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Sirius Minerals PLC creating a "world leader"

The York Potash operation will be the first new potash mine in the UK for 40 years and will use a deep shaft to access the thickest and highest grade polyhalite ore reserve in the world.

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The finished product is a fertiliser called polyhalite.

The long-awaited definitive feasibility study (DFS) for Sirius Minerals PLC's (LON:SXX) York Potash Project in North Yorkshire has underscored its “world class” potential.

The report says its net present value of the asset today is US$15bn using a 10% discount rate.

This figure rises to US$27bn once the mine is up and running. The after-tax internal rate of return is put at 26%.

The operation has the potential to generate underlying earnings (EBITDA) of US$1-3bn a year, depending on volumes and price.

The cash margins on the business are put at 70-85%, while operating costs are expected to be in the order of US$37.20 a tonne.

The plan is for the York mine to initially produce 10mln tonnes of polyhalite fertiliser a year, though there is the capacity to double output.

The cost to deliver the 10mln tonnes a year is put at US$3.56bn, with the financing done in two tranches.

Talks with potential funders are “well developed”, the company said.

First production will occur in 2021 with the company hitting the 10mln tonnes per year figure by 2023.

Managing director Chris Fraser said: "The business that is created from this project will sit as a world leader in the fertiliser industry based here in the UK.

“It is expected to have a low operating cost structure, high margins and a very long asset life in one of the most business friendly, stable and dynamic economies in the world.

"In delivering this project we can create thousands of jobs in North Yorkshire and Teesside, deliver billions of pounds of investment to the UK and put the country at the forefront of the multi-nutrient fertiliser industry.

"The DFS represents the blueprint to bring this global fertiliser business into large-scale production and successfully delivers on the core strategic vision of the company to become a major low cost producer of multi-nutrient fertilisers.”

 

THE PROJECT

It has been a long haul to get to this pivotal stage in the development of Sirius and its project, which is located in North Yorkshire's National Park, not far from Scarborough.

The granting of mining and transport licences last year were major milestones that paved the way for construction, which could begin later this year.

The York Potash operation will be the first new potash mine in the UK for 40 years and will use a deep shaft to access the thickest and highest grade polyhalite ore reserve in the world.

It will also involve the development of an underground mineral transport system from the mine to a proposed new materials handling facility at Wilton on Teesside.

Polyhalite is a naturally occurring mineral containing four of the six nutrients required for plant growth - potassium, sulphur, magnesium and calcium.

The deposit contains a JORC resource of 2.66bn metric tonnes. This is culled from just 7% of the project area and provides enough fertiliser for the next 100 years. Within the resource area, there is a probable mineral reserve of 250mln tonnes of polyhalite.

FROM THE BOSS

MD Chris Fraser came into the Proactive studios earlier. Here’s what he said:

On the timing of the financing…

We are not giving specific time-tables, but we have been laying the foundations to put the financing together. That’s now moved into a very detailed diligence phase. The plan is to get the financing done as quickly as possible and start production.

One the staging of the financing…

Stage one is for shafts and the subsurface components of the project. The idea is to put the stage-one capital in place and, when you move down the risk profile, bring the second-stage debt financing in.

With this split financing, phase-one capital is equity and structured debt. Then you have the senior debt, which is the more traditional project finance, or bonds and the potential involvement from IUK (Infrastructure UK) in that part.

This [two-stage process] has been done to align capital with risk and to minimise the total cost the funding to the equity holders.

The graphic above, taken from the Sirius presentation, shows how and when the financing of the York Potash Project will be financed.  

On the DFS…

The outcomes are probably came out better than expected in a number of areas.

What next?

The job now is to get detailed engineering and financing. We have a huge contribution to make to the region economically.

WHAT THE BROKERS SAY

Shore Capital

According to the company, discussions have been underway “for a significant period of time” with potential providers of structured debt and equity for stage-one. Sirius now intends to “engage in a more detailed formal due diligence process” with key parties with a view to obtaining binding commitments “as quickly as possible”.

In the meantime, we note that Sirius remains very well-funded for a company at this stage, with £25mln of cash on its balance sheet as of February 2016.

While an investment in Sirius will become progressively de-risked as the company advances towards production, we believe that it already offers a more robust, lower-risk investment with the prospect of better returns than typical of its peers.

Liberum – target price 38p

Applying Sirius pricing methodology the project delivers a US$15bn net present value versus our previous US$4.6bn estimate. The key difference in our valuations remains pricing assumptions; we assume prices are set by production costs at the marginal producer, rather than nutrient value.

Management focus will now turn to delivering the significant debt and equity funding package of US$1.6bn for the first phase.

THE SHARE PRICE

Sirius, up 150% in the past year and a quarter since the start of 2016, succumbed to profit-taking trade at 18.45p, down around 19%.

Quick facts: Sirius Minerals PLC

Price: 3.4 GBX

LSE:SXX
Market: LSE
Market Cap: £238.69 m
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