Sirius Minerals attracts bargain hunters after early crash

A brief but dramatic slump had investors piling into Sirius Minerals Thursday. Lee Wild explains what happened and why.

After years of digging around in the North York Moors, convincing both government and locals to back Britain's biggest mine in decades, and raising money to start the project, Sirius Minerals looked to be home and dry. However, a hiccup announced Thursday has just wiped a third off the share price. 

Sirius shares, always volatile, had risen around 40% in 2018 up to last night's close, repaying patient investors in spades. Yet, after reaching a two-year peak recently, they plunged by as much as a third to a low of 22p Thursday.

That's because Sirius now says it will need $3.4-$3.6 billion for stage two funding of the project, or $400-$600 million more than first thought. It needs the extra development spend – possibly from a strategic partner, contingent funding or structured capital - for wider tunnels and thicker lining in its mineral transport system (MTS).

We'll also have to wait until the first quarter of 2019 before final stage two financing is in place rather than late 2018. And, while first polyhalite, or potash, is still expected in 2021, it will take until 2026 to reach production of 13 Mtpa (million tonnes per annum) and 20 Mtpa in 2029, longer than expected. Anticipated restrictions imposed by senior debt terms on use of company cashflow to fund project expansion are blamed here.

However, there is plenty of good news in this latest update, and there were plenty of buyers of Sirius stock at today's lower prices. Indeed, buyers outnumber sellers on the interactive investor platform by 3:1.

Source: interactive investor      Past performance is not a guide to future performance

Sirius says it's agreed contracts for the construction of Drive 2 and 3 of the MTS and an engineering, procurement and construction (EPC) deal to build the materials handling facility at Wilton, which "substantially completes" the procurement process.

"The expected increased funding requirement coming from this process reflects an optimisation of the MTS tunnel design and a significantly improved risk allocation for Sirius to support the senior debt financing," chief executive Chris Fraser tells us. "The project's economics remain extremely compelling and we are confident they support the expected additional funding requirement."

Because two-thirds of costs are fixed and the rest largely on 'target price' bases, "accuracy of, and confidence in, the numbers should therefore by much higher – with positive implications for financing," argues joint house broker Shore Capital.

It also points out that operating costs at both 10 and 20 Mtpa are now lower, and that the company's estimate of net present value (NPV) at 20 Mtpa is still $14.9 billion.

Source: interactive investor      Past performance is not a guide to future performance

"For us, the snippet regarding coming offtake agreements was the highlight of today's announcement," writes ShoreCap analyst Yuen Low. "In our experience, it is unusual for Sirius to be willing to 'jump the gun' so - we interpret this as an indication of the company's confidence in its ability to successfully close these key agreements shortly.

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"Concluding these agreements could also neuter a line of attack much favoured by detractors and short sellers: questioning the ‘quality’ or creditworthiness of Sirius’s Chinese offtakers. Excluding the Chinese deals, Sirius would still have 6.2 Mtpa of peak contracted volume."

Sirius is still at the development stage and won't be generating cash flow for years. However, ShoreCap believes "an investment in Sirius should become progressively de-risked and enjoy significant value uplift as it advances towards production".