Sirius Minerals - DFS II

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DFS compilation process

The DFS was prepared between 2014 and 2016 by a number of industry leading specialist consultants and contractors under the management of the Company's in-house team and Bechtel, as project management study consultant.  Bechtel coordinated the compilation of the DFS including compiling the cost estimate, the schedule and the risk assessment.   The other consultancy firms involved in the various areas of the DFS preparation were:

·     Geology & Mining - SRK

·     Environment - Royal Haskoning DHV

·     Shafts - Worley Parsons (RSA)

·     Mineral transport system ("MTS") - Arup

·     Materials handling facility ("MHF") - K Home International

·     Port - Royal Haskoning DHV

·     Implementation - Bechtel

A short biography of each consultancy can be found at the end of the RNS. 

Business strategy

A number of strategic decisions have been made by the Company in setting the framework for the DFS and for the business, ensuring maximum value can be extracted from its exceptional resource, including:

·     Adopt a disruptive market penetration strategy - make the product widely available through established distribution channels;

·     Install large production capacities to capitalise on the value opportunity created by the unique nature of the large scale high quality polyhalite deposit in North Yorkshire;

·     Design sustainably low cash operating costs driven by resource quality and core infrastructure implementation decisions;

·     Select quality over cost where it leads to either reduced operational risk or operating cost; and

·     Mitigate risk where possible through strategy, design, or implementation approach.

Disruptive market penetration strategy

Detailed independent studies and direct engagement in the fertilizer market over the last five years has confirmed the very large opportunity for bulk high quality multi-nutrient fertilizers like the Company's POLY4 product.  The size of the market opportunity is framed in three key areas:

·     Substitution of existing products in the market;

·     Market growth; and

·     Premium performance.

Independent analysis by groups such as CRU Strategies and Fertecon have assessed the substitute market opportunity for polyhalite to be between 30 and 50Mtpa.  These independent assessments however did not take into account the longer-term growth within the different sectors of demand or factor in any value for premium performance over that of the specific substitute. The Company believes the potential aggregate substitution market for polyhalite could be in excess of 300Mtpa. 

The Company has identified multiple market growth opportunities in both high-value crops and broad acre crops.  32% of potassium used in the world today is used on chloride sensitive crops, but only 9% of the world's potassium supply is currently chloride free.  This represents an incremental opportunity of circa 70Mtpa of POLY4. 

The Sulphur Institute estimates a world plant nutrient sulphur deficit.  This could represent a potential demand for 60Mtpa of polyhalite in order to address the imbalance.  In addition to these significant opportunities, a number of key agricultural regions are magnesium deficient, thereby representing further market growth opportunities for POLY4. 

The Company's agronomic studies undertaken over the last four years have confirmed the importance and value of polyhalite as a premium multi-nutrient fertilizer.  Demand for multi-nutrient fertilizers continues to grow and outpace that of the underlying straight products due to the inherent efficiencies of having more nutrients in a single product and the natural agronomic synergies available from products like POLY4.  Crop trials undertaken on broad acre crops (corn, soybean, wheat and sugarcane) have consistently demonstrated POLY4's premium performance over potassium sources such as MOP.  These four crops alone could represent a potential global demand of over 200Mtpa.   

Existing well established and comparable multi-nutrient products command a significant premium to the nutrient sum-of-the-parts.  Analysis of some of these comparable products reveals a volume weighted average premium of approximately 64%.  The Company's base case polyhalite price path is linked to the initial discounted pricing mechanism in the current offtake agreements.  Over time, as the performance of POLY4 becomes more widely known and available, and the initial offtake agreement discount pricing mechanisms begin to unwind, prices are expected to trend towards nutrient parity. 

The DFS assumes average real prices for the first 10 years of production of US$166/t (real 2016) and average mine life equivalent prices of US$186/t (real 2016).  The initial pricing range is based on CRU's nutrient forecasts during the first 10 years of production and calculated using the pricing mechanisms included in the offtake agreements already executed.  After this period and as foundation offtake agreements are replaced with new offtakes, a period of real price growth is assumed such that the price of POLY4 trends to a level consistent with the sum of its parts.     

