Sirius shares fall on revised capital estimates

The Red Arrows flying over Sirius Minerals exploration drilling rig at its North Yorkshire polyhalite project
The Red Arrows flying over Sirius Minerals exploration drilling rig at its North Yorkshire polyhalite project
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Sirius Minerals, the company behind the £3.2bn Woodsmith polyhalite mine in North Yorkshire, said deals with Brazil and Europe are close to finalisation.

The firm, which is on track to deliver its first polyhalite production in 2021, also announced the signing of two major construction contracts and a revised capital estimate for the project.

However, the group's shares fell 12 per cent to 28.5p after the firm revised its capital estimate. The stage 2 funding requirement is now expected to increase by between £309m and £464m.

The company now estimates that its revised stage 2 capital funding requirement will be between £2.6bn and £2.8bn, up from the previous estimate of £2.3bn.

Sirius has entered into design and build contracts for the construction of Drive 2 and 3 of the company's mineral transport system and an Engineer, Procurement and Construction contract for the construction of the materials handling facility at Wilton.

Chris Fraser, managing director and CEO of Sirius, said: "The signing of the contracts for the remaining tunnel drives and the materials handling facility at Wilton are significant steps forward for the business with almost all procurement now complete.

"The expected increased funding requirement coming from this process reflects an optimisation of the mineral transport system tunnel design and a significantly improved risk allocation for Sirius to support the senior debt financing. The project's economics remain extremely compelling and we are confident they support the expected additional funding requirement."

Sirius has entered into a design and build contract with STRABAG for the construction of Drives 2 and 3 of the mineral transport system between the Woodsmith Mine and Lockwood Beck.

The firm said the cost of the mineral transport system contract is higher than originally anticipated. This is because it has learned more about the geotechnical characteristics of the strata following further ground investigation and seismic work.

The extra costs are to do with widening the tunnel from 4.3m to 4.9m, an increase in lining thickness from 250mm to 350mm and a commercial risk allocation which transfers construction and delivery risk to STRABAG.

Sirius has also entered into an Engineer, Procurement and Construction contract for the materials handling facility at Wilton with Jacobs UK, a subsidiary of Jacobs Engineering Group, a Fortune 500 provider of technical, professional and construction services.

Sirius said all key stakeholders remain engaged in the stage 2 financing process and due diligence is ongoing. The firm has received detailed responses from potential lenders which support a commercial debt tranche of around £1.2bn, subject to completion of satisfactory due diligence.

The company said it believes that the robust economics and cash flow potential of the project will support the expected increased funding requirement.

Commercial discussions are continuing in key target markets and the current priority is to conclude agreements in Europe and Brazil. Sirius said negotiations in both of these regions are well advanced.

A number of opportunities in other regions of the world are also progressing.

Analyst Yuen Low at Shore Capital said: "On balance, we were quite encouraged by today’s procurement and capital estimate update.

"For us, the snippet regarding coming offtake agreements was the highlight of today’s announcement. 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."

Mr Low said that 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.

"All things considered, while Sirius is currently at development stage and still some years from becoming a cash flow-generating company, we believe that an investment in Sirius should become progressively de-risked and enjoy significant value uplift as it advances towards production," concluded Mr Low.

Analyst Paul Smith at WH Ireland added: "Sirius Minerals has today provided a comprehensive update on developments at the Woodsmith mine.

"The key takeaways for us are 1) transfer of risk from Sirius to contractors as it puts many phases of work on fixed cost contracts; 2) offtake deals in Brazil and Europe are close to finalisation; 3) reduction in expected operating costs – based on new inputs; 4) a modest increase in capital cost; 5) a requirement for additional funding $400m-$600m based on understanding of new known capital contracts; and 6) debt funding is expected to be concluded by the end of the year and delivered in the first quarter of 2019.

"In light of these significant changes we will update our fair value in due course (from 60p per share). The Sirius story remains one of the highlights of the mining sector in London, and in our opinion, with its high profit margin production and strong cash flow potential, stands to deliver superior returns to shareholders."