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Sirius Minerals' FTSE 250 elevation underlines growing market confidence in the Yorkshire project

'Progress on offtake deals is the main catalyst to further stock re-rating'
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Future agronomy studies will be customer specific

Sirius Minerals PLC’s (LON:SXX) promotion to the FTSE 250 underlines the superfast progress made by the company since its York Potash project was given the planning go–ahead.

It means the company is now playing in the stock market big leagues with major institutional investors and many more analysts assessing the potential.

So far, the transition has been smooth with the company now valued at about £1.3bn, reflecting a further jump since the company left AIM to join the main market at the end of April.

A number of analysts have already visited the site near Scarborough and reports coming back have been encouraging.

Earthworks underway

Work has started on ground preparation with Shore Capital’s Yuen Low noting that Sirius is negotiating what he described as “pain-gain” sharing agreement with the contractor sinking the shaft of the giant polyhalite mine.

This would ensure the contractor is rewarded for finishing the job promptly, but penalised if work drags on.

The analyst also said minehead plans could reduce the complexity (and by extension the cost) of the project, while there may also be a low cost-alternative to the building from scratch an export facility on the River Tees.

For the Redcar Bulk Terminal (RBT) may be a viable, ready made option following the closure of the local steelworks.

“The use of RBT would remove/reduce the need to develop port facilities at Sirius’s adjacent greenfield Bran Sands site, in turn lowering tolling rates payable by Sirius (port financing/construction and operations are to be outsourced),” said Low.

“Repositioning of Sirius’s Teesside facilities next to the harbour could result in further savings.”

Low is a buyer of the share with a net present value-derived 65-82.5p price target range.

Offtake deals a key catalyst for shares

He also believes that in future offtake deals can be achieved better pricing terms.

We came away from the site visit with the encouraging impression that new take-or-pay agreements could see lesser discounts than offered in the past.

“If this indeed proves the case, the current contracted volume target of 7Mtpa to support Stage 2 financing might potentially be reduced, which should have the effect of improving Sirius’s upside potential. 

“While Sirius is currently at development stage and still some years from becoming a cash flow-generating company, an investment in Sirius should become progressively de-risked and enjoy significant value uplift as it advances towards production.”

'Night and day' after financing

Richard Knights, at house broker Liberum and another of those to have visited the site, said Sirius is now undertaking multiple, detailed conversations with major potential offtakers. The miner has so far secured 3.6mln tonnes of binding offtake agreements and is aiming towards 7mln tonnes, he said.

Progress here is the main catalyst to further stock re-rating, he believes, with the mood transformed since Sirius completed a US$1.2bn financing last year for stage one of the project.

 

 

 

Polyhalite proving its worth

Agronomy programmes across the globe meanwhile continue to support the efficacy of the polyhalite product compared to traditional fertilisers said Sirius with new studies to be customer specific going forward.

Mining to Dining

Last year and ahead of its US$1.2bn funding Sirius agreed a financing deal worth up to US$300mln with Hancock Prospecting, the company controlled by billionaire Gina Rinehart.

Under the terms of the agreement, Hancock British Holdings is acquiring a 5% royalty on the first 13mln tonnes of fertiliser produced every year and 1% on anything over that output figure at a cost of US$250mln.

According to Shore Capital the Hancock investment fits snugly with Rinehart’s ‘mining to dining’ strategy.

The billionaire’s company is best known for its iron ore operations in Australia’s Pilbara region, where it runs mines with Rio Tinto. but in recent years has been investing in agricultural assets.

In partnership with a Singapore investor, it bid A$365mln for a cattle operation spanning an area (almost) the size of Scotland.

“Hancock’s recent focus on agriculture was the result of it identifying a fast-growing Asian demand for higher-quality foods," said Shore analyst Low.

“We believe that Hancock identified an investment in Sirius as a logical, complementary extension of this strategy.”

Low, in a note, said significant tracts of farmland in Asia suffer low productivity due to salt-induced degradation.

Sirius converts bonds...

Siris has revealed that more of its stage one financing convertible bonds have been exchanged for shares.

The bonds were announced last November and issued at US$200,000 each to raise a massive US$400mln as part of the financing for the project - believed to be the world's largest high-grade known deposit of polyhalite - used as a fertiliser.

The bonds are due in 2023 and with today's announcement, 16.75% of them have now been converted into ordinary shares in Sirius.

Put another way, that's 335 bonds at a value of US$67mln, and over 217.8mln Sirius shares have been issued as a result.

Effective fertiliser...

For Sirius, and its polyhalite product, this is significant as studies have shown the fertiliser is particularly effective in such conditions.

“Polyhalite’s multi-nutrient and low-chloride make-up is of particular benefit to high-value chloride-sensitive fruit and vegetable crops for which there is growing demand from increasingly wealthy Asian populations,” he said 

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