Sirius Minerals PLC’s (LON:SXX) new plan and re-envisaged approach to project financing should “catalyse major re-ratings” for the downtrodden UK mine developer’s shares, that’s according to house broker Shore Capital.
The collapse of Sirius’s project financing earlier this year put one of Britain’s most ambitious projects in doubt.
READ: Sirius slows mine development work as funding crisis prompts search for new development alternatives
It decimated the investment portfolios of thousands of individual private investors that had bought into the promise of a ‘world class’ mine, large scale regional infrastructure development and Yorkshire job creation.
All those things may yet be possible, though the company’s equity value crumbled – shares are down over 80% since April – as management hit reset on plans to raise US$3bn to turn its large hole in the Yorkshire ground into an operational mine capable of churning out fertiliser for global export.
Shore Cap analyst Yuen Low, in a sixteen-page note published on Monday, has taken a closer look at ‘The Plan’ revealed by Sirius last month as part of its ongoing strategic review.
Low’s note emphasises that the new approach would need significantly less upfront capital in order to advance the remainder of the mine development. This initial or intermediate stage would still give the company “attractive returns”, according to the analyst.
“Most importantly, from our point of view, ‘mining’-type construction risk is now concentrated in the Initial Scope (Stage 1), along with the ‘risk sharing’-style shaftsinking construction contracts,” Low said.
“As a result, the Deferred Scope (Stage 2) is materially de-risked for senior debt providers, which should facilitate raising senior debt.
“We expect that successful fund raises at each stage should catalyse major re-ratings.”
The ‘initial scope’/Stage 1
Sirius estimated that it would need around US$600mln to spend on shaft sinking and to complete the Drive 1 portion of its underground mineral transport system - in order to achieve the ‘first polyhalite’ project milestone by Q2 2022, opening up production and revenue streams.
Sirius needs to land those funds before the end of 2020’s first quarter, Shore Cap noted, and the company is seeking this cash from either a strategic investor, structured debt or equity (or a combination of either).
“Sirius noted that strategic investor participation would likely reduce the perceived credit risk for Deferred Scope funders; intriguingly, ‘various interested parties’ are undertaking due diligence,” Low added.
The deferred project/Stage 2
Delivering the entirety of the Yorkshire mine project requires substantially more funds, estimated by Sirius at some US$2.5bn based on the previously envisaged 10mln tonne per year operation.
Low, in his note, reckoned that cost cutting could lower that burden and potentially also accelerate the expansion of the project beyond its more limited ‘initial scope’.
The analyst said: “work is ongoing on a number of options which we believe to have the potential for significant further schedule acceleration and cost reduction.
“The deferred scope would only be committed to once full financing has been secured (traditional bank based project financing and/or bonds), which Sirius anticipates occurring within 12 to 24 months of Initial Scope commencement.”
The range of potential valuations vary wildly
Shore Capital’s own analysis indicates that the potential value of an investment in Sirius may vary wildly, depending upon which development and funding scenarios transpire.
Low notes that the ‘post-tax net present value’ could range from 26.5p to 94.7p per share.
The broker’s base case assumes a two year wait for the ‘Deferred Scope’ or Stage 2 project and with a 26.5p NPV it is the bottom marker on the above range.
A ‘risked’ version of this base case asset valuation is pitched by Shore Cap at 13p per share, unlocked post ‘Initial Scope’ funding.
At this level, Shore Cap’s view suggests some 250% upside to Sirius Minerals current market price of 3.65p.
Shore Cap’s valuation range doesn’t, however, calculate how the large Yorkshire hole-in-the-ground would be worth if the Q1 2020 funding deadline is not met.
Unanswered questions for anxious shareholders
Also pertinent to the investment case would be the composition of the ‘initial scope’ funding as the finer details of whatever funding deal is reached will be decisive and, likely, divisive for existing shareholders.
How much of the funding will involve equity?
At what price will that equity be sold?
And how dilutive will such a raise be to the thousands of private investors already holding Sirius Minerals shares?
According to Low’s analysis, even the funding requirement itself is a moving target.
He explained: “we estimate that in an all-equity 12-month deferral scenario, Sirius could get by with raising just circa US$400m (£309mln) in the first quarter of 2020.
“However, the prudent course for the company would be to assume, and raise, sufficient funds to cover a 24-month deferral, in which case we estimate that US$700m would suffice if this were raised entirely as equity.”
Evidently, whilst Shore Cap’s note may provide some apparent optimism or silver lining for Sirius but there are still many unanswered questions for existing shareholders who will likely have a few more months of anxiety whilst management thrash out their next financing phases.