Financing & Development Update: 17 September 2019 Sirius Minerals Plc
* Company does not believe the proposed US$500 million senior secured notes offering can be issued in the current market conditions
* Scope of construction activities on the Company's North Yorkshire Polyhalite Project will now be adjusted while a strategic review is undertaken over a period of up to 6 months
* Unrestricted cash reserves of £180m (£117m uncommitted) as at 31 August 2019 - provides sufficient liquidity for the Company to explore all strategic options during the strategic review
* US$400 million convertible bonds due 2027 (ISIN: XS1991116127), with the proceeds held in escrow following the issuance of such bonds in May 2019, will be redeemed and proceeds returned to investors
"The Board of Sirius Minerals plc ("Sirius" or the "Company") today announces changes to its financing and development plan and a comprehensive review of the various strategic options available to the Company to maximise value for its shareholders.
Chris Fraser, Managing Director and CEO of Sirius, commented:
"Due to the ongoing poor bond market conditions for an issuer like Sirius we have not been able to deliver our stage 2 financing plan. As a result, we have taken the decision to reduce the rate of development across the Project in order to preserve funding to allow more time to develop alternatives and preserve the significant amount of inherent value in this world-class project.
"The Company will now conduct a comprehensive strategic review over the next six months to assess and incorporate optimisations to the project development plan and to develop a different financing structure for the funds required. This is the most prudent decision to give the Company the time necessary to restructure its plans to move the Project forward. The process will incorporate feedback from prospective credit providers around the risks associated with construction and will include seeking a major strategic partner for the Project."
Current financing plan:
On 29 April 2019 the Company entered into commitment documents in respect of a US$2.5bn Revolving Credit Facility to be entered into in respect of its proposed stage 2 financing (the "RCF Commitment"). One of the conditions of the RCF Commitment, was the issuance of senior secured notes in a minimum amount of US$500 million and meeting certain criteria by no later than 29 October 2019.
On 6 August 2019 the Company announced that it had postponed the proposed note issuance due to market conditions. Since that time there has been no material change for an issuer like Sirius and the Company is not aware that any significant new issuer in the same B/B- credit range that has come to market.
To meet the terms of the RCF Commitment the note issuance must, as well as other conditions, be both broadly distributed and have an all-in effective yield not exceeding 15%. The Company has received feedback from a number of potential investors which has indicated that a note issuance could potentially be successful should the offering include warrants (the rights to ordinary shares in Sirius). However, a note with warrants attached would not satisfy the conditions set out in the RCF Commitment due to the expected returns of the warrant component of the offering. The Company requested, but did not obtain, a waiver of this condition to enable it to issue warrants as part of the note offering.
The Company intends to terminate the RCF Commitment in the coming days.
Due to the lack of depth in the commercial bank project finance market the Company developed its original stage 2 financing plan for its North Yorkshire Polyhalite Project (the "Project") based on the anticipated participation of the Infrastructure and Projects Authority ("IPA") which is part of HM Treasury. Discussions with the IPA were paused in early 2019 to allow the Company to pursue the RCF based financing plan as per the RCF Commitment.
Following the postponement of the proposed senior secure notes offering in August, the Company re-engaged with the UK Government. The Company had requested Government provide a commitment to enable the issue of up to US$1bn of guaranteed bonds in the event the Company was unable to issue unguaranteed bonds to refinance the RCF (after approximately at least a further 18 months of development activity and up to an additional US$2bn being invested in the Project). The Government has reviewed the case for the provision of the support requested to facilitate the financing of the Project and has decided not to provide the support requested. The Company believed this commitment would have enabled the Company's financing to be delivered as planned.
As part of its proposed stage 2 financing, and as previously announced, on 23 May 2019 Sirius Minerals Finance No.2 Limited (the "Convertible Bond Issuer") issued US$400 million convertible bonds due 2027 (ISIN: XS1991116127) (the "Escrow Bonds") guaranteed by the Company, the gross proceeds of which were placed in escrow and (other than in the limited circumstances described in the terms and conditions of the Escrow Bonds) only to be released to the Convertible Bond Issuer upon the earlier of (a) 23 January 2020 and (b) the completion (a "Stage 2 Debt Event") by the Company and/or a subsidiary of the Company of (i) an issuance of senior secured guaranteed bonds or other financing raising gross proceeds received by the Company or such subsidiary in an amount of at least US$500 million and (ii) the entry into a revolving credit facility with a committed amount available to the Company or one of its subsidiaries of at least US$2.5bn from time to time and provided that, on the date such Stage 2 Debt Event is notified to holders of the Escrow Bonds, the Company or the relevant subsidiary is in compliance with its covenants under such facility.
For the reasons set out above, the Company and its subsidiaries will not proceed with (a) an issuance of senior secured guaranteed bonds or other financing raising gross proceeds received by the Company or such subsidiary in an amount of at least US$500 million or (b) the entry into a revolving credit facility with a committed amount available to the Company or one of its subsidiaries of at least US$2.5bn from time to time. Accordingly, a "Stage 2 Debt Non-Occurrence Event" under the terms and conditions of the Escrow Bonds has occurred.
