When Sirius Minerals (SXX) snapped up the York Potash Project in a £25m all-share deal in January 2011, investors were presented with a fertiliser mining venture with no marketing plan and unproven geological data. Inconveniently, it also nestled between the North Sea and one of England's most environmentally-sensitive national parks. It was far from certain whether the 600 square kilometre York Potash licences would support the initial resource targets, or if the project would be commercially viable. Two years on, however, and Sirius has gone a long way towards addressing these concerns. So its ambition to be a major global exporter of the raw material that goes into much of the world's fertilisers is realistic thanks to the quality and scale of its assets and the likely shortage of fertiliser from other sources. The group could also be a takeover target for heavyweight fertiliser producers, such as Mosaic and YARA, or for a large integrated miner such as BHP Billiton, which has tried to gain a foothold in the industry.
- Upgrade in resource size
- High-quality ores
- Marketing deal with key customer
- Possible takeover target
- See 'Don't make a Sirius mistake' for the opposing view on this share tip.
The York Potash resource appears to be both larger, and of higher grade, than initial estimates. In November, mining consultant SRK Consulting increased its estimate for the resource to 2.2bn tonnes of raw material - a 70 per cent increase on its June estimate - and around 950m tonnes of that is high-grade polyhalite, the raw material from which potash is refined. In addition, the appraisals linked to SRK's estimate have covered just 5 per cent of the project area. So early speculation that Sirius was sitting on "the biggest potash mine in the world" no longer seems quite so fanciful.
| SIRIUS MINERALS (SXX) | ||||
|---|---|---|---|---|
| ORD PRICE: | 21.5p | MARKET VALUE: | £288m | |
| TOUCH: | 21.25-21.5p | 12-MONTH HIGH: | 30p | LOW: 12.75p |
| DIVIDEND YIELD: | nil | PE RATIO: | na | |
| NET ASSET VALUE: | 6.7p* | NET CASH: | £36.8m† | |
| Year to 31 Mar | Turnover (£m) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
|---|---|---|---|---|
| 2010 | nil | -3.84 | -1.0 | nil |
| 2011 | nil | -7.67 | -1.0 | nil |
| 2012 | nil | -63.11 | -5.6 | nil |
| % change | – | – | – | – |
Normal market size: 60,000 Matched bargain trading Beta:1.4 *No profits forecasts available †As at 30 Sep 2012 | ||||
Funding is always a critical issue for junior miners, but especially for Sirius, which only has £24m at its disposal even though construction at its flagship mine is due to start in a matter of months. That said, Sirius's ability to get finance was enhanced in December with the publication of a concept study, which took much of the risk from the project by reducing costs through to production to $1.7bn (£1.12bn) - a 37 per cent fall on the previous estimate. Capital requirements shrunk due to Sirius's decision to sell unrefined, granulated polyhalite, as opposed to the sulphate of potash that it originally intended to produce.
Admittedly, there were concerns that Sirius would be unable to sell bulk polyhalite on global markets. However, a marketing agreement with KEYTRADE AG, a Zurich-based fertiliser trader and distributor, suggests it will be able to, especially as the Swiss company is half-owned by CF Industries, the US's second-largest fertiliser company. Another channel to markets could be provided if Sirius decided to partly fund development through 'off-take' agreements where a partner provides finance in exchange for future production.
