Sirius Minerals new price target revealed

With $1.2 billion (£950 million) in the bank, Sirius Minerals can finally start thinking about building its huge potash mine on the North York Moors, which politicians hope will provide a massive boost to the UK economy. It's been a big year for Sirius, but it's still got the hard slog to come. After putting its price target under review after the successful fundraising, broker WH Ireland has just confirmed its new number.

Analyst Paul Smith still thinks the shares are worth 60p, using a polyhalite price of $160 per tonne (/t), the level agreed in firm offtake agreements. Achieve $192 and that target increases to 70p. Un-risked - which assumes the project is a 100% success - it swells to 122p.

Sirius now has $1.2 billion to build the first phase of its potash mine, thanks to an £370 million oversubscribed placing, $400 million (£315.6 million) convertible bond and US$300 million in a royalty financing deal with Australian billionaire Gina Rinehart. An open offer to existing shareholders raised £37 million.

However, the share placing at 20p was a heavily-discounted, and Sirius shares were sold off mercilessly throughout November.

Technical analyst and Interactive Investor contributor Alistair Strang warned of a possible dive to 19.5p as far back as September, with the share price at 39p. But, the shares have gravitated back to 20p after touching 17p last week and, if Smith is correct, they currently offer 200% upside from here.

It will cost $3.6 billion to build the mine near Whitby, with the capacity to produce 10 million tonnes of polyhalite each year. Costing $2.4 billion, the second phase will be financed through senior debt - six lead banks have already agreed to underwrite $700 million. Once the initial build work starts, Sirius will need the cash for mine infrastructure, process plant and port, and underground Mineral Transport System.

When it's producing and cash is flowing, Sirius will fund further capacity expansions to 13 million tonnes per annum (Mtpa) and then 20Mtpa itself. This will provide "obvious" upside as operating costs reduce and economies of scale feed through, says Smith.

At 13Mtpa capacity, the flagship project should break even with polyhalite priced at $80/t, much less than WH Ireland’s current estimate of $160. At this "conservative" price, the mine will be capable of consistently generating over £1 billion of EBITDA (cash profit) every year at industry-leading margins.

"We are mindful at this stage that there are several hurdles to cross before we can mix our valuation methodology (finalisation of Phase 2 funding, construction, commissioning and further market development)," admits Smith, "but feel that once Sirius has the project in production and all construction and commissioning risk has gone then Sirius will be valued differently as a steady-state producer of cash.

"We see value in Sirius not only by capital appreciation as the project goes through the construction and commissioning cycle and de-risks and starts generating cash, but also on the dividends we anticipate it will pay in the 100-plus years mine life to come. The dividend returns on a company with a mine generating ~£1 billion in operating cash flow should be significant."

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.