Following a very recent flurry of interest in the York Potash project indicated by Sirius Minerals (SXX) share price doubling since May 2016 it seems prudent to assess and attempt some analysis. Rather than a frenizied or furious approach over some furtile grounds .... furry and fetch.
To recap ; Sirius Minerals aims to develop & deliver the World's largest potash mine, the York Potash Project, here in North Yorkshire. see here: http://siriusminerals.com/
This 'rather large' development on our doorstep has taken some rather serious time, energy, financial resource and commitment from the York Potash team and SXX investors so as 'alien/outsider' please note an attempt to be, erm 'sensitive', in this retrospective analysis has been abandoned.... tis futile .... tis ruff around the 'edges.
Firstly, doubling up... on a Take Over ... Razor has repeatedly resinstated this project is Independent and it is his intention to see it through to production, disruptive mebbee ... but ruthless is as ruthless does, Claws in Paws. Pause. Rewind, rephrase: ... OK, lets keep it simple :
A Framework :-) (Breakdown)
1. Welcome To Earth - Presentations, Planning, People
2. Virus Smirush - Technology, Engineering, Partners
3. Reduce, Reuse & Recycle - The DFS, Design & Duplication
4. Bringing Down the House - Finance
5. Speech - 'Bigger & Better' - Announcements
6. Area 51 - Strategic UK Investment
7. Going Global - Progress
Where are we now? Boxes 1, 2, 3, tick tick tick ... at Tock Box 4 'Bringing Down the House'. (If your not a yokel you never saw this) :) https://www.youtube.com/watch?v=FaVBcAgKLwY
Anyhoos ... no whining
In the absence of any reiteration or updates from any House Broker including the Shore Captial report May 2016, extracts:
"Significant re-rating can be expected after Stage 1 financing: Sirius is intending to raise construction funding in two risk-matched stages in order to minimise the overall financing cost. Stage 1 (US$1.63bn) would be raised via a
combination of equity and structured debt; Stage 2 (US$1.93bn) would take the form of project finance or a high-yield bond. If all goes to plan, there should be no further need to raise equity after Stage 1. Dilution would no longer be an issue,
and we believe the resulting improved clarity on potential equity returns could trigger a significant re-rating. Excellent debt and interest cover should entice debt providers: Our model projects prodigious cash generation at impressive margins. Even if production is capped at a sub-optimal 15Mtpa, the average EBITDA margin would still be attractive at 77.7%, and debt and interest coverage would remain excellent (EBITDA/Interest would exceed 2.0x by 2023F; net debt/EBITDA would fall below 3.5x by 2025F). Such financial resilience should prove enticing to debt providers, we believe."
"Sensitivities suggest ample upside, relatively limited downside: In our ‘basecase’ scenario, post-tax 2016 NPV10% is £4.5bn (104p/share fully diluted [FD]). Our sensitivity analyses suggest ample opportunities for upside to this valuation,
whereas downside risk appears relatively limited. For example, assuming a 5% discount rate is appropriate once steady-state production of 20Mtpa is achieved, we estimate a 2028 NPV5% of £25.1bn (578p/share FD), which would represent a
very attractive CAGR uplift of 13.7% from our 2016 NPV10% estimate. Brightest star in the junior potash universe: Compared with its peers, Sirius would boast the highest expected margin; the largest projected annual profits (even after ‘annual capex’) for far longer; the lowest predicted capex intensity; and the second-best forecast capital efficiency. Sirius also compares well against two topical projects: K+S’s Legacy and BHP Billiton’s Jansen."
It then rattles on about Peer Groups and places Sirius in, erm its place... "We calculate that Sirius would possess the lowest predicted capex intensity. To reflect mine life and capital efficiency, we divide capex by LOM (to yield ‘Annual Capex’) and use the result to divide Annual Adjusted Operating Profit. On this measure, Sirius would be second best. We note that the UK has amongst the most competitive corporate income tax rates, does not require the government to be given a free-carried interest and does not impose royalties (although Sirius will pay a royalty to landowners and a foundation).
And on price:
"We standardise longterm prices, assuming US$300/t FOB for MOP, US$588/t for SOP and US$150/t for polyhalite."
Best not mention the 'Aging Neighbour' ...
Needles? "Given its potent combination of volume, margin and life, we believe that Sirius could be an attractive target for the large multinational fertiliser companies, in that its acquisition could significantly ‘move the needle’ for them. We see ICL (in particular), K+S and Yara International as the most likely suitors." Ah, so ... tis not attractive... puppies... tis an old dog!
OK of interest, on the DFS: "£3.2bn to be raised in two risk-matched stages: The DFS envisaged two riskmatched stages of financing. In Stage 1, US$1.63bn would be raised as some combination of equity and structured debt – we are modelling c.£1.13bn in mid-2016, split 35:65 between equity (1.97bn shares @ 20p/share) and structured debt (15% annual interest, rolled up till production). For Stage 2, we simplistically assume that all £2.1bn of senior project debt (7.5% interest, also rolled up) is drawn down in 2018, of which £0.57bn is used to pay down structured debt. In 2023, the Stage 1 and 2 debt instruments are replaced with £3.86bn of conventional bank debt that is rolled over in perpetuity, and for which we model a flat average interest rate of 5%."
