirius stories, we have seen their popularity wane as retail investors have been replaced by institutions that bought into November 2016’s US$495mln placing and open offer of new Sirius stock.
However, that new, blue chip following really seems to be buying into the story – quite literally – as the share price has appreciated 14% in 2017, making Sirius a £1bn company.
Main board move
The move to the main board of the London Stock Exchange seems to have coincided with a sharp spike in the value of the share price, which by early June was trading above 34p.
That switch opened Sirius up to a whole host of would-be backers that couldn’t invest in AIM companies.
Since June, however, we have seen Sirius stock drift back by around 12p a share.
Most retail investors, who loyally backed the fledgling business through the exploration phase and the tortuous process of gaining approval for the mine, will be anxiously looking at the price, quietly wondering: do I sell now?
Hold your nerve
With that in mind, Proactive has taken a look at the latest research from around the City in a bid to answer that question.
The consensus appears to be hold your nerve – the current share price isn’t really a fair indicator of Sirius’ present value let along what it might be worth when Woodsmith is up and running.
The most conservative of the brokers covering the mid cap mine developer is JP Morgan Cazenove, which thinks the stock is worth 45p, or around double what it’s changing hands for today.
Liberum reckons the stock is worth 60p, which would value the business at almost £2.7bn, while Shore Capital sits at the top of the range at 65p, or 82.5p once the second round of funding is complete.
“While Sirius is currently at development stage and still some years from becoming a cash flow-generating company, an investment in should become progressively de-risked and enjoy significant value uplift as it advances towards production, we believe,” said Shore analyst Yuen Low in a note to clients.
The company has made significant progress with activity on the ground increasing every month and opportunities presenting themselves to lower the investment required to build Woodsmith.
Commercially Sirius is making headway with the offtake deals for more than 4.3mln tonnes of fertiliser a year already in the bag.
Liberum believes the company needs binding agreements adding up to 6-7mln tonnes to deliver the stage-two financing.
So what could go wrong?
Well, as mentioned several times above, Sirius requires a further US$2.6bn before it is fully funded to production.
While this is expected to be achieved via debt financing, and therefore non-dilutive to existing equity investors, the risk is that funding negotiations will be protracted and the terms less favourable than envisaged.
It is also worth remembering that while the early work on the site has gone to plan, Woodsmith is a complicated feat of mine engineering – and its scale is hugely ambitious.
In other words there are bound to be problems at some point in the construction phase – the only question really is how big will they be?
And remember, the mine doesn’t start generating an income until 2021.
The financials look good. Woodsmith is expected to be generating a gross profit of around US$1.2bn a year by 2024, producing 10mln tonnes of POLY4 (output eventually rises to 20mln tonnes). But remember this requires it to lock in a price of US$158 a tonne.
How easy is it going to be to negotiate sort of figure? After all this is a new product to the market.
In other words there are no certainties, just forecasts and projections.
But while there are significant uncertainties, Sirius and its management team have habit of proving their detractors wrong.