Sirius Minerals PLC (LON:SXX) has been a standout success in an otherwise tough mining sector, with the share up about 140% since October, when it secured planning permission for its mine development in North Yorkshire.
That the share was even higher - briefly trading near 25p in March - ahead of the mine’s bankable feasibility study suggest something of a coiled spring beneath the stock.
As highlighted by City broker Liberum, in a new note, negotiating financing to start building the mine is now the final step in unlocking substantial value.
Upon release of the DFS, Sirius said talks with potential funders were “well developed”.
Here, we take a closer look at the high profile AIM quoted mining stock.
March’s DFS spelled out the mine’s world class potential
The long-awaited definitive feasibility study (DFS) for Sirius Minerals for the mine development project in North Yorkshire underscored its “world class” potential.
The report says its net present value of the asset 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.
First production will occur in 2021 with the company hitting the 10mln tonnes per year figure by 2023.
The North Yorkshire Polyhalite mine will be a British success story
Chris Fraser, Sirius Minerals chief executive, 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.”
It was 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.
It 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 specialised fertiliser, which will be in high demand
New agronomy studies were released in early May, revealing encouraging findings for the potential use of Sirius Minerals polyhalite (POLY4) product in China.
POLY4 is the group’s flagship polyhalite product. It is a natural blend of nutrients essential for plant growth.
On-going crop trials have demonstrated POLY4’s effectiveness, showing a positive impact on soil nutrient legacy and not significantly affecting soil pH, meaning a more efficient use of the fertilizer.
And the special blend is particularly suited to China’s main crops.
POLY4 is low in chloride, to which tea and chilli pepper crops are particularly sensitive.
Of the 4.8mln tonnes of tea consumed worldwide annually, China supplies 72%. China produces 15.8mln tonnes of chilli peppers a year, around 39% of the global market.
It is also ideally suited to China’s $41bn annual oilseed rape market. Studies have shown it increased yield by 7% and improved nutrient uptake.
“The agronomy studies help to further demonstrate the value in use of the Company's POLY4 product and also support on-going engagement with current and potential customers,” Sirius said in a statement.
Project financing is now the focus
Fraser told Proactive Investors that whilst there is no specific time-tables, the company has been busy laying the foundations to get financing in place as soon as possible.
The process had, by early March, reached a very detailed diligence phase.
It is a major project, with major capital requirements. And, Sirius intends to split the funding process into two parts.
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 expected to be equity and structured debt.
In the second stage it is more likely to be funded via senior debt - a more traditional type project finance - or bonds and the potential involvement from IUK (Infrastructure UK) in that part.
Fraser explained that the two-stage process is designed to align capital with risk, and to minimise the total cost the funding to the equity holders.
Shorecap says better returns than typical of its peers
Laying out the reasoning for its ‘buy’ recommendation the broker said the North Yorkshire polyhalite mine development will be a ‘paradigm-shifting’ project.
“The DFS results were essentially in line with our expectations, projecting a high-volume (20Mtpa), low-opex (c.US$27/t), long-life (50 years, but we believe there to be potential for >100 years) operation with prodigious cash generation, high margins and attractive returns,” said ShoreCap analyst Yuen Low.
“Key planning permits were received unchallenged in 2015, so the focus now is on raising the requisite construction funds with which to germinate this embryonic fertiliser giant – and given its myriad strengths, we do not expect this to prove overly problematic.”
According to Low, Sirius shares will see a significant re-rating once the first phase of project finance is secured – he notes that a US$1.6bn package is anticipated as a mix of debt and equity, while phase 2 would be more traditional project financing.
“If all goes to plan, there should be no further need to raise equity after Stage 1,” he said.
“Dilution would no longer be an issue, and we believe the resulting improved clarity on potential equity returns could trigger a significant re-rating.”
Low added: “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.”