Investment in Sirius Minerals PLC’s (LON:SXX) fertiliser project in North Yorkshire is a complementary extension of Gina Rhinehart’s ‘mining to dining’ strategy, says Yuen Low, analyst at Shore Capital.
Rhinehart, one of the world’s richest women, is investing US$300mln in the UK mine development via her company Hancock Prospecting.
Hancock, which will take US$50mln of Sirius shares, will form an important plank of the overall funding package for the AIM-listed group’s North Yorkshire Polyhalite Project.
Under the terms of the agreement, Hancock British Holdings is acquiring a 5% royalty on the first 13mln tonnes of fertiliser produced every year and 1% on anything over that output figure at a cost of US$250mln.
The funding won’t kick in once the initial US$630mln of remaining Phase 1 project financing has been secured and spent.
Hancock is best known for its iron ore operations in Australia’s Pilbara region, where it runs mines with Rio Tinto, but, it has in recent years invested in agricultural assets.
Notably, in partnership with a Singapore investor, it bid A$365mln for a cattle operation spanning an area (almost) the size of Scotland.
“Hancock’s recent focus on agriculture was the result of it identifying a fast-growing Asian demand for higher-quality foods," Low says.
“We believe that Hancock identified an investment in Sirius as a logical, complementary extension of this strategy.”
Low, in a note, explains that significant tracts of farmland in Asia suffer low productivity due to salt-induced degradation.
For Sirius, and its polyhalite product, this is significant as studies have shown the fertiliser is particularly effective in such conditions. The Poly4 product can be effective in a ‘soil conditioning’ role – it can stabilise soils, reduce erosion and cultural eutrophication, Low says.
He added: “Polyhalite’s multi-nutrient and low-chloride make-up is of particular benefit to high-value chloride-sensitive fruit and vegetable crops for which there is growing demand from increasingly wealthy Asian populations.”
The analyst describes the deal as a ‘resounding endorsement’ of Sirius and the North Yorkshire polyhalite project, where the now reduced Phase 1 funding requirement will be the last major piece of the jigsaw.
“We continue to anticipate the conclusion of Stage 1 financing during the autumn of 2016,” Low added.
“If all goes to plan, there would be no further need to raise equity thereafter, dilution would cease to be a concern, and we believe the resulting improved clarity on potential equity returns could trigger a significant re-rating.
“While Sirius is currently at development stage and still some years from becoming a cash flow-generating company, an investment in Sirius will become progressively de-risked and should enjoy significant value uplift as it advances towards production, we believe.”
Low rates Sirius Minerals as a ‘buy’.