17th Mar 2016 14:43
LONDON (Alliance News) - Sirius Minerals PLC Thursday said it will have to spend billions of dollars to build its huge potash mine in York, but said the project could deliver billions of dollars in earnings once it is up and running in 2021.
Sirius Minerals shares were trading down 25% to 17.16 pence per share on Thursday afternoon.
"The business that is created from this project will sit as a world leader in the fertiliser industry based here in the UK," said Chris Fraser, managing director and chief executive of the company.
"The definitive feasibility study represents the blueprint to bring this global fertiliser business into large-scale production and successfully delivers on the core strategic vision of the company to become a major low cost producer of multi-nutrient fertilisers," he added.
Sirius is proposing to initially build a project capable of producing 10.0 million tonnes of polyhalite per year for an initial capital cost of USD1.63 billion, before ramping up production to 20.0 million tonnes a year by spending a further USD1.93 billion.
"Work is advancing with our financing partners globally to bring together the pieces of the initial financing of this project. This process is expected to take a number of months but certain parts of the early construction activity, such as highways upgrades, are commencing soon to facilitate an efficient start of the project," said Fraser.
Sirius plans on the first phase of financing to be comprised of equity, either from strategic partners or ordinary equity, plus structured debt.
"It is the intention of the company to seek conditional commitments from the structured debt providers first and then to complete the required equity component to satisfy the conditions of the debt commitments," Sirius Minerals said.
"The company's goal is to secure this funding as soon as possible to enable construction to commence. Discussions have been underway for a significant period of time with providers of the structured debt and also potential equity investors," the company added.
The second phase of financing is expected to be derived from a project finance facility or a high-yield senior bond, as Sirius believes the project will be significantly de-risked by then. Sirius said that financing "may or may not" include an Infrastructure UK guarantee, for which the company pre-qualified in September 2015.
Sirius said it is working with Societe Generale as its financial advisor for the second phase of financing, and believes it could secure a 14-year debt facility or secure a high-yield bond of USD2.50 to USD3.00 billion.
Sirius has a cash balance of USD25.0 million at present, and on top of the capital expenditure needed the project will need around USD20.0 million a year in sustaining capital expenditure.
Initial production is expected to start in 2021, but the project is not set to reach that initial 10.0 million tonnes a year until 2023. After hitting the 10.0 million tonne mark, production will increase to 13.0 million tonnes a year before potentially rising to the 20.0 million tonne target.
Sirius said site preparation and pre-sink activities will take 22 months whilst the main shaft sinking activity would take 36 months - meaning the project is set to take at least four years and ten months to construct before any polyhalite is extracted.
"Currently there is a limit of 13.0 million tonnes per annum of production imposed by a planning condition on the North York Moors National Park Authority approval," said Sirius.
"The company is confident that, given the expansion to 20.0 million tonnes per annum will be largely achieved through utilising the infrastructure constructed for the initial capacity, there will be limited environmental impact arising from the tonnage increase and therefore an application to vary the planning condition to allow for the increased tonnage would be granted as required," said the company.
Importantly, Sirius has already secured numerous offtake partners for its product, even though production is years away. The company has offtake agreements covering 3.6 million tonnes a year for the first 5 to ten years, and said it has other agreements that could push that up to 7.9 million tonnes a year.
Sirius said it was confident of securing more offtake agreements whilst construction is ongoing.
The project currently has a net present value of USD15.00 billion - a huge valuation for a company that only has a market cap of around GBP531.0 million. Once production begins, Sirius believes the net present value will rise to USD27.00 billion.
The miner is hoping the operation can generate annual earnings before interest, tax, depreciation and amortisation of between USD1.00 to USD3.00 billion per year, and said the variation depends on what the final volume and price achieved by the project.
Specifically, Sirius' estimates suggests a 10.0 million tonne a year operation would generate Ebitda of USD201.0 million in 2022, before rising to USD1.36 billion the following year.
If the expansion to 13.0 million tonnes a year was completed in 2024, annual Ebitda would be around USD1.83 billion before rising to USD1.89 billion in 2025.
If it then gained approval and expanded the operation to 20.0 million tonnes a year in 2026, that annual Ebitda would rise to USD2.65 billion before heading onto Ebitda of USD3.39 billion in 2028 and USD4.11 billion in 2030.
Sirius is using a high-margin model, stating its cash operating costs will only be around USD27.2 per tonne, giving it a cash margin of around 70% to 85%, it said.
That is based on average prices over the first ten years of the project being around USD166 per tonne over the first ten years of production, and an average price over the life of the mine of USD186 per tonne.
Sirius has conceded it is using a "disruptive market penetration strategy" with the York project, and believes it can produce a premium product compared to existing products in the market.
By Joshua Warner; [email protected]; @JoshAlliance
Copyright 2016 Alliance News Limited. All Rights Reserved.
Related Shares:
Sirius Minerals