Sirius Minerals PLC (LON:SXX) was out of favour in the City on Thursday in reaction to an apparent rise in project costs at its Yorkshire mine development.
In a statement, this morning, the company said that it has revised its capital requirement estimates - adding US$400mln to US$600mln, taking the total requirement (including contingency) to US$4.16bn.
It comes as the company finalised procurement and associated risk allocations. Sirius said it will now review the most cost-effective and efficient sources of capital.
READ: Sirius Minerals sees capital bill swell above US$4bn
Chris Fraser, Sirius managing director, said: “The expected increased funding requirement coming from this process reflects an optimisation of the MTS tunnel design and a significantly improved risk allocation for Sirius to support the senior debt financing.
“The project's economics remain extremely compelling and we are confident they support the expected additional funding requirement."
Today’s revised estimates came as Sirius confirmed that it had signed two major construction contracts for the company’s mine development programme.
Sirius shares were down 3.6p or 11.16%, changing hands at 29.02p.
Stockbroker reduces target price, assuming additional equity raise
Liberum Capital downgraded Sirius in the wake of the update, dropping its target price by 16% to 50p per share from 60p.
Analyst Richard Knights said that the reduction in target price accounts for the risk of a US$400mln equity raise, anticipated at a placing price of 30p per share.
He said, in a note, that the way in which the additional capital requirement is financed will have a larger influence upon Sirius’s valuation.
Options highlighted by Knight included strategic partnership, a ‘completion support’ arrangement, structured capital, or the issue of equity or convertible debt.
Knights noted that at least two of the possible solutions involve dilution, but, said that there were “many permutations” to the ultimate funding solution for the project.
Also, the analyst commented: “The target for financial close of the stage 2 financing has been pushed out to Q1'19. If financial close pushed much into Q2'19 the capex schedule would likely need to be pared back.
“While we don't have a clear view at this stage as to the valuation impact resulting from how the incremental c.$500m of capex will be financed, we are confident the project economics (70% EBITDA margin and peak EBITDA c.$2bn at spot) are compelling enough to deliver the financing, particularly with a further 3mtpa of binding offtake.
“That the shares trade at a 60-70% discount to our NPV range should also provide support.”
“However, in line with our conservative pricing and cost profile, we now run a base case scenario that involves a further $400m of equity being raised, via either a strategic, equity or convertible at 30p. This reduces our diluted NPV/share to 84p (from 108p) and our target price to 50p (from 60p).”