The Sirius Minerals Plc (LON:SXX) business could represent around 6-9% of Anglo American plc’s (LON:AAL) group earnings by 2026, according to mining sector analysts at Barclays, who see the Yorkshire fertiliser project as a “decent asset”.
Anglo surprised the market yesterday as it confirmed it had approached Sirius and was in advanced talks, which could see Sirius recommend a takeover offer of £386mln (5.5p per Sirius share).
The FTSE 100 constituent revealed that it had been interested in the Sirius Minerals fertiliser mine project for “some time” due to its potential quality, scale, resource life and cost profile.
In a stock market statement, it added: “The project has the potential to fit well with Anglo American's established strategy of focusing on world-class assets, particularly in the context of Anglo American's portfolio trajectory towards later cycle products that support a fast-growing global population and a cleaner, greener, more sustainable world.”
Such sentiments were similarly reflected by Barclays analyst Ian Rossouw who, in a note, pointed out that Anglo has “broken ranks” from the other diversified miners, potentially picking up a “distressed asset in a new commodity”.
He commented: “Strategically it would be an intriguing move, taking AAL into the agriculture space, reorienting the portfolio away from the Chinese steel supply chain towards ‘consumer’ exposure and population growth as a demand driver.”
Whilst describing Sirius and its fertiliser project as a “decent asset” – with a 44-year mine life, low operating costs and 64-74% earnings margin – that would be at the upper end of Anglo’s portfolio, the analyst also identified commodity pricing as the key risk.
On one hand, Rossouw noted that Sirius assumes significantly higher pricing for its polyhalite fertiliser than currently seen in the market.
At the same time, the analyst more broadly also has a negative view on ‘potash’ fertiliser prices in the future, with technological advances anticipated to dampen the demand growth story.
“The US has seen major gains in ag yields due to technology, but potash consumption has grown much more slowly – we believe a similar scenario is likely to replicate in EM over time, leading to slower potash demand growth,” he said.
“Agriculture technology yield gains will likely also keep food supply/demand in check and hence prices, which have 70% correlation with potash prices.
“While delayed versus original estimates, there is still meaningful new capacity ramping up. With two new market entrants, we worry that pricing discipline may not be as strong going forward.”
Rossouw, however, still reckons the commodity price risks are overcome by a “low proposed acquisition price.”
Anglo American now has until 5:00pm on 5 February to make a formal offer for Sirius.