London listed Sirius Minerals PLC is a UK based fertilizer development company focused on the development and operation of a polyhalite mine in North Yorkshire. Sirius Minerals mine when complete will be the world’s largest and highest grade polyhalite resource. Polyhalite is a multi-nutrient fertilizer which can be used as a source of Potassium, Sulphur and Magnesium. Production from Sirius’s mine is expected to start in 2021, initial production will come in at 2mt per annum but is expected to increase steadily potentially rising to 20mt per annum by 2027. To date Sirius Minerals has signed off take agreements for 5.7mt of future production essentially proving that a viable market exists for their POLY4 product.

Sirius’s mine is expected to cost in the region of $3 billion dollars, to minimise dilution to shareholders Sirius has split the project financing into two phases. Phase one financing was completed in November 2016 with the company raising a total of $1.2 billion through the completion of a placing, a royalty agreement and the issue of convertible bonds. Phase one financing gave Sirius the resources to commence development on the mine, phase two financing is expected to consist of $3 billion in debt financing. Bank commitment letters for phase two financing are expected shortly, these will then be followed by a final financing document. Phase two financing is one of the last big risks the project is facing and the shares are expected to re rate once this milestone is passed. Phase two financing is expected to be conditional on binding off take agreements reaching 6-7mt but it’s worth noting this does not prevent Sirius from obtaining conditional commitments from the banks.

Analysts at Liberum currently assign a £1.10 per share net present value (NPV) to the project, the shares are currently trading at 36p meaning they are trading at a 63% discount to the NPV. More importantly for investors buying in now there’s a 200% upside potential by the project simply reaching NPV. Understandably the shares are trading at a discount to NPV due to the risks the project faces. There is $1.8 billion of unfunded capex left on the project so without phase two financing the project simply won’t proceed, with phase two financing widely regarded as one of the biggest risks facing the project once this milestone is passed the shares are expected to rally substantially. By the end of 2018 Sirius Minerals expects bank financing to be fully completed, the signs of this happening are expected to come in stages with the three stages being the following:

  • Bank commitment letters.
  • Letter of support from the IPA (A government guarantee scheme, guaranteeing debt issued for major infrastructure projects).
  • Incremental off take agreements up to the required 6mt

As part of its Phase 1 financing Sirius announced it had engaged a syndicate of banks which provided letters of interest, including JP Morgan, Lloyds, EDC, Societe Generale, ING and RBS. Since then the company has requested commitment letters from around 30 banks and is awaiting submissions, submissions were initially due back in June but have since been delayed and are expected shortly. With news due soon and the vast potential Sirius offers the shares are certainly worth considering.

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