Sirius Minerals PLC (LON:SXX) must be chomping at the bit for the development of its ambitious North Yorkshire Polyhalite Project after it confirmed “extensive” work to secure the construction finance.
Sirius expects the underground fertiliser mine to produce its first polyhalite by 2021; by 2023 it is expected to churn out at least 10mln tonnes a year, with the capacity to double output.
The project is an ambitious one, tapping into a world-class global resource deposit, and one that is very much in demand.
Experts have hailed it as the biggest, thickest and highest grade polyhalite deposit in the world.
Polyhalite fertiliser is used in agriculture to replenish nutrient and mineral levels in farmland, and is vital to maintain intensive, efficient yield levels for the world’s food crops.
It is a relatively new fertiliser and was once considered a lower grade form of potash due to the concentration of other minerals.
Polyhalite, as the name suggests, contains a number of essential macro-nutrients (potassium, sulphur, calcium and magnesium) which makes it a well-rounded fertiliser translating to cost-savings and increased farm profits.
Neighbouring Teesside harbour development
The project includes an underground transport tunnel to the nearby Teesside harbour which will also be developed to manage shipping of the resource.
A long-awaited definitive feasibility study for the project back in March underscored its “world class” potential.
Capital requirements were estimated at US$1.09bn, with an additional US$1.1bn needed to get the first phase underway.
Review slashes initial estimates
The requirement was slashed by almost a third from its initial estimate following renewed financing plans. The total capital requirement was also reduced by 18% to US$2.91bn.
The study gave the project a net present value of US$15bn, using a 10% discount rate. Once the mine is operational, the figure rises to US$27bn, with an after-tax internal rate of return is at 26%.
Depending on volumes and price, the project has the potential to generate underlying earnings (EBITDA) of between US$1-3bn a year.
Cash margins are expected to hit 70-85%, while operating costs are expected to hit US$37.20 a tonne.
Harbour project approved
Last month, Sirius was granted development consent for its proposed harbour facilities from the Department for Transport, confirming that the Secretary of State has approved its Development Consent Order (DCO).
The harbour facility, on Teesside, will include a new berth as well as ship loading facilities and conveyor linkage to a separate materials handling facility. The company noted that the DCO includes all compulsory purchase powers required for the harbour development.
Sirius’s mine and mineral transport system permits went unchallenged during a six week window and the DCO appeal window which closes at the end of August is also expected to pass unchallenged, especially given the pressing issue of unemployment in the region.
Once it has passed, it should excite fundraisers, with the first stage of funding expected for the third quarter of the year.
Analyst is confident about the project
“Given said project’s myriad strengths, we are more confident than ever that procuring the requisite funds should not prove overly problematic,” said Shore Capital analyst Yuen Low.
Sensitivity analyses suggest ample opportunities for upside to the initial US$15bn net present value, whereas the downside appears relatively limited, said Low.
Even if production is capped at a sub-optimal 15mln tonnes a year the valuation would still be 91p share, the analyst added. The current price is 36.5p.
If all goes to plan, there should be no further need to raise equity after stage one, said Shore’s Low.
Polyhalite’s intrinsic value is estimated at US$219-272 a tonne.
Selling 15mln tonne a year in 2026 is “achievable”, according to Low, but 20mln tonnes a year by 2028 might be “challenging”.
“Undoubtedly, a large and challenging project, the firm has thought things through incredibly carefully and the contractors are world class,” said Investec’s Jeremy Wrathall.
He said a recent announcement by an Israeli chemicals company was testament to there being a market for polyhalite.
"This project could become an annuity stream going forward given its high volume and hopefully relatively stable price of polyhalite,” said the analyst.
The project has an estimated five-year build time, with a ramp up to 20mln tonnes a year by 2028.
Analysts expect average operating costs of US$27 per tonne of polyhalite, with a peak capital funding requirement of US$2.9bn to be raised in two stages.
The project has been given a 50-year life-of-mine from first production in 2021, after a five-year build period. The vertical shafts were designed to last a century.
Sirius has already secured at least 3.6mln tonne take or pay agreements with an option of up to 7.9mln tonnes per year, which Low says is “proof of the pudding” and validation of the potential of the project once operational.
The shares price has more than doubled in the past year, valuing the business at £844mln.