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Sirius Minerals: A potential target as potash market consolidates?

Could an eventual sale to large North American players represent an ideal ‘exit strategy’ for the smaller UK players in this tough market?

Heap of potash
A surplus in the world market meant prices have fallen by a third in the last year.

Talk of North America’s US$30bn “potash mega merger” has further piqued the excitement surrounding London’s smaller fertiliser stocks, including the market’s current darling, Sirius Minerals PLC (LON:SXX).

It is probably too early to talk about a bid for Sirius, says Yuen Low, analyst at Shore Capital, who has been tracking with interest the potential deal between giants PotashCorp (NYSE:POT) and Agrium.

Put bluntly, the Yorkshire-based mine developer "just wouldn’t move the needle" when it came to the PotashCorp-Agrium combination, claims Low, as it is too small at this stage.

Prices have plummeted

A surplus of potassium-rich potash in the world market meant prices have fallen by as much as a third in the last year, which has led to layoffs and mine closures across the industry.

Demand for the fertiliser has also been weak in some markets and there is a glut of material.

If the proposed merger goes ahead, it might then be possible to control supply more closely with one industry champion at the helm.

The potash marriage of the decade might even help rehabilitate the industry in the eyes of investors scared off by previous failed attempts at deals.

“Potential potash industry consolidation could certainly help improve investor sentiment across what is currently a very challenged space,” said Morgan Stanley, commenting on the possible transactions.

Other analysts, however, were not so quick to see this as an answer to industry woes.

Andrew Wong of RBC Dominion Securities said the deal would not “solve the industry’s current challenges with an over-supplied market”.

A history of failure

“The potash industry is going to struggle to meaningfully improve profitability in both the short and medium terms,” warned Morgan Stanley analysts earlier this year.

The market is still reeling from a string of failed mergers and acquisitions, but there is reason to believe this time will be different.

Pressure from the drop in commodity prices and the excess supply have forced these two agro-giants to sit down at the negotiating table.

Jeremy Wrathall of Investec told Proactive Investors the potential merger was a “tacit admission that the potash market needs some surgery”.

A merger would give those two groups the potential to cut cost base, by creating a powerhouse in the potash market, which is good news long term, said Wrathall.

“Something needs to be done and this is a good potential solution to it.”

Closer to home

Here in London fertiliser shares have been performing well in London.

There are no sector giants of the PotashCorp or Agrium ilk. Instead the market here is host to earlier-stage growth companies that are in the process of developing future source of supply to the sector.

Perhaps the most well know is Sirius Minerals.

Investors have seen the UK mine developer’s value rise above £1bn as the price advanced towards 50p per share last month. It is currently riding just above 40p, compared to the 1.9p seen six years ago. Sirius’s share price has increased by around 175% so far in 2016.

Recent contenders

Meanwhile, Harvest Minerals (LON:HMI) shares are up more than 300%, bucking the usual summer lull expected around this time of year.

Last month, the Brazil-focused potash explorer told investors that new resource estimates at just 3% of the Arupua project were sufficient to green-light plans for a trial mining operation.

A recent contender, rising from the carcass left behind by former AIM stock Wildhorse Energy, is Salt Lake Potash (LON:SO4).

Having sealed its ‘transformation’ with a rename and re-launch last December 2015, Salt Lake Potash has seen its shares rise some 225%.

On Tuesday, shares edged closer to 30p after it reported a robust scoping study for its Western Australia potash project.

Salt Lake is a little different to the others though, it instead focuses on drilling into a liquid host of minerals called brine.

And there’s African Potash (LON:AFPO), which this summer announced a series of distribution deals.

Having marked a rise of around 1,000% just over a year ago the AIM shares price has eventually levelled off again. The attention is on delivery and new business.

North Yorkshire

Here in the UK, Sirius Minerals is embarking on its own ambitious fertiliser project.

The group is on the cusp of developing a world-class mine in North Yorkshire, tapping into a polyhalite deposit that has been hailed by analysts as the largest, thickest and best quality in the world.

The high-class fertiliser it will churn out will be greatly in demand for decades to come as agricultural operations seek ways to enhance crop yields in the face of increasing global food scarcity.

“Once they have signed up the next 3mln tonne of off-take and the project is funded, then I think majors might take a more serious look at them,” Richard Knights of Liberum told Proactive Investors.

Great British Sell Off

Could an eventual sale to large North American players represent an ideal ‘exit strategy’ for the smaller UK players in this tough market?

For other small companies, an eventual sale to any large player would certainly represent one possible (and usually most desired) exit strategy, said Shore’s Low.

“This would preferably occur before funding has to be raised or (failing that) before production commences.”

He said that raising construction funding and commissioning are arguably the two most difficult phases for any junior miner to navigate successfully

“In Sirius’s case, however, the potential value uplift from de-risking and passage of time is such that it would (in my opinion) be more attractive to get into production before having to negotiate a takeout. The key is to get the ‘right’ people in place, I believe,” added Low.

Investec’s Wrathall however speculated a possible deal with Israel Chemicals Ltd might be more likely, but conceded it was too early to speculate

“Sirius has got to prove it can do this before anyone can buy it,” he said, referring to its primed and ready North Yorkshire plans.

“But as M&A hots up in the sector, that’s generally a good sign,” he added.


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