A day after the potash mine developer announced that it was having to throw in the towel for its £500mln bond issue due to market uncertainty, Liberum, which is one of three ‘house’ brokers, issued a note to clients where it ran through the numbers on possible financing solutions.
With around six-months worth of cash to give it time to carry out a strategic review, management suggested in the conference call that they are now looking at ways of re-allocating risk in the financing structure to appeal more to debt capital providers.
In a nutshell, Liberum analysts interpreted this to mean Sirius could come back to market in three to six months with a debt offering that doesn't include exposure to the highest-risk component of the Woodsmith project, ie the mining shaft.
Sirius could “annex” the funding of shaft from the bond by bringing on third party or strategic investors to finance it and also for the mineral transport system tunnel, having already been approached by a number of investors for "infrastructure finance".
Annexing off finance of separate items could improve credit risk on a couple of fronts, the analysts said, while a lower-risk proposition might also raise the odds of getting government support.
Potential size of strategic investment
Of course, the impact for equity holders would ultimately depend on the size and price of any equity placing.
Assuming the strategic investment needs to cover the cost of shaft construction, this could require a US$400-500mln fundraising, below the US$770mln cost in the prospectus.
“The logic is that in order to derisk the shaft, a strategic would only need to pay for the shaft to be sunk to the polyhalite extraction level, not the entire fit out of the shaft.”
Raising US$500mln from a strategic investor at 5p, delaying the project by a year and reducing overall capital costs 5% from the initiatives outlined by management, Liberum said its net present value per share for the project drops from 68p to 38p, with the strategic investor ending-up with a 50% beneficial interest in the project.
Varying the required amount of strategic investment and the price, a US$300mln investment at 4p gives a NPV of 43p and a US$700mln investment at the same price gives a 28p NPV, while a higher price of 10p at both those amounts gives NPVs of 58p or 45p.
“These economics clearly look compelling for the right investor with upside to NPV/share of >500% on financing.”
The project has various components that the analysts believe would make Sirius an ideal target or strategic investment for a major mining business, agribusiness or sovereign fund: a “multi-generational, expandable resource…bottom of the addressable cost curve…pent-up demand for low chloride potassium units (demonstrated by the 12mt of take-or-pay agreements)…low processing risk”.