The Company has to-date signed take or pay offtake agreements for 3.6Mtpa of the initial production for the first 5 to 10 years of production.  In addition it has entered into various other commitments that bring the total volume allocated to customers (including customer expansion options) to 7.9Mtpa.  The Company is confident that it will be successful in securing further commitments during the construction phase.   

High volume

The initial installed capacity of the total Project as defined in the DFS is 10Mtpa.  This is consistent across the Project however each component has different embedded capacities from the initial installation, all of which are readily scalable to 20Mtpa.

The Company's intention is to implement three phases of volume growth:

·     Initial development - initial installation of 10Mtpa of capacity across the Project;

·     Incremental expansion - expansion to 13Mtpa to utilise the hoisting capacities and to the current approved production level; and

·     Final capacity expansion - taking all installed capacities to 20Mtpa.

The current approvals for the Project enable the installation of the core infrastructure that delivers the capability of 20Mtpa.  Currently there is a limit of 13Mtpa of production imposed by a planning condition on the North York Moors National Park Authority approval.  The Company is confident that, given the expansion to 20Mtpa will be largely achieved through utilising the infrastructure constructed for the initial capacity, there will be limited environmental impact arising from the tonnage increase and therefore an application to vary the planning condition to allow for the increased tonnage would be granted as required.

Table 1

Long-life, Low cost

The Project is based on a unique asset in the Company's polyhalite resource in North Yorkshire that has key attributes that enable the Company's business strategies to extract the greatest value for shareholders, including:

·     The largest and highest grade polyhalite resource in the world, reported using the internationally accepted JORC code;

·     Consistency and thickness of the orebody - low cost high efficiency bulk mining techniques (US$33.1/t at 10Mtpa and US$27.2/t at 20Mtpa); and

·     High level of purity (grade) - unlocking the low cost direct multi-nutrient product.

The Project has a Joint Ore Reserves Committee ("JORC") compliant Probable Mineral Reserve of 250 million tonnes of 87.8% polyhalite within an area representing just 1% of the Project area of interest.  The Reserve sits within a wider resource area of 2.66 billion tonnes of polyhalite at an average grade of 85.7%.  The Company expects to complete further resource definition from underground once operations commence, as is required by the business for its future expansion.

The particular characteristics of the resource that make it amenable to a low-cost bulk mining approach are its thickness and grade.  The Reserve has an average thickness of 25 metres and areas within the deposit that are up to 70 metres thick.  Thickness and consistency enables high efficiency bulk mining methods to be adopted.  The effective 1:1 ore to product ratio combined with large scale bulk mining methods means the Project can produce large volumes of its premium multi-nutrient fertilizer product for very low comparative costs - a key sustainable competitive advantage.

Implementation decisions - lower risk and higher quality

During the scoping and design phase of a project such as this, developers are often faced with key decisions about the balance of capital and operating cost.  This trade-off analysis usually relates to the quality of installation and design lives of key components.  This is not the approach adopted by Sirius.  During the development of the DFS the Company has made a conscious decision to opt for higher quality where it could either:

·     Enhance the sustainable competitive advantage of low cash operating costs; or

·     Reduce the risk of implementation delays and capital variation risks.

A key example of this approach is the Company's upgrading of the MTS design specification.  Initially this system was scoped as a 'mining roadway' in order to reduce capital costs.  During the design process and engagement with the tunnelling contractors it became apparent that a fully segmented tunnel would deliver a solution that was more certain in construction schedule and capital cost, be safer and also deliver a lower operating cost solution for the long-term.

The core infrastructure (deep shafts and MTS) design lives in the DFS are over 50 years.  These design decisions were taken to underpin the longevity and efficiency of the mining operations but has resulted in a relatively higher capital cost for those elements.  This will ultimately deliver a more sustainable long term competitive advantage for the Project.

