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Sirius Minerals - City broker reveals how and why debt deal could help unlock significant value

“Expect shares to grind higher as bond nears completion,” said Liberum analyst Richard Knights in a note to clients.

Pictured, a hole in the ground somewhere in North Yorkshire

The City broker Liberum sees significant upside for shares in the fertiliser miner Sirius Minerals PLC (LON:SXX) both ahead of and after its planned US$500mln bond offering, seeing the cash call as potential value trigger.

Richard Knights, an analyst at the miner's house broker Liberum, thinks the shares are currently worth 40p each, which compares with the 16p at which Sirius closed on Monday.

However, he pointed out a successful bond issue allows Sirius to tap into a US$2.5bn revolving credit facility that erases substantially all of the funding risk associated with the company’s giant potash project in North Yorkshire.

In doing so, the deal should narrow the stock’s discount to its 68p net present value.

“Expect shares to grind higher as bond nears completion,” said Knights in a note to clients.

Roadmap to financing 

Setting out the roadmap for the financing, the analyst said the bond should be priced by August 6 with the deal closing three days later now that Fitch and Moodys have issued their respective credit ratings of B and B-.

Knights also reckons Sirius has been a little conservative on the coupon it expects to pay on the bond.

At 12% it would be comparable to the rate of interest paid on debt for two single asset lithium mining developments, the Liberum number cruncher said.

“We think there are a number of reasons why Sirius could secure superior terms to those offerings,” Knights added.

Better terms?

The issues in question - by Pilbara and Nemaska – failed to secure a public rating ahead of their issue, he pointed out, while the bonds were issued in the US, a softer market for debt ahead of a potential cut to interest rates there.

Sirius, meanwhile, has already made significant progress with construction, while the technical risks are lower, he added.

Sirius needs to secure the funds by the end of September otherwise it risks running out of money, although bosses are confident of completing the sale of the bonds well before then.

Analysts had previously expected the bonds to be ready in time for management to kick off the roadshow – where they promote the bond to institutional investors – ahead of the August holidays.

Going deep

Sirius needs the money to fund the development of the Woodsmith mine, one of the biggest civil engineering projects currently being undertaken in Europe.

The mine is 1.5km deep and requires a 37km-long underground conveyor belt to take the minerals from the site to a processing facility.

First production at Woodsmith is expected in 2021, with output increasing to 10mln tonnes by 2024.

Quick facts: Sirius Minerals PLC

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