Sirius said in an announcement on Tuesday that, due to unfavourable global market conditions and uncertainty around Brexit and UK politics, it was cancelling its US$500mln bond issue is cancelled and would return US$400mln of previously raised funds will be returned, meaning it would not be able to secure an agreed US$2.5bn revolving credit facility (RCF) from JP Morgan.
“Although the share price has taken a beating on today’s news, it isn’t game over for Sirius and its shareholders,” said analyst Russ Mould at AJ Bell.
“The miner has a few options to try and salvage the project.”
With £180mln of unrestricted cash reserves as of 31 August, of which £117mln was uncommitted, Sirius said it has sufficient cash to explore alternative financing solutions over the next six months. It will reduce the pace of development at its Woodsmith project to “preserve the most value”.
Strategic review options
House broker Shore Capital suggested that alternative solutions could potentially include teaming up with a strategic partner.
A new strategic investor could theoretically provide cash upfront in exchange for a stake in the business but due to the company’s need was likely to be on unfavourable terms.
With the lack of appetite for its bonds more a function of project-specific risks, market conditions or a combination of both, fellow house broker Liberum said the result was that “a capital markets led financing solution seems unlikely, leaving the only feasible financing options being via government-guaranteed bonds or a strategic investor with a balance sheet”.
Other options could include optimising the development plan, revising the development plan and finding alternative financing arrangement.
Government says no
Despite positive noises from Theresa May’s government, support was not forthcoming from Boris Johnson’s regime.
ShoreCap noted that Sirius requested a commitment to enable the issue of up to US$1bn of guaranteed bonds, where the UK government would provide a guarantee, not actual funding in the event the company was unable to issue unguaranteed bonds for the JP Morgan facility.
Analysts noted that the government refused even in spite of Sirius proposing that any such bonds would “only be issued after at least 18 more months’ development activity (to reduce execution risks) and up to an additional US$2bn having already been invested in the project”.
Mould said it was “disappointing to see the UK Government refuse to support the company when you consider that Sirius believes it can generate £100bn for the UK economy over the next 50 years should the mine become operational”.
It also seems that market conditions made JP Morgan less than flexible, with ShoreCap noting that feedback from investors suggested the offering could succeed if equity-linked warrants were included in the offering.
“The stumbling block was that one of the conditions of the US$2.5bn RCF stipulates a maximum all-in effective yield for the IBs of 15% - which would be exceeded by the expected returns of the warrants.
“Sirius therefore requested a waiver of this condition, but JP Morgan declined to play ball.”
Woodsmith project costs
Grasping at straws perhaps, but analysts at JP Morgan and ShoreCap both identified some potential cost optimisations to the project development plan if the project can be rescued.
In particular, ShoreCap noted that tunnelling rates have been faster than expected, already hitting the target of an average 17 metres per day and with a fastest rate achieved of 29.5 metres per day, despite the current ground being relatively difficult.
This potentially removes the need for a tunnel boring machine at Lockwood Beck and offers the potential to use the machine's mucking system to transport up to 6m tonnes per year of polyhalite during tunnel fitout, which would accelerate commercial production.
In conclusion, JP Morgan warned of "two significant risks to equity ownership" going forward.
"Firstly, the market will clearly price in either further equity calls from investors and/or reduction in ownership via a strategic sell-down in the asset base (at a discount to NPV)."
Secondly, the project metrics used to underpin valuation models, such as when first potash will be mined and the levels of operating costs, are all subject to change, which means there are "inherent risks" with calculating a valuation for Sirius based on future expected cashflows.