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City analysts welcome Sirius Minerals' Redcar port deal

The deal simplifies the development, as it means Sirius can initially use existing third-party owned port facilities - nonetheless, it retains the adjacent site for its own, future use

Sirius Minerals polyhalte product
Sirius continues to advance and de-risk its fertiliser mine project

Sirius Minerals PLC’s (LON:SXX) deal to access port facilities previously used by Tata Steel has been described by a City analyst as “very good news”.

The company has signed an agreement with Redcar Bulk Terminal Limited which opens up the capacity to ship 10mln tonnes of POLY4 fertiliser product per year.

READ: Sirius Minerals’ major value drivers remain on track

It is, according to Sirius, going to reduce construction risk and lower capital requirements, and, significantly, it is expected to be beneficial for the project’s Stage 2 financing.

"We are pleased to enter into this arrangement which reduces the complexity of our construction programme and ultimately helps to simplify our stage two financing plan which is being finalised over the coming months,” said Chris Fraser, Sirius Minerals chief executive.

"By working with a local partner, we can develop our project and also deliver benefits to an existing established business in the Tees Valley.

“The RBT facility has been underutilised since the closure of the steel works and this agreement will ultimately help us deliver tremendous economic benefits for the region."

City analysts see reduction in project risk

Yuen Low, analyst at Shore Capital, in a note, said: “We expect that these arrangements will reduce the complexity - and hence construction-related risks (e.g. fewer contractors to mobilise and manage, berth pocket dredging could potentially release environmental ‘nasties’ in the mud) - in Sirius’s initial construction programme, provide greater flexibility in storage and port operations (alleviating operational risk), and simply the Stage 2 financing plan (reducing financing quantum and associated risk).”

Elsewhere, Liberum Capital repeated a ‘buy’ recommendation with a 60p price target, suggesting some 80% upside to the current market price of 33.22p.

Analyst Richard Knights said: “The deal should result in a small reduction in port capex (from $229m in the BFS), have no impact on guided opex but de-risk the development of the port by reducing the scope of construction work to be undertaken (dredging, birth construction etc.).

“With final capex estimates still being bedded down as part of stage 2 financing, we make no changes to our numbers here.”

Two separate agreements add flexibility and simplicity

Sirius subsidiary York Potash Ltd signed the materials handling agreement with Redcar Bulk Terminal Limited (RBT), meanwhile, a separate Sirius subsidiary York Potash Processing & Ports Ltd has entered into a long-term lease for land adjacent to the company's existing port facilities for finished product storage facilities.

RBT will provide port and ship loading services from its existing Redcar Bulk Terminal port facility.

The RBT facility is a deep-water terminal capable of handling up to Capesize vessels, and it is located adjacent to the Bran Sands site that, in Sirius’ initial plans, is earmarked for its own port facility.

RBT historically serviced a nearby steel works which closed in 2015, and since then it has been underutilised.

Some capital items will be required to enable RBT to handle Sirius’ POLY4 fertiliser product – with ship loaders and conveyors needed  - and it is anticipated that Sirius will procure and install the necessary equipment and systems.

The agreement has a ten-year span and covers up to 10mln tonnes of the Yorkshire mine’s production per year.

From the third year onwards (from the start of production), the company will guarantee certain payment levels for a set minimum volume of materials handling – it will be a level which Sirius says is in line with its expectations for POLY4 sales.

READ: Sirius Minerals shares up as it inks new 7-year POLY4 supply deal for Nigerian market

Sirius also said it retains the right to develop its Bran Sands facility at a future date, and that continues to be the plan in due course.

Albeit, there is flexibility to continue to use RBT and bring on-stream Bran Sands, as the company looks to expand beyond the initial production levels.

The separate arrangement, for the land, gives Sirius a 30-year lease over a 40-acre site adjacent to both port sites. It will house finished product storage facilities.

Sirius highlighted that the site provides it with a more efficient loading circuit by substantially decreasing the distance from the warehouse, and, the company noted that it already has planning permission for locating the storage facilities on the RBT site.

Quick facts: Sirius Minerals PLC

Price: 3.55 GBX

LSE:SXX
Market: LSE
Market Cap: £249.22 m
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