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The year Sirius Minerals came of age

We look at what was achieved last year, and the next steps for the group.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

2017 was a huge year for Sirius Minerals. Last week’s full year results seem like an appropriate time to reflect on progress at the North Yorkshire fertiliser miner, and what comes next.

Breaking Ground

Since 2010/11 Sirius has been focused on developing the world’s largest polyhalite mine (an experimental fertiliser), right under the North York Moors National Park.

In years past the company was a bit of an all or nothing investment. Would management be able to convince authorities to approve their plan, and then could investors be persuaded to fund it?

Despite initial scepticism, the group’s cleared all the regulatory hurdles, and 2017 saw it finally break ground on the main mine shaft. Sirius expects a newly agreed design to speed up the process, reducing the time to first polyhalite.

Having completed first stage fundraising, the company moved to a Main Market listing and joined the FTSE 250 in June.

In short, Sirius has come of age.

Sirius Minerals share price and charts

What now?

Despite the progress in 2017 there’s still a lot to be done. Sirius doesn’t expect to be producing Polyhalite until 2021, and won’t hit its medium term production target of 10 megatonnes a year (mtpa) until 2024.

2018 will see the group begin construction on most of the major components of the mine and supporting infrastructure, including the 37km tunnel needed to remove material while protecting the national park.

Sirius is also targeting new sale agreements for 2 mtpa of polyhalite this year. Current agreements cover up to 9.15 mtpa and should mean the group has a ready market for its product when it does start production.

However, the big news in 2018 is likely to be preparation for and completion of phase II funding. Unlike previous funding rounds, phase II is expected to be 100% debt and will provide up to $3bn, sufficient cash to see the group through to a completed mine.

Sirius Minerals share price and charts

One for the patient long term investor

Once up and running, Sirius believes it will be able to produce at around $32.60 a tonne, while the market price is expected to be $125/tonne. A very healthy profit margin.

There’s enough polyhalite in the ground for the mine to produce for 100 years or more. Depending on volumes (production could be as high as 20 mtpa) and exact market price, Sirius thinks EBITDA (earnings before interest, tax, depreciation and amortisation) will be between $0.7bn and $3.4bn a year.

That kind of cash flow could be very attractive to investors, especially once the debt needed to build the mine has been repaid. All being well, there’s potential for a substantial, and sustained, dividend payout.

However, even if all goes to plan that future is still some way off, and in a complex project like this there’s a lot that can go wrong.

It’s three years until production starts, and six until the ramp up is complete. If the group encounters serious delays, the debt needed to fund the project could become an increasingly heavy burden. Debt repayments will make significant demands on cash in the early years in any case, potentially limiting the scope for returns to investors.

We think all investments should be made with a long term view. But with Sirius that is truer than ever. The shares will be volatile over the years ahead, and price movements are likely to be news driven - since a lack of sales makes the group difficult to value.

Sirius Minerals share price and charts

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.

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Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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