Rolled Over. Rover. Spare Capacity : "To maximise returns on capital, Sirius is studying the opportunistic filling of any ‘spare’ capacity (should this arise) with rock salt, Muriate of Potash (MOP) or Sulphate of Potash (SOP). We examine a scenario whereby Sirius determines that it could sell a maximum of 15Mtpa if polyhalite pricing were to be maintained at c.US$150/t (see discussion regarding potential demand in Polyhalite section), and decides to fill the remaining 5Mtpa of ‘spare’
capacity with byproducts/coproducts. Timings would be coincident with that for the final infrastructure capacity expansion (to 20Mtpa) and byproduct-related capex would be internally funded."
The Robusts: https://www.youtube.com/watch?v=kKmtlp3yRP0
"Robust financials Sirius Minerals does not yet generate revenues and so is currently reliant on capital market financing to cover its funding requirements. With c.£25m of cash as at February 2016, Sirius is very well-funded given its present stage; importantly, this should be more than sufficient to take the company through the initial stage of construction financing, we believe. As noted earlier, Sirius is proposing a two-stage construction financing plan, which would
better match perceived project risk with the risk appetite of the various potential sources of funding, thereby minimising overall financing cost.
● Stage 1: US$1.63bn would be raised over 2016 via a combination of equity (‘strategic’ or ‘ordinary’) and structured debt to cover sub-surface activities that have ‘higher’ and more ‘variable’ risks (notably vertical shaft and cavern excavation) plus a portion of indirect costs, project management, owner’s costs and contingency. Sirius anticipates seeking conditional commitments from structured debt providers (“large global private debt funds”) initially, and then raising equity to satisfy debt commitment conditions.
● Stage 2: US$1.93bn would be raised to fund lower-risk remaining activities that are amenable to lump-sum pricing and defined procurement (e.g. tunnelling, mine fit-out). Funding could take the form of project finance or a high-yield senior bond. There is also potential for export credit agencies (ECAs) and/or Infrastructure UK (IUK) guarantee scheme participation. Although commitments would be obtained in early 2018, Sirius anticipates actual drawdowns only starting around mid-2019."
So, that's the meat on the bones to crunch.
Ooops, more "For Stage 1, we model the raising of c.£1.13bn in mid-2016, split 35:65 between equity and structured debt (15% annual interest, rolled up); for Stage 2, £2.1bn of senior debt in 2018, of which £0.57bn is used to pay down structured debt.
● For our share price assumption, we round up the current share price to 20p/share (priced as at 25th May 2016), which implies the issuance of 1.97bn shares, resulting in Sirius having 4.27bn shares in issue (4.33bn shares on a fully diluted basis).
● We assume that structured debt will carry a coupon of 15%, with interest payments rolled up until 2022; the senior debt, 7.5% similarly rolled up. In 2023, the Stage 1 and 2 debt instruments are replaced with £3.86bn of conventional bank debt that is rolled over in perpetuity, and for which we model a flat average interest rate of 5%."
And it repeats. Repition. Yep, tis extrapolation. Ta very @ Shore Capital: http://www.shorecap.co.uk/
So, lets assume they are all off on their jolls. Cats away and mice will play ...
A lot has happened since May. Bone crunching.... extrapolates: Shore have given two primary constants to work with, price £150 and capacity 15mta confidently giving £2.25bil to play with.
Missed an important bit: "We estimate a Risked NPV for Sirius Minerals of 50p/share once Stage 1 financing has been completed, derived by applying a 50% discount to our rounded 2016 NPV10% valuation. As the project is de-risked and lower discount rates can be justified, we believe the shares could over the next five years (i.e. to just before production commencement) trend towards c.400p/share."
Crunch or brunch time ...
What has changed? Plenty ... to be continued :-)
Oh, OK tis a lot to chew on ... so once you get your eds around that ... The next bit is far more simples btw if ya can be bovverred...
Exstrapolates. Late again.
Oh OK; with two constants it should be relatively easy to calculate the SP/MCAP or 'wotever' given any identified variables ... inc risks
Ah, so ... there are three :-) (Constants) ... Stargate has its limits ...
So, off ye go .... heres a little elf ;-))
tis simples X MN =XN x XM ... add in multiple variables and hey ho
Volume 15mta, Price $150, Discount 50%
Variables : Share Volume Issue : see here http://siriusminerals.com/site/assets/files/4249/sirius_minerals_-_inves..., say 2.4bil at 8th August.
Targeting 50:50 equity and structured capital (Ordinary equity or cornerstone investors) ie borrow 50% (debt) share dilution 50% mix of PI & CI) stated at £400mil.
Placing at 25p ? Derisking by a further 40% (given 10%) of 50% of NPV
NPV 10mta= $27bil, NPV 15mta = $40bil 10% risk at production = $36bil (£1.00:$1.30) = £27.69bil - 50% derisk = £13.84bil present MCAP = £825 @ SP £36.25 increase in value x16.8
To finance Stage 1 (derisk by 40%) MCAP SP/16.8 the placing should equal 15mtpa 27.69/1.648 = 16.82 @ 50% = £8.42/16.8 = 50p @ 50% = 25p.
After placing to prospect an SP of £0.871 on a current sp of .348 would be required.
To gain a 40% risk reduction, a derisked total of 50% I would require 1bil shares to be issued to get my money back. Instantly :-)
Simples, albeit Neat.
SP = MCAP/Vol : £27.69/3.4
Ah, so ... not quite:
Spare capacity? tis a triology, allegedly....