Anglo American Plc’s (LON:AAL) “experimental M&A” move for Sirius Minerals Plc (LON:SXX) is unlikely to be rewarded, so says UBS mining analyst Myles Allsop who has repeated a ‘sell’ rating following Wednesday’s surprise £386mln approach.
With a perhaps more pointed critique Allsop claimed the targeting of stalled UK mine developer raises questions over Anglo’s capital discipline.
On Wednesday, Anglo American confirmed it had approached Sirius and was in advanced talks, which could see Sirius recommend a takeover offer of £386mln (5.5p per Sirius share).
The FTSE 100 constituent revealed that it had been interested in the Sirius Minerals fertiliser mine project for “some time” due to its potential quality, scale, resource life and cost profile.
It has until 5 February to make a formal offer for Sirius.
UBS analyst Allsop notes that Sirius has been in difficulty since failing to secure Phase II project financing for its polyhalite fertiliser mine project – a deep mine targeting a 13mln tonnes per year with a 2022 start up – which also requires the development of an underground 37 kilometre mineral transport tunnel to port facilities that also need to be built.
“Sirius has spent $1.1bn on the project so far & estimates an additional $3.1bn is needed to complete the project,” Allsop pointed out.
Moreover, the analyst details uncertain over pricing polyhalite – essentially a new ‘potash’ / fertiliser product.
“Polyhalite is a multi-nutrient mineral fertilizer consisting of sulfate (c50%), sulfate of potash (c15%), magnesium sulfate (c5%) & calcium sulfate (c15%); it is a low chloride alterative to potash so expected to be a good fertilizer for fruit & veg.
He added: “Polyhalite is a very small market (c700kt) with Israel Chemicals being the only producer at its Boulby mine (also in Yorkshire).
“Sirius values the project using a price range of US$100-200 per tonne with a base case of US$150/t vs the current price of $100-120/t.
“There is significant uncertainty on the long-term price of polyhalite & whether there will be demand for 13Mtpa of this new product; Sirius has signed supply agreements with potential customers totalling 12Mtpa but pricing terms/ level of commitment is unclear.”
UBS already had a ‘sell’ rating on Anglo American with a 1,800p price target implying some 16% downside to the current price of 2,136p.
Concluding his note Allsop added: “Anglo believes Sirius "has the potential to be a tier 1 asset" & provides more late cycle commodity exposure; it expects to add value operationally & with financing.”
In our opinion, this transaction is a small incremental negative given the project & commodity price risk (albeit it has the potential to generate a robust IRR/ NPV if prices are >$120/t); Anglo has other attractive growth options (eg Mogalakwena, LosBronces, Collahuasi) in addition to Quallaveco; the transaction raises questions about capital discipline.