Sirius Minerals PLC (LONSXX, OTCQX:SRUXY) shares gained around 6% after it signed a financing deal worth up to US$300mln with the company controlled by one of the world’s richest woman.
The pact with a subsidiary Gina Rinehart’s Hancock Prospecting 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.
Hancock has also agreed to acquire US$50mln-worth of Sirius shares. The values Sirius Minerals project at US$3.9bn, analysts said.
The deal is subject to a number of conditions, the main one being Sirius must secure Stage-One funding for the mine, sited near Scarborough in Yorkshire, which is put at just over US$1.6bn.
The company said it is making good progress in this regard.
Chief executive Chris Fraser told investors: "We are delighted to have signed this agreement with such an experienced party in the mining industry, as well as one that has very successful and strong leadership and a long term and growing agricultural interest."
At 3pm, stock in the company was up 2p at 36.25p, valuing the mine developer at just shy of £840mln. The broker Liberum Sirius is worth 50p a share.
Analyst Richard Knights has described the Hancock deal as a “clear endorsement” of the Yorkshire project.
Next to follow will be news equity and structured debt arrangements to fund the remainder of the mine’s Phase-One development, he added.
He said the Hancock deal values the Sirius’ North Yorkshire project at US$3.9bn, pointing out the royalty agreement was significantly less dilutive than a straight equity raise.
“Looking at the deal from an existing equity holder's perspective, the same level of equity dilution could only be achieved if that money was raised at 95p, almost three times the current share price,” Knights said in a note.
Mining to dining
According to Shore Capital the Hancock investment fits snugly with Gina Rhinehart’s ‘mining to dining’ strategy.
The billionaire’s company is best known for its iron ore operations in Australia’s Pilbara region, where it runs mines with Rio Tinto. bBut, it has in recent years, it has invested in agricultural assets.
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," said Shore analyst Yuen Low.
“We believe that Hancock identified an investment in Sirius as a logical, complementary extension of this strategy.”
Low, in a note, said 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.
“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,” he said Low.
The analyst described Tuesday’s deal as a ‘resounding endorsement’ of Sirius and the North Yorkshire polyhalite project.
“We continue to anticipate the conclusion of Stage-One financing during the autumn of 2016,” Low added.
Equity dilution at a minimum
“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’.