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Sirius Minerals overhauls debt plans

Some investors were spooked this week by the disclosure of a possible high-yield bond issue, unresolved due diligence matters and a looming deadline
January 23, 2019

Sirius Minerals (SXX) this week changed the terms of its debt fundraising plan for the Woodsmith polyhalite mine, in a move interpreted by both analysts and investors as a sign of rising financing costs.

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The FTSE 350 group is currently negotiating $3bn (£2.3bn) of loans to fund the rest of the mine's construction, and had originally sought a commercial bank tranche and a government-guaranteed tranche, which would rank on equal terms and be drawn “on a broadly pro-rata basis”.

Following discussions with lenders, Sirius now expects the package to include a third “uncovered debt capital markets tranche”, and will be drawn sequentially against certain construction milestones.

Such a structure, while likely to carry higher upfront bond payments, has been designed “to reduce both the risk and the quantum of any IPA [Infrastructure & Projects Authority] guaranteed bond tranche to the taxpayer”. This is because by the time Sirius draws down its third tranche, the group expects to have overcome major construction and sales risks.

Brokerage Liberum thinks lower interest rates attached to the IPA guarantee could offset a costlier first debt tranche, but the possible issuance of a high-yield bond was enough to spook some investors, and knocked 7 per cent off Sirius’ share price on the day of the announcement.

Others may have concerns around liquidity. Although Sirius has £230m of unrestricted cash on its balance sheet, these funds will only take the project “into the second quarter of 2019”, underlining the need to wrap up second-stage financing soon. This will also require lenders’ assurance that “due diligence items highlighted by respective consultant reports” have been satisfied.

Once the $3bn package is signed, Sirius expects to be able to raise funds for the $400m-$600m of additional project costs identified in September, although no further detail was provided on which form this could take. Whether via capital markets, a strategic partner, leasing providers or subordinated debt, these funds will be drawn before the debt package.