Project schedule

The Project schedule can be broken into the following key stages:

1.   Site preparation and pre-sink activities (22 months).

2.   Main shaft sinking activity (36 months).

The aggregate construction schedule equates to 58 months (4.8 years) to first production.  As a reference point, if the Company were to commence scheduled activities in April 2016, then first product would be expected in early 2021 and full ramp-up to the 10Mtpa production rate would be reached in late 2023.

Capital funding requirement

The following table outlines the capital funding requirement of the Project for the Company. 

Table 2:

Key attributes of the capital funding requirement estimates are as follows:

·     Estimate accuracy range of  -10% to +10%;

·     The capital funding requirement is the capital funding required by the Company to the end of the first quarter in which the Project generates positive net cashflow.  On the basis of a mid-2016 commencement the capital funding requirement period extends to 30 June 2022;

·     The capital funding requirement is net of the estimated costs for mobile mining equipment and outsourced port and handling infrastructure.  The Company's expectation is for these items to be funded by third parties and paid for through operating costs:

All mobile mining equipment assumed to be leased (US$12m during the capital funding period);

All port related infrastructure (including storage and general buildings as defined in the DFS) are assumed to be constructed under a build own operate arrangement (US$515m during the capital funding period based on the DFS estimated cost of greenfield facilities); and

An aggregate operating charge of US$7.7/t has been included in the operating cost estimates (at 10Mtpa) to account for the cost of mining equipment and greenfield outsourced infrastructure.  Should existing infrastructure be utilised then the level of charge related to the port aspects of the Project would be expected to be lower.

Table 3.

Note: 1) Expansion capital costs presented on a real 2016 basis.  It is expected that all incremental capital will be funded from operating cashflows.  2) Company estimates developed using the DFS scope and estimate as a basis for estimating the expansion cost. 

Operating cost estimate

Operating costs are estimated on a free on board ("FOB") basis to be US$33.1/t at 10Mtpa and US$27.2/t at 20Mtpa (real 2016 - life of mine averages).  This includes labour, raw material, reagents, operating supply, maintenance supply, utility, lease and other costs.  This cost structure positions the Project as the lowest cost multi-nutrient potassium producer and in the bottom quartile of potassium chloride producers.

Table 4.

Project economic analysis

The key assumptions underpinning the financial analysis are as follows:

·     50 year mine life from first production with no terminal value assumed;

·     Commencement of scheduled activities on 1 April 2016 (adopted as DFS reference point);

·     Expansion to 13Mtpa in 2024;

·     Expansion to 20Mtpa in 2026, capital expenditure funded from operations over the 3 year period prior;

·     80% granulated and 20% coarse POLY4 production and sales split;

·     Nominal project cashflows (including associated operating expense of outsourced infrastructure and leased mining equipment) with annual inflation of 2% on prices and costs with initial construction capital cost escalation as per the DFS estimates;

·     NPVs are after-tax applying a 10% nominal discount rate;

·     Revenues estimated based on expected FOB prices derived from existing offtake contracts and regional sales forecasts.  Average real prices for first 10 years of production US$166/t (real 2016) and average mine life equivalent prices of US$186/t (real 2016);

·     Total royalties 3% of revenue for minerals rights holders and the York Potash Foundation;

·     Capital and operating costs translated to USD from the currency of underlying estimates which are predominantly USD and GBP (exchange rate assumed GBP 1 = USD 1.42);

·     Average sustaining capital expenditure of circa US$20m per annum; and

·     UK Corporation tax rate legislated to reduce to 18% from 1 April 2020.

Table 5.


The Company has been conducting a tendering exercise for the site preparation, the mine site development scope and the MTS scope in parallel with completing the DFS.  This exercise has involved recognised major industry shaft and tunnelling contractors and the designs provide a scheme that is both buildable and cost effective.  The tender processes are well advanced and the Company is close to selecting preferred bidders for over 50% of the DFS value.  The Company expects there will be further optimisations available as this process moves forward.

Financing plan

It is the Company's stated intention to undertake a staged financing of the Project as the best method to deliver the lowest overall cost of funding for the development.  This will be achieved by aligning perceived risks with the most appropriate cost of capital in the various phases of the Project. 

