George Salmon, Equity Analyst 9 August 2019
Shares in Sirius Minerals fell 29% on Tuesday after the company released a brief statement to say it had cancelled a $500m bond offering due to current market conditions.
Getting the bond away is crucial to the group gaining access to a revolving credit facility (RCF) from JPMorgan. That will finance its plans to construct a functioning polyhalite mine under the North Yorkshire Moors National Park.
Polyhalite is a naturally occurring mineral, and the group thinks it has got the potential to revolutionise modern agriculture.
What does the delay mean?
Because Sirius doesn’t yet generate any cash, it needs to finance its project with external funding. The bond’s cancellation raises questions about where the funding is going to come from, and with the RCF offer expiring in September, there’s a time element to the problem too.
Management say the bond can still be launched later before the end of September deadline. The plan is to regroup after the current choppy waters around the US-Chinese trade dispute have settled.
But the importance of the cash means there has to be a plan B.
If the bond launch doesn’t go through as planned, logic dictates Sirius has 3 options.
- Renegotiate with JP Morgan and come back for funding at a later date.
- Fund the project by selling new shares, possibly involving a large strategic investor.
- Modify the terms of the bond to make it convertible into shares. This would potentially entice extra investment because it would enable financers to enjoy more potential upside.
The first is not very practical. Not only would it push back the transition to profitability, but the group would soon run out of cash. £371m flowed out of the company last year in capital expenditure and operating cash costs, and more spending is needed to get the mine up and running.
As at the year end, the group’s net cash reserves were only £230m. Further funds have since been raised, but not enough to cover the required spending for long.
The latter two options are complicated by the fact that existing shareholders and creditors would need to be onside, which is by no means guaranteed. And while potentially enabling the group to press on as normal, both would mean further dilution for existing shareholders.
None of the alternatives are that palatable. If Sirius can launch the bond soon that would be a huge relief for investors.
What’s the good news?
Well, there’s no suggestion the project is facing delays, provided the funding is secured. And the group’s arrangements with buyers aren’t at risk either. As a reminder, the group has secured buyers for 11.7Mtpa of polyhalite at average prices of around $140-150 per tonne. That compares to expected production costs of $30. So if production can get going without any hitches, and at the moment that’s a big if, it has the potential to be highly profitable.
Where does this leave investors?
All investments strike some balance between risk and reward. In Sirius’ case, that has always been rather heightened. On the one hand there’s the potential for 100 years of production of a potentially revolutionary and high margin product. On the other there’s the risk the project never gets off the ground.
This clearly changes the picture. Investors can still hang on to the enticing prospect of a highly profitable operation after production ramps up from 2021 and beyond, but quite how Sirius gets there is now far from certain.
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