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White Knight or cynical opportunist? ... City reacts as Anglo American makes £386mln swoop for Sirius Minerals

The rise and demise of Sirius Minerals has been one of the UK market's top stories in recent years, news that mining major Anglo American is looking to buy-out the former small-cap has naturally ruffled feathers.

A large hole in the ground, Yorkshire
A large hole in the ground, Yorkshire

De Beers owner Anglo American plc (LON:AAL) may see a diamond in the rough as it swoops to takeover Sirius Minerals PLC (LON:SXX).

It was confirmed this morning that Anglo had stopped short of making a formal bid but had proposed a possible 5.5p per share (£386mln) cash offer to buy all of the stalled UK mine developer’s shares.

Anglo said that it has been interested in the Sirius Minerals fertiliser mine project for “some time” due to its potential quality, scale, resource life and cost profile.

“The project has the potential to fit well with Anglo American's established strategy of focusing on world-class assets, particularly in the context of Anglo American's portfolio trajectory towards later cycle products that support a fast-growing global population and a cleaner, greener, more sustainable world,” it said in a statement.

Casting the mining major as a ‘white knight’, the narrative is that Anglo has the cash and expertise to figuratively and literally dig Sirius out of a deep hole.

In mid-2019 - whilst mid-way through a phased mine construction, with a large vertical open shaft already in place - Sirius’s US$3bn project financing plans collapsed as it failed to land debt financing on viable terms.

Put simply (and taking “market conditions” aside), lenders demanded too high a premium for the risks attached to a large, ambitious development being run by a company with no prior track record of building mines.

In September, Sirius surrendered US$400mln raised via convertible bonds, cancelled a further US$500mln bond issue and, in turn, had to forget its plan to secure a US$2.5bn revolving credit facility.

Then, in November, it pumped the brakes operationally to slow construction work on-site amid revised planning for smaller phases of development (with the first requiring US$600mln of funds).

It meant the company was left with a high-quality asset, a running clock and limited ability to finance necessary work.

This was reflected in the company’s share price performance, Sirius shares changed hands at around 21p this time last year, and, as recently as September they were priced at 11p.

As such, a 5.5p per share cash takeover will likely cement significant losses for the company’s swathes of retail and individual private investors (there are some 85,000 small shareholders in the company, many of which reside in Yorkshire and the surrounding region).

Plainly, Sirius was in a vulnerable and precarious position for bargain-hunting acquirers.

To twist and subvert the diamond-in-rough cliché, it could alternatively be said that by targeting Sirius the mining major sees a chance to pluck a pound note from a pile of muck.

Whether you view Anglo as a white knight coming to the project’s rescue or as a opportunist snatching the spoils of someone else's failed investments, is largely a matter of perspective.

Across the City, views were correspondingly mixed.

‘House’ broker says the Anglo offer vindicates past bullishness

Anglo’s interest provides vindication, and, also a path to success according to Shore Capital (joint broker to Sirius Minerals).

The FTSE 100 mining major has all the resources and capabilities to make a success of the partially built fertiliser mine, Shore Cap analyst Yuen Low said in a note.

“As one of the world’s leading miners, AAL possesses the financial, technical and marketing resources and capabilities to make a success of the project,” the analyst said in a note.

“AAL expects project development to be broadly in-line with Sirius’s revised development plan for the first two years after an offer is successfully completed. It intends to update the development timeline thereafter, optimise mine design and ensure appropriate integration with its own operating standards and practices.”

Low added that Anglo American’s takeover interest vindicates Shore Cap’s long held positive view on the mine project’s merits.

He said: “AAL said it had identified Sirius as being ‘of potential interest some time ago’, on the grounds of ‘the quality of the underlying asset in terms of scale, resource life, operating cost profile and the nature and quality of its product’.”

Shareholders will see the offer as derisory, but rejection will be risky – AJ Bell

Russ Mould, AJ Bell investment director, in a note, said: “Anglo American has appeared as a white knight for Sirius Minerals, sounding out the troubled potash miner with a 5.5p per share takeover approach.

“Many shareholders will view this as a derisory sum, thinking their investment is worth multiples of this amount. In reality, Anglo is offering what it thinks the project is worth today (plus a small sweetener), not what it could be worth when in production.

“Shareholders must think hard about the situation. Rejecting any bid – should an official offer be made by the 5 February deadline – could be a risky move as there is no certainty that Anglo would come back with a higher amount or that a bidding war happens.”

“Without a bid, Sirius remains in a very difficult position financially. Would it be better for shareholders to accept 5.5p per share when the alternative could be zero if the miner can’t raise the required money to keep the lights on?

He added: “From Anglo’s perspective, Sirius’s financial problems have created an opportunity to scoop up a development-stage project for what could be a good source of long-term revenue generation and, importantly, not have to pay top dollar to buy it.

“It has deep pockets and the skills to build large projects, suggesting it is a perfect owner for Sirius.”

Siriusly snookered – CMC Markets

Analyst David Madden, in a note, commented: “The Yorkshire based company has had a terrible time lately as the company had to postpone a bond issuance on account of poor market conditions, but the firm needs to raise cash itself before it can unlock further funding from JPMorgan.

“Sirius are in a bind, so if they don’t accept the Anglo offer they would most likely remain snookered.”

Distressed asset on the cheap – markets.com

In a note, chief market analyst Neil Wilson said: “Anglo American is to play white knight to Sirius Minerals.

“Whilst this is great news for the holdouts and many retail investors still clinging to the stock, the valuation is still barely a tenth of what it once was.”

Focussing on Anglo, Wilson added: “As one of the largest miners in the world, it has the financial clout and expertise to make this project happen.

“We also wonder whether the government may have offered certain assurances.

“The fact this offer is public could make raising cash for other sources very tricky now, if not impossible, forcing SXX into something of a corner – even if the price is not the best they will have to accept it.

“The market knows they need cash ASAP but with this offer on the table, it’s now the only show in town – they have to recommend it or it’s curtains.

“Anglo is picking up a distressed asset on the cheap.”

Disgruntled private investors and twitchy Tweets

Sirius Minerals’ rollercoaster stock market story has always been one more for individual investors and the ‘retail’ end of the stock market – largely due to the huge number of smaller shareholders on the register (approximately 85,000 holders at the peak).

It would be remis to turn a blind eye to the reactions among this passionate segment of the market.

One long-term Sirius Minerals shareholder, who emailed Proactive, begged the question of how the company’s management and advisors could justify a recommending the Anglo offer at £386mln when the group’s assets including as plant and equipment would “alone be valued at £898mln as at 30 June 2019”.

This shareholder described the price of the Anglo offer as “scandalous”.

Twitter, naturally, was host to ‘a variety of perspectives’ …

 

 

 

 

 

 

 

 

 

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