Ahead of the bond issue next week, Bloomberg has reported provisional guidance for a coupon rate – the interest paid over the life of a bond – of 13.5%, above the 10-12% that Sirius Minerals had estimated.
House broker Liberum said: “The rate is above the 12% we modelled and adds $56mln of interest costs over the life of the bond, but the far more important impact as far as the shares are concerned is improved certainty around completion of stage 2 finance given the circa US$7bn gap between the current share price and our net present value (NPV),” house broker Liberum said.
“Once the bond has been issued and the revolving credit facility (RCF) terms finalised, the company will have fully financed project which we believe should sharply reduce the discount to our 68p NPV.”
Sirius Minerals needs to find enough buyers for the bonds in order to unlock a US$2.5bn revolving credit facility from JP Morgan.
If Sirius is able to secure that financing, it will have enough money to complete the development of its Woodsmith polyhalite mine.
The funds need to be in place by the end of September, otherwise the FTSE 250 group risks running out of money, although bosses are confident of completing the sale of the bonds well before then.
Facilities to absorb increased interest costs
“We model subsequent (lower risk bonds), which will be issued to offset draw downs on the $2.5bn RCF, at a 10% interest rate,” Liberum said.
“Given the likely higher rate of the first bond, clearly risk on interest costs is to the upside.
“If we increase the anticipated interest cost on subsequent bond issues to 11.5% (also + 1.5% on our base case), then our modelled interest costs for the financing to 13mln tonnes would increase by $210mln from $1.47bn to $1.68bn.”
Liberum added that it was worth noting that the increased interest cost can be comfortably absorbed by available facilities.
“As each incremental $500mln bond is issued, the available funds in the RCF only declines by $300mln,” it said.
“As a result, the RCF provides an incremental $1bn of liquidity over and above the $524mln contingency.”
The broker repeated ‘buy’ rating on the stock and a target price of 40p.