Stage 1 Financing - US$1.63bn

Stage 1 financing will cover the entire direct costs of all site preparation, shaft excavations, tunnel caverns and a proportion of the indirect costs, project management and owner's costs and contingency - representing approximately 46% of the capital funding requirement.  It is proposed that this will be a combination of equity, either from strategic partners or ordinary equity plus structured debt.

It is the intention of the Company to seek conditional commitments from the structured debt providers first and then to complete the required equity component to satisfy the conditions of the debt commitments.  The Company is working closely with its corporate brokers and advisers in relation to the components of the Stage 1 financing.

The Company's goal is to secure this funding as soon as possible to enable construction to commence.  Discussions have been underway for a significant period of time with providers of the structured debt and also potential equity investors.  Following the release of the DFS the Company will engage in a more detailed formal due diligence process with these key parties to seek to move to binding commitments as quickly as possible.

Stage 2 Financing - US$1.93bn

The Stage 2 financing will fund the remaining capital components of the Project that are lower risk and amenable to lump-sum pricing and defined procurement.  It is likely to be a project finance facility or a high-yield senior bond.  This financing may or may not include an Infrastructure UK guarantee, for which the Company pre-qualified in September 2015.

Sirius has been working with Societe Generale as financial advisor in relation to the structuring of the Stage 2 financing as a project financing facility.  This has included due diligence of the financial model, undertaking debt sizing analysis and production of associated credit metrics.  This work has identified that the Project could secure a project debt finance facility with the following indicative terms for the Stage 2 financing (subject to market sounding):

·     US$2.6bn facility value;

·     14 year debt facility with amortisation commencing in year seven;

·     Require the Company to secure sufficient offtake to support the credit analysis; and

·     Secure lump-sum Engineering Procurement and Construction ("EPC") contractors for substantially all of the remaining Project construction.

The opportunity for export credit agencies and/or Infrastructure UK guarantee scheme participation remains a key part of the Company's financing plan and these options will be explored in further detail as part of the market sounding exercise. 

In addition to the work on traditional project finance the Company has also been in discussions with various advisers in relation to the potential for a high yield bond to finance the second stage of the Project.  This work has identified that a high yield bond of US$2.5 to 3bn could be raised by the Company to fund the Stage 2 capital requirements.

The Company's cash balance as at 28 February 2016 was £25 million.


Now't unexpected ;-)






1 Comment

Capt. 'Bob''s picture

SM: Mix n March

Bits we missed: "The project – which has a potential lifespan of 100 years – would be built in two phases over five years using a combination of debt and equity, and would involve sinking a shaft and digging caverns at a depth of 1,500m. A 23-mile underground tunnel would then transport the polyhalite via conveyor belt for processing on Teeside, using the former Redcar steelworks."

"The company is in discussions with investors over funding, and would consider a partner to help bring the project to fruition. “We have compiled a world-class execution group, but a partner could help de-risk the project, by making financing quicker or adding value,” said Mr Fraser.

Potash prices have crashed in the last year, putting some producers in financial difficulty, but Mr Fraser insisted Sirius’ “multinutrient product” would command a premium over traditional potash, eventually reaching $186 a tonne. By contrast, Sirius believes it can mine polyhalite for just $33 a tonne.

Sirius said it already had buyers lined up to take roughly one-third of its projected output, though further commitments could see that rise to two-thirds."

"There’s a really strong desire in the local community to get started. Opposition mostly died away when the planning permissions were granted. We now want to get through the construction side as quickly as possible,” said Mr Fraser, adding that Sirius had received “10,000 expressions of interest” through its website from people wanting to work for the company.

The project has already qualified for an Infrastructure UK guarantee, which means the Treasury would ensure that lenders would be repaid irrespective of how the project performs.

“We are still the largest private development project in the north,” said Mr Fraser. “It will bring huge economic benefit and be a major win for the ‘northern powerhouse’.”"

Mad March is over ... all baaa the Motley ...