For British mine developer Sirius Minerals PLC (LON:SXX), the “crucial juncture is nigh”, according to broker Shore Capital, which has issued a note highlighting significant potential for valuation upside compared to other fertiliser mineral peers.
To recap, Sirius has a large ‘world class’ resource and presently has an increasingly large hole in the ground in North Yorkshire.
The construction work, which will include a 23-mile tunnel and mineral transport system connected to new port facilities in Teeside, is expected to run into 2021, though the initial phase will come to completion in the relatively near future.
Such is the progress that attention has recently been fixed on the anticipated Stage 2 project financing, which will aim to secure the remaining funds necessary to complete the mine and take the Sirius fertiliser product to market.
A new project finance opportunity emerges
Evidently, a deal is now close, following news this week that a new backer had approached Sirius with a funding proposal.
Consequently, Sirius decided to put on hold its previously long-running debt finance negotiations to explore the new funding opportunity.
“The company believes that the alternative proposal potentially offers a more flexible and attractive solution to its stage 2 financing requirements and therefore it is pausing discussions with its existing prospective lenders to pursue the alternative proposal,” Sirius said in a statement.
Sirius told investors that it is working to obtain firm commitments for the new proposal and any additional financing before the end of April.
“We think this gives some clarity around the delays in debt financing from a top-down view looks a simpler solution with only one party to deal with,” said Liberum analysts Richard Knights, who repeated his ‘buy’ recommendation.
Sirius shares reacted positively on Tuesday, rising around 9% on the day, and have remained positive today.
Shore Capital bullish on value opportunity as financing nears
Yuen Low, analyst at Shore Capital, in a note, said: “If all goes to plan, Sirius’s US$3.4bn to US$3.6bn Stage 2 financing will be successfully completed over the coming weeks.
“We expect this seminal achievement to catalyse a major re-rating of the shares, as it is effectively the key to unlocking Sirius’s vast value potential.”
Specifically, the Shore Capital analyst gives Sirius a 50p per share valuation (risked net present value) post-financing, versus a current share price just below 20p.
“Beyond that, while Sirius would still be some years from becoming cash generative, an investment in the company should become progressively de-risked and enjoy significant value uplift as it advances towards production, we believe,” Low added.
The analyst highlighted comparisons to sector peers and suggested that as Sirius approaches full production from the Yorkshire mine, it should upgrade significantly, to potentially have a market value of some US$18bn - based on an enterprise value to earnings (EV/EBITDA) rating of around x11).
Moreover, he asserts: “In other words, we see c.13.5x upside to the current market cap over the next few years.
“In our view, the current market cap also represents a material undervaluation in that, for any plausible acquirer, Sirius would not only be appreciably ‘needle-moving’ but should also improve said acquirer’s margins and EV/EBITDA rating.”