As a result, the Escrow Bonds shall be automatically redeemed pursuant to their terms and conditions, subject to the right of any holder of Escrow Bonds to elect that its Escrow Bonds shall not be redeemed. In connection with such redemption, an amount equal to the aggregate principal amount of the relevant Escrow Bonds so redeemed shall be released from escrow to the principal paying agent for onward payment by way of part payment of the redemption monies in respect of such Escrow Bonds to the holders of the Escrow Bond so redeemed.
Following completion of such redemption (and subject to any holder of the Escrow Bonds making the election referred to in the previous paragraph), approximately US$240 million of convertible bonds guaranteed by the Company will remain outstanding.
As at 31 August 2019 the Company had approximately £180 million of unrestricted cash which included over £117 million of uncommitted capital. This amount does not provide sufficient liquidity for the Company to continue development of the Project in line with the Company's publicly articulated development schedule for any significant period of time. As such the Board has decided that the scope of development works on the Project will now be adjusted to enable the Company to undertake a strategic review of its project development and financing options.
The Board considers that a reduced pace of development focused on key areas of the project that will ultimately serve to preserve the most value for the project and will provide the Company with a period of up to six months to review all available options for the Company to move forward. Under the terms of the Company's major construction contracts the Company has the right to alter, increase, decrease or omit or otherwise amend the works for various periods of time. The Company expects to meet its payment obligations as they fall due during the period of the strategic review.
Potential to optimise the project development plan:
A range of optimisation opportunities and acceleration initiatives have been developed by Sirius and its contractors over the last year. These include:
· Optimised Shaft Boring Roadheader ("SBR") operation and scheduling - maximising the benefits of the upgrades built into the SBR's purchased by the Company (targeting up to 4 meters per day long-run sinking average);
· Opportunity to remove the need for a tunnel boring machine ("TBM") from Lockwood Beck (TBM2) from the development schedule due to the faster than expected tunnelling rates experienced on Drive 1, enabling Drive 1 to continue past Lockwood Beck and connect with Drive 3 from the Woodsmith Mine;
· Opportunity to utilise the TBM mucking system during the fitout of the mineral transport system ("MTS") to transport up to 6 Mtpa of polyhalite to Teesside - potentially accelerating commercial production earlier than planned; and
· Resizing of key components and pilot plant testing increasing the MHF capacity and significantly reducing the cost of expansion to 13 Mtpa.
To be incorporated into the revised financing plan each of these initiatives need to be further developed and engineered and reviewed by the independent technical engineer to the Project. As part of the strategic review process the Company intends to enter into discussions with its contractors to ascertain how these optimisations can be fully incorporated into the development plan and how the savings and benefits will be shared between the contractors and Sirius.
Potential to revise the project development plan:
In the debt raising processes conducted by the Company over the last three years, one common aspect identified by prospective credit providers has been the perceived risk associated with deep shaft construction. This perception and its weighting in underlying risk assessment is despite the unique circumstances of the Project and the technical due diligence completed by independent experts confirming the Company's assessment of technical, cost and schedule risk associated with the development of the Project.
During the strategic review the Company will explore how the development of the shafts and the other major aspects of the construction programme can be rescheduled in a way that reduces this perceived risk and delivers better cost and scheduling certainty for debt providers across the project.
Alternative financing arrangements:
The Company also intends to explore alternative financing structures. While the current stage 2 financing process has been unable to be completed at this time, a number of different investors and advisers have indicated the potential for a range of alternative approaches. These alternatives will now be assessed in detail to determine if there is a way to structure the financing of the development of the Project to enable either the existing development plan or a revised development plan to be financed through different means. The Company believes that the compelling economics of the Project provide a strong basis for a revised financing plan but this will require time to bring together the components of such a plan and to assess investor appetite for a revised financing plan.
Strategic investor process:
The Company has identified strategic partners previously as a way to bring capital into the project and to provide additional support to the credit case. With the current delay to the stage 2 financing of the Project the Company intends to now undertake a much broader process with the possibility of the acquisition of a significant part of the Project.
Sirius Mineral's Chief Executive Officer, Chris Fraser will host a webcast for investors and analysts at 9.30am today.
The webcast can be listened to live by clicking on the link below. A replay will be available on the Company's website in due course.
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Half year results for the period ended 30 June 2019
Sirius Minerals Plc ("Sirius" or the "Company") today announces the unaudited half year results for Sirius and its subsidiaries (the "Group") for the six-month period ended 30 June 2019.
* Significant progress made across all construction sites and construction activities to date have progressed in line with 2019 full year guidance
* 10-year supply and distribution agreement with BayWa Agri Supply and Trade B.V. for up to 2.5 Mtpa POLY4 in Europe
* Major 8-year take-or-pay supply agreement with IFFCO for the supply of up to 1 Mtpa POLY4 in India
* Operating loss for the period was £14.3m compared to £10.8m in the prior corresponding period, the increase primarily driven by a greater level of corporate and sales and marketing costs linked to the Company's Stage 2 Financing.
* Loss for the financial period of £3.1m compared to a loss of £95.3m for the prior corresponding period, the reduction primarily driven by fair value gains attributable to derivative instruments in comparison to the fair losses incurred on these in the prior period.
* £240m deployed during the period for the purposes of developing the Project.
* Total funds at the end of June 2019 were £713.8m, comprising cash and cash equivalents of £349.0m and restricted cash of £364.8m and has reduced to $180m (£117m uncommitted) as at 31 August 2019. "
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