Sirius Minerals’ (SXX) promises have always been big, but no one ever promised that building a first-of-its-kind polyhalite mine would be plain sailing. This week, shares in the prospective miner pulled back sharply after investors learned that capital expenditure requirements would be $400m-$600m (£309m-£463m) higher than previously forecast.
The company said that after consulting with newly appointed contractor STRABAG, it had decided to increase the diameter of the 37km tunnel between the Woodsmith mine and a processing plant on Teesside. The tunnel will also now be drilled at a slower pace.
There was more bad news. The completion of second stage financing from banks – and potentially the UK government – has also been pushed back from late 2018 to the first quarter of 2019. And to compound matters, Sirius has delayed the timing of its long-term ramp-up by a year. Within a day of the announcement, the group’s shares had dropped 16 per cent.
In rising costs, investors have a good reason to fear a potential hit to equity. Sirius does not plan to seek more than $3bn in senior debt in its second stage financing, leaving a $0.5bn shortfall in capital needed to get the Woodsmith mine to first production.
That could come from any one (or a mixture) of four sources, says Sirius. Two options – the addition of a strategic partner at the asset or project level, or a capital markets fundraising via a convertible note or share sale – are dilutive to equity holders. Two others – completion support from potential stakeholders or financial investors, or the use of subordinated debt and leasing providers – are not, although clearly come at a cost that was not foreseen a week ago.
The capital update wasn’t entirely negative. Pending due diligence, Sirius has received responses from potential lenders “which support a commercial debt tranche of approximately $1.5bn”. More than 3Mtpa of binding offtake agreements are about to be signed with Brazilian and European buyers, and design and build contracts for the mineral transport system drives have now been signed. We are also told that forecasts for first stage production operating costs have been reduced by 10 per cent, thanks to lower port storage and loading and materials handling cost estimates.
