Berenberg lowers target on Sirius Minerals, but believes financing package will succeed

Berenberg lowered its target for Sirius Minerals's share price from 40p to 35p after incorporating the structure of the potash miner's long-awaited stage two financing for its Woodsmith polyhalite mine into its valuation model.

And while the financing package cleared "some" of the hurdles around the project, the German broker was quick to point out that it "by no means guaranteed" the necessary funds and that Sirius remained in a "crucial" phase of securing the monies that it needed.

"While this package goes some way to de-risking the viability of the project, the composition and terms of the package did not match with our best-case scenario and still present some uncertainty about mid-term financing, although less than previously," Berenberg said.

The funds from the convertible would be held in escrow until the revolving credit facility had been secured, which in turn hinged on the successful sale of $500m in high yield bonds.

Should Sirius fail in the above "there is no guarantee that alternative methods of financing can be secured, and as such the company will again run into cash flow issues."

Nonetheless, Berenberg was confident in the company's ability to pull-off the debt sale, albeit likely "at an elevated interest cost" and kept its recommendation at 'buy'.

More fundamentally, the broker said it remained "positive" on the project's longer-term attractions, estimating that even on conservative assumptions it could generate an internal rate of return of 15%.

Berenberg was also positive on the long-term business case for the firm's POLY4 product, saying that it was a cheaper alternative for struggling farmers to fertiliser products such as sulphate of potash and outing its potential yield benefits, particularly for higher value crops.