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Sirius Minerals: Is now the time to invest ahead of key US$3.5bn financing?

Sirius’ bosses are due to deliver a key financing later this month that analysts think will remove most of the project’s risk, so is now a good time to get in?

poly4
Project costs, the actual digging and polyhalite’s potential are all concerns for some in the City

Sirius Minerals PLC (LON:SXX) is approaching a “crucial juncture”, according to analysts, so is it time to make an investment?

You’ll struggle to find an analyst who says not to: out of the four abacus rattlers who watch the stock, three have ‘buy’ recommendations while the other has an ‘outperform’ rating.

READ: Sirius Minerals makes it onto Liberum’s most preferred list

Sirius is behind one of the biggest civil engineering projects currently being undertaken in Europe.

It is building the Woodsmith polyhalite fertiliser mine in North Yorkshire, which is 1.5km deep and requires a 37km-long underground conveyor belt to take the minerals from the mine to a processing facility.

Backing such a complex and impressive project in the UK will no doubt be reason enough for some investors.

Financing due this month

Analysts are less romantic, though, and instead point to an upcoming financing as perhaps the biggest remaining inflection point and one which punters should get in ahead of.

“If all goes to plan, Sirius’s US$3.4-3.6bn stage 2 financing will be successfully completed over the coming weeks,” said Shore Capital’s Yuen Low in a recent note to clients.

“We expect this seminal achievement to catalyse a major re-rating of the shares.”

Low thinks the financing will spur the Sirius share price onto the 50p level, while Liberum’s mining analyst Ben Davis is looking for somewhere between 45p and 60p post-funding.

Either way, both are forecasting a sharp rise in the FTSE 250 group’s share price, which currently sits at just above 20p.

It has been pushed back before though …

Critics will have their doubts as to whether the financing will be secured on time and on terms the market considers acceptable.

The deadline for completion has already been pushed back once: it was supposed to be delivered in the first quarter of this year, but Sirius bosses are now guiding for the end of this month (April).

Sirius can’t afford any more delays either. In an update back in January, it said it has enough in the bank to last it “into the second quarter” without having to alter the project’s timeline.

Then there was the surprise at the start of the year when the UK government only committed to lending the company US$1bn to help develop Woodsmith. The expectation previously was that the government would underwrite US$2bn of loans.

Sirius tried to jazz up the announcement by saying that it would rely less heavily on debt from one particular party, although others argued that government financing is almost always the cheapest.

Digging such a deep mine isn’t easy (or cheap)

While the financing accounts for the majority of the project risk – about 60% seems to be the consensus – the rest of the risk lies in the ground (literally).

Because the mine is so deep and requires such a complex conveyer belt system to be built, Sirius is having to drill through a lot of earth.

With every metre comes more risk that tunnellers bump into the unexpected. In a recent op-ed, the Financial Times claimed that the digging costs alone could end up being US$530mln higher than forecast, although this figure was disputed by Liberum.

Rising costs are a touchy subject for long-term Sirius investors, though. In September, Sirius said it needed to build a wider tunnel for the mineral transportation system (MTS) which would add US$400-600mln to the overall bill, currently at US$4.2bn.

Is Sirius over-egging the potential of POLY4?

Assuming the project does go ahead without any major operational or financial hiccups, being able to sell the fertiliser is critical. What’s the point otherwise?

Sirius has struck deals with various companies around the world that have agreed to take a combined 8.2mln tonnes of POLY4 every year.

As yet, there is no supply agreement in place in Europe, but negotiations with a potential offtake partner are “well advanced” and Liberum’s Davies is of the view that a “big player could be a share catalyst”.

Some in the industry are sceptical over the market for the fertiliser, though given that only one other company produces it: Israeli Chemicals (ICL) at a nearby mine.

While Sirius is looking to build a mine that can produce 10mln tonnes of polyhalite every year – and with plans to double that by 2029 – ICL reckons potential long-term demand is nearer to 3mln.

Liberum thinks the fact that Sirius has managed to strike deals with several big firms around the world means the market for POLY4 is now “unquestionable”, although only time will tell.

Sirius shares were up 5% to 23.2p on Tuesday. They had been as high as 26.6p earlier in the session.

-- Updates share price --

Quick facts: Sirius Minerals PLC

Price: 3.55 GBX

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