Interactive Investor

Sirius Minerals to move dial on UK GDP

17th November 2016 13:42

Harriet Mann from interactive investor

It's been another busy month for Sirius Minerals. The wannabe potash miner has secured its first $1.2 billion (£963 million) of funding for the North York Moors project, and it's looking stronger than ever. There's still second-phase financing to secure but, with a big chunk of this already underwritten, the future looks bright, reckons broker WH Ireland.

A $400 million convertible bond, $300 million royalty finance agreement with Aussie billionaire Gina Rinehart, and £370 million share placing raised the first phase cash. An open offer for existing shareholders, ending soon, will raise £37 million.

An AIM minnow with a long road ahead until production, it's obviously great news for Sirius that the placing was oversubscribed, although the 20p placing price did disappoint. This is testament to the hard work management has put in over the last few years to get the project signed off and win over investors.

"Management has made a strong case for the project to UK investors over the past couple of years overcoming several (seemingly) insurmountable hurdles - not least the permitting of a major industrial project in a UK National Park," says WH Ireland analyst Paul Smith.

Sirius reached a peak of 52.5p this summer before unwinding its first-half gains. Now at 21p the shares have lost half their value, slipping 2% Thursday as investors wait for the general meeting to see if the financing is waved through.

House broker WH Ireland, which has unsurprisingly viewed Sirius as undervalued for a long time, puts its 60p price target under review for the same reason.

Assuming a polyhalite price of $150 per tonne, Sirius expects annual turnover of about £2.3 billionWith this $1.2 billion in the bag, Sirius can fund site preparation costs, mine shaft excavations, tunnel caverns and project management.

Six banks have also agreed to underwrite $700 million of the remaining $2.6 billion needed to complete the project.

The second phase of financing will go to building the mine, process plant and port, developing the underground Mineral Transport System and completing the final stages of the infrastructure.

Assuming a polyhalite price of $150 per tonne, Sirius is looking at an annual turnover of about £2.3 billion when it's up and running, with cash profit of £1.8 million and a cash profit margin of 78%, we've previously reported.

Investment case stands

Despite the autumnal turn in sentiment, the fundamental investment case still stands, argues Smith.

Sirius will mine high grade polyhalite ore for at least 50, possibly over 100 years, he says. Its use as a natural fertilizer already proven, the ore doesn't need much processing after it's been taken from the ground, and offtake agreements worth 3.6 million tonnes a year have already been signed.

"This project will move the dial on UK GDP before any of the expected upside flows through from increases in polyhalite price to at least nutrient value, possible expansion and production of by-product rock salt utilising the same infrastructure," says Smith.

"We are of the opinion that the North York polyhalite project is a good long-term investment and believe that management has the right team in place and has selected best-in-class contractors to complete the build to schedule.

"We maintain our 'buy' recommendation today but place our target price under review as we wait for the General Meeting to pass the required resolutions," the analyst concluded.

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.