Sirius Minerals: Buyers pile in as JP Morgan backs deal

Down as much as 22% to a two-year low, Sirius Minerals insiders expect a major re-rating of the shares.

For Sirius Minerals (LSE:SXX) and the army of small shareholders who remain captivated by the potential of the company's giant UK mining project, the moment of truth has finally arrived.

Today's announcement of a stage two financing package worth US$3.8 billion to fund the construction of the polyhalite mine in North Yorkshire represents the start of a make-or-break few weeks in this epic, decade-old story. The disclosure of a plan backed by JP Morgan Cazenove is also a huge relief, given that funding was in doubt beyond the current quarter.

An underwritten equity raise of $400 million is taking place immediately and should be sufficient to last the company until September. Sirius is also planning to raise $400 million from the sale of convertible bonds this summer, with the US bank providing a £2.5 billion revolving credit facility.

House broker Shore Capital summed up today's developments as a crucial juncture for the company: "Successfully securing the stage 2 financing is effectively key to unlocking Sirius's vast potential, and we expect should catalyse a major re-rating of the shares."

While Sirius would still be some years from becoming cash generative, Shore's Yuen Low said an investment in the company would become "progressively de-risked and enjoy significant value uplift as it advances towards production".

That optimism appears to be mirrored by many investors today, with Sirius the most traded stock on the interactive investor platform this morning. The vast bulk of Sirius activity involved buying the stock, which was at two-year low as a result of the placing and open offer of shares.

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The equity fundraising at a price of between 15p and 18p represented a discount of up to 32% on last night's closing price. While analysts at Berenberg said the equity element of the funding may have come as a surprise, they said this was a "long-term positive for the project's viability". 

Initially, stage two funding was set to be funded by debt but talks with lenders were put on hold in order to pursue the alternative financing proposal from JP Morgan Cazenove. The total of $3.8 billion covers capital expenditure for the whole project, with the Woodsmith mine set to deliver its first polyhalite by the end of 2021. From there it will be transported underground to a materials handling facility at Teesside.

Sirius chief executive Chris Fraser said:

"Today's announcement provides a clear pathway to a fully financed project in the months ahead, while enabling us to progress construction at full speed."

The company hopes the Woodsmith mine, located south of Whitby, can reach output of up to 20 million tonnes per annum.

In annual results also published today, Sirius said £391 million had been deployed in 2018 for the purposes of developing the project. It also reported success in sales and marketing of POLY4, with aggregate peak contracted supply agreements for the polyhalite fertilizer productat a bigger-than-expected 10.7 million tonnes per year.

Polyhalite is an evaporite mineral comprising a natural combination of four of the six macro-nutrients that are essential to plant growth — potassium, sulphur, magnesium and calcium. The North York Moors area is believed to be the largest high-grade known resource of polyhalite to be found anywhere in the world.