With the company having been in danger of running out of cash to be able to keep up spending on the development of its Woodsmith polyhalite mine by the end of next month, securing financing has been the primary focus for Sirius over the past year and a half.
The full financing package, which includes a signed-off share placing of US$425mln (£327mln), a US$2.5bn revolving credit facility from JPMorgan, a US$500mln high yield bond and a convertible bond offering, is designed to covers the entire development capital required by this highly complex project.
Before production is due to start in 2021, the company has to sink two 1.5km shafts near Whitby in North Yorkshire and a 40km tunnel to transport its polyhalite all the way from the site to the port at Teesside, from where the fertiliser product will be shipped around the world under the POLY4 brand.
Berenberg said the package “clears some hurdles surrounding the project” but the full financing “is by no means guaranteed and the company remains in a crucial phase to secure long-term funding”.
Berenberg analyst Rikin Patel said the composition and terms of the package did not match with his best-case scenario, noting that the terms of the convertible bond state that the funds will be held in escrow until the company is able to secure the revolving credit facility which is in turn contingent on successfully issuing the US$500mln high yield bond.
“If the company is not able to do this, there is no guarantee that alternative methods of financing can be secured, and as such the company will again run into cash flow issues.”
Berenberg remains positive on long-term concept
However, Patel remained confident that Sirius can secure the funding from the high yield market, even though this will likely come at an elevated interest cost, which he was now factoring into his forecast model and, while he cut his target price to 35p from 40p, reiterated his 'buy' rating.
“While shareholders may face some dilution in the short term, fundamentally, we remain positive on the project’s longer-term credentials. The economics and valuation are still favourable, even with conservative assumptions on pricing, volumes and capex,” the analyst said.
Berenberg estimates that project should generate an internal rate of return of 15% with a price/net present value ratio of 0.4 times.
“Furthermore, we remain positive on the long-term success of its POLY4 product. Our argument is predicated on the idea that polyhalite can offer a cheaper alternative to existing speciality fertiliser products like SOP (sulphate of potash). With farmer incomes under pressure, we think speciality products like POLY4 can grow share in the market given the potential yield benefits, especially for higher-value crops.”