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Sirius Minerals PLC

Sirius Minerals: no potash at the end of the rainbow?

We could end up with a useless hole in the ground that is so expensive, even Robbie Williams would baulk at paying for it.

Polyhalite
The fertiliser has hit the fan

Do you want the bad news or the good news about this morning's half-year report from potash project developer Sirius Minerals PLC (LON:SXX)?

The bad news is there was no good news – at least, no good news anyone cares much about.

Sure, the FTSE 250 (but not for much longer) company highlighted “significant progress” across all construction sites and that construction activity has progressed in line with 2019 full-year guidance.

When it comes to the Jerry Maguire test (“Show me the money”), however, progress has come to a juddering halt. Never mind Jerry Maguire; the film that comes to mind is the 1986 Tom Hanks & Shelley Long comedy, The Money Pit.

With the company yanking its proposed issue of US$500mln of loan notes, the group's stage 2 financing has unravelled.

The company needed to get away the bond issue in order to gain access to a US$2.5bn revolving credit facility from the London branch of US investment bank, JP Morgan.

Sirius has said it will slow down the pace of development at its Woodsmith mine in North Yorkshire and has admitted that it will need to secure additional external financing in order to allow it to continue operations after 31 March of next year.

In short, we could end up with a useless hole in the ground that is so expensive, even Robbie Williams would baulk at paying for it.

Will the government dig the company out of a hole?

Not when it has got other infrastructure projects, such as HS2, the UK's controversial high-speed rail network, to pay for.

All the company was asking for was a loan of a billion quid from the government but it was a no-go from BoJo.

"We cannot comment on commercially sensitive matters," a government spokesperson said.

"All requests for financial support must meet necessary lending criteria. When examining any request for financing, we have to assess the potential of a project against the need to protect taxpayers’ money," the spokesperson added.

The company has off-take agreements in place, including a 10-year supply and distribution agreement with BayWa Agri Supply and Trade BV for up to 2.5mln tonnes per annum (tpa) of its POLY4 fertiliser product in Europe plus a take-or-pay supply agreement with IFFCO for the supply of up to 1mln Mtpa POLY4 in India.

Those agreements offer rays of hope for the future of the company as it undertakes a strategic review of its options that could take up to six months.

As at the end of last month, the company had £180mln of unrestricted cash reserves, which it says provides sufficient liquidity for it to explore all strategic options during the strategic review.

"The company will now conduct a comprehensive strategic review over the next six months to assess and incorporate optimisations to the project development plan and to develop a different financing structure for the funds required,” said Chris Fraser, the managing director and chief executive officer of Sirius.

“This is the most prudent decision to give the company the time necessary to restructure its plans to move the project forward. The process will incorporate feedback from prospective credit providers around the risks associated with construction and will include seeking a major strategic partner for the project,” he added.

With around 6.1% of the company's shares sold short – the process where traders borrow the company's shares from institutional investors and sell them in the expectation of buying them back cheaper later – in the market, this catastrophe does not come as a complete surprise.

More charitable observers commend the company for having walked the tightrope successfully for so long; there were similar doubts concerning its chances of getting stage 1 financing away, while the engineering feat required to (partially) build the mine while not blighting an area of natural beauty should not be underestimated.

The fact remains that a lot of people have backed the dream and, depending on the price they got in at, that dream has turned into a nightmare.

Some 14 years ago, the shares were trading at 6.46p; three years ago they hit 45.23p; today the shares slumped to 2.1p at one point, before recovering to 4.875p, which is roughly half of last night's closing price.

Today's share price volatility suggests that opinions are still divided on whether the company has a future as an independent entity.

With a General Election possibly on the horizon, a publicity campaign to prompt a government rethink on backing for the project might gain some support but whether it will change the government's mind … well, I would have to check how many marginal constituencies there are in the Teesside and North Yorkshire area before I would venture an opinion on that.

 

READ MORE: Sirius Minerals’ financing falls apart amid Brexit bond turmoil

Quick facts: Sirius Minerals PLC

Price: 3.36 GBX

Market: LSE
Market Cap: £234.31 m
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