Sirius faces scepticism as update divides analysts

Shares in Sirius Minerals were temporarily suspended after falling more than 27% in early trading on Thursday but several brokers remained optimistic about the company's prospects as it looks to develop a polyhalite mine under the North Yorkshire moors.

The FTSE 250 firm revealed on Thursday that higher than expected costs of the contracts to develop the mine's mineral transport system would lead to the project's stage two capital requirement estimate increasing $570m to almost $4.2bn, meaning the Stage 2 funding requirement is now expected to be $400-600m higher at $3.4-3.6bn and come in the first quarter of next year rather than the end of this year.

Broker Peel Hunt noted that the majority of the increase is the MTS contract which has blown out 70% from the initial estimate of $858m to $1,461m.

"Investor's concerns from this point should focus around the issue that there is still some major procurement ahead. Management has guided that it expects the remaining items will be in line with previous estimates, but after today's news this will be viewed with scepticism and an equity issue is listed as a potential route to cover the budget shortfall."

However, part of the increased cost of the MTS contract was a "significantly improved" commercial risk allocation which transfers construction and delivery risk to contractor Strabag, who now take on construction risk provided ground conditions sit within an agreed geotechnical baseline.

On a call with analysts, Sirius chief executive Chris Fraser said “we'll be looking to strategic partners” and mentioned the possibility of “bringing in a partner with a bigger balance sheet”.

Depending on the ultimate financing solution agreed, Liberum, one several house brokers, said its conservative pricing and cost profile led to a new base-case scenario involving a further $400m of equity being raised, via either a strategic, equity or convertible at 30p, which reduces its NPV per share estimate from £1.08 to between £0.75 and £1.00, and reduces its diluted NPV/share estimate to 84p.

Liberum cut its target price to 50p from 60p based on 0.6x ratio of price to net present value, but keeping it 'buy' rating with the shares trading at a major discount to its NPV range.

Another supportive point, Liberum pointed out, was that the project is de-risking with Sirius also revealing that talks were at an advanced stage over agreeing 3m tonnes per annum (Mtpa) worth of offtake agreements in Brazil and Europe, "by the end of October", and confirming that bank responses support a $1.5bn commercial lending tranche and transfer of risk in the new capex quotes.

House broker Shore Capital noted that Sirius now only plans to achieve 13Mtpa by 2026 and 20Mtpa in 2029 rather than 2025 and 2028 respectively expected due to the expectation that senior debt facility terms will restrict the use of operational cashflows in funding said capacity expansions.

But analyst Yuen Low was, on balance, "quite encouraged" by the update, saying if the Brazil/European offtakes come through they "could see shorts & doubters roasted, we believe".

He was reassured by Sirius’s Stage 2 funding requirement being "based largely on signed contracts, with the remainder estimated on the basis of pending contracts", with his understanding that two-thirds of costs are fixed rate and much of the remainder are on ‘target price’ bases. "Accuracy of, and confidence in, the numbers should therefore be much higher – with positive implications for financing," he said.

Operating costs are now lower too, he pointed out, with 10Mtpa at $29.4 per tonne free-on-board and 20Mtpa at $27.4/t, he pointed out, versus the 2016 estimates of $32.6/t and $27.6/t, as higher power rates have been offset by an updated mine plan, reduced binder costs for granulation, and lower port outsourcing charges following the handling agreement.