A torturous summer was capped for shareholders in Sirius Minerals (SXX) this week after the aspiring polyhalite miner scrapped its plans for second-stage financing, throwing into serious doubt the future of the UK’s largest mining development in a generation. Six weeks after an aborted attempt to tap the bond market for $500m (£400m), the group concluded that a second attempt had been rendered impossible by what it termed “current market conditions”.
Those conditions are not expected to improve by the end of October, by which point Sirius had undertaken to sell the bonds to unlock a $2.5bn facility from JP Morgan. Having initially failed to tap debt investors in August, a request to the UK government to provide a $1bn guarantee for later-stage project financing was also turned down. The miner said it believed a state commitment “would have enabled the company's financing to be delivered as planned”.
Predictably, shares in the group crashed from 10.1p to a decade low of 2.1p, before rebounding to 4.3p. Given the heavy local political backing of the giant Woodsmith project, which has promised to create 1,200 jobs, recriminations and finger-pointing also followed. Anna Turley, the Labour MP for Redcar, laid the failure of the latest financing round at the feet of the government, which she accused of “refusing to step in and secure” the project. “It seems no finance was sought from government immediately – just security in 18 months for Sirius to be able to issue their bonds now,” she said. “Other countries would bend over backwards to support this kind of global project on their doorstep.”
That claim is debatable, as the reaction of debt markets has proved in recent months. The chances a third-party might step in at this stage rests on the ability to annex high-risk capital items such as the shaft and tunnel, according to analysts at Liberum, which argues “plausible” solutions exist that could still boost Sirius’ net present value to 40p-50p a share. However, the broker cited a lack of clarity on the eventual financing structure in downgrading its target price on the stock to just 9p – equivalent to $1.1bn of invested capital less convertible debt.
Sirius now has six months and £117m of uncommitted cash to alter its plans and find a project financing solution. That will no longer include one source of capital – the $400m of convertible bonds issued in May – which will now be redeemed and proceeds returned to investors.
Whether Sirius might have more luck with an equity placing, potentially involving a strategic investor, is now in question. Liberum estimates that a fundraising of $400m to $500m, at 5p a share, might be enough to cover the cost of the shaft construction, and would merely dilute the group’s net present value to 38p a share.
