Three and a half years after Anglo American PLC (LSE:AAL) took over Sirius Minerals' Woodsmith polyhalite mine, Barclays said it is "more convinced" than ever about the market opportunity and potential benefit that the POLY4 fertiliser can deliver.
Analysts at the bank said they see "significant upside value potential" from the miner in coming years, with the agriculture and agronomy industry on the cusp of major change as demand for food rises but usable land falls and chemical fertilisers are questioned.
Despite high hopes for Woodsmith over many years, the sheer levels of capital cost to dig down and build its lengthy tunnel under the North Yorkshire moors, as well as the long-away cash flows saw Sirius eventually run out of money and investor support, enabling a cut-price bid from the FTSE 100 miner in late 2019, wrapped up the following March.
The costs of the project remain a key area of debate among institutional investors, analysts at Barclays said, given the US$1 billion-a-year capital investment and first production not expected until 2027, not to mention uncertainty around the pricing of the POLY4 product, as well as and the scale of volumes this project will add to the existing market.
After being taken on a tour of the site, the analysts said they were not provided with any new financial information on project metrics, "we came away more convinced about the market opportunity and benefit POLY4 delivers, as well as the team's market development strategy".
Farmers who have been trailing polyhalite were brought in to speak to the analysts, and "the feedback was universally positive".
On the market opportunity, the analysts noted that farmers face the challenge of producing more food in a sustainable way amid declining soil health.
While chemical fertilisers over the long-term have a detrimental effect on soil strength and structure, and therefore on the productivity of land, naturally occurring POLY4 is "the only product" that can address these challenges, being the only large-scale polyhalite resource available.
Meanwhile, construction of the critical infrastructure project was seen to be progressing and tracking slightly ahead of schedule, with a service shaft having reached at 550m depth and the production shaft 340m after being started six months later as they both look to reach an ultimate depth of 1,600m.
Once production begins in 2027, it is expected to ramp up to five million tonnes a year (mtpa) by 2030, and, following some additional capex, 13mtpa by 2035.
A selling price of US$192 per tonne is still assumed, versus operating costs of US$50/t, which should deliver circa US$1.6 billion of EBITDA at 13mtpa.
Barclays noted that management said that forming a syndicate could potentially be an important step to crystallise early value for the project.
A final board decision, expected in early 2025, is likely to be an important milestone to crystallise some of the value, the analysts said implying potential stake sale from 2025 onwards.
"However, it was clear from the site visit that there is significant upside potential for pricing from incremental value-in-use as the market develops and product gains acceptance which could potentially be difficult to fully capture in a stake sale this early in the project."