Sirius Minerals makes funding progress

Sirius Minerals plunged as much as 12% to a two-week low Thursday morning. Yes, the shares have had a stellar run this summer, but that sell-off looked overdone. It was, and buyers have emerged despite initial disappointment at limited news on crucial first stage funding for its North Yorkshire potash mine.

With all the major approvals for the mine now received, and with government backing even more enthusiastic following the Brexit vote, Sirius is in a great position. Now, however, it's the two-stage funding process of the project that's the key driver.

It's the second stage, to be made up of senior debt facilities, that Sirius is keen to talk about Thursday. This will bankroll the fit out of the mine, developing the Mineral Transport System and building the processing and harbour facilities.

Six financial institutions experienced in mining and infrastructure project finance have signed a non-binding, but mutually agreed, term sheet to arrange the financing - Export Development Canada, ING; JP Morgan; Lloyds Bank; Societe Generale, Corporate & Investment Banking; and The Royal Bank of Scotland.

Once approved, stage two financing will likely include aggregate senior debt facilities of up to $2.6 billion (£2 billion). Financial close for the facilities is expected to take place in 2018. Expect the money to come from commercial banks, export credit agencies and other money men.

Crucially, the so-called Mandated Lead Arrangers (MLAs) have also agreed to fund up to $700 million themselves, although Sirius says the initial marketing it carried out suggests further funds will be available "above and beyond the amounts indicated by the MLAs".

The Infrastructure and Projects Authority (IPA), which reports to both HM Treasury and the Cabinet Office, has also confirmed it is still interested in supporting the financing. A guarantee from the Treasury should help attract the right money.

Of course, this is not a done deal. MLAs still have to carry out due diligence and will demand credit and other business approvals, and execution of legal documentation. Government also has conditions.

"IPA requires its normal processes to be undertaken in addition to due diligence, such as satisfaction of conditions, HM Treasury credit process, risk committee, credit committee and ultimately Ministerial approval," says Sirius. A major hiccup, however, is unlikely.

Investors will also have wanted something more concrete on important stage one financing, not least because the second stage cannot begin without it. Neither can the serious building work. It's probably why the share price just sank from 41.25p to near 36p.

"The company continues to progress the stage one financing and is in active discussion with a number of parties undertaking due diligence," says Sirius. "The details of the stage one capital structure and timing will be subject to further announcement at an appropriate time."

Chief executive Chris Fraser added: "This positive step on the senior debt financing should provide stage one investors with greater clarity and confidence on the total financing of our world class fertilizer business."

WH Ireland analyst Paul Smith thinks this is all good news. "We believe that today's news shows there is appetite for a large amount of debt over the Sirius Polyhalite project and that this should provide comfort for those who are considering investing in the Stage One round - that there will be a completion of the project and the generation of the significant returns we anticipate from the project."

"We maintain our 'buy' recommendation and 60p share price target following this news, which we believe vindicates management's optimism in the financing process and validates the split of funding sources in the two proposed stages."

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.