6 September 2018 Sirius Minerals Plc "Procurement and capital estimate update"
* Design and build contract signed with STRABAG for the remaining mineral transport system drives
* Materials handling facility EPC contract signed with Jacobs UK Limited
* Finalising procurement and the associated risk allocations expected to result in stage 2 funding requirement increasing by US$400 - 600m
* Company to review the most cost effective and efficient sources of capital to fund the additional capital requirement
Sirius Minerals Plc ("Sirius" or the "Company") announces the signing of two major construction contracts and a revised capital estimate for the Company's North Yorkshire Polyhalite Project (the "Project"). The Company has entered into design and build contracts for the construction of Drive 2 and 3 of the Company's mineral transport system ("MTS") and an EPC contract for the construction of the materials handling facility ("MHF") at Wilton. In addition, following the signing of these contracts which substantially completes procurement across the Project, the Company has finalised a revised estimate of the Project's capital cost, funding requirements revised operating costs.
Chris Fraser, Managing Director and CEO of Sirius, commented:
"The signing of the contracts for the remaining tunnel drives and the materials handling facility at Wilton are significant steps forward for the business with almost all procurement now complete. The expected increased funding requirement coming from this process reflects an optimisation of the MTS tunnel design and a significantly improved risk allocation for Sirius to support the senior debt financing. The Project's economics remain extremely compelling and we are confident they support the expected additional funding requirement."
Procurement and capital estimate :
MTS Drives 2 and 3
Sirius has entered into a design and build contract with STRABAG AG, a subsidiary of STRABAG SE ("STRABAG"), for the construction of Drives 2 and 3 of the MTS between the Woodsmith Mine and Lockwood Beck (the "MTS Contract").
The MTS Contract is effectively a lump sum arrangement, with fixed rates for tunnelling advance. The price is based on a defined and agreed geotechnical baseline report, with firm pricing for a range of expected support classes within the build.
The cost of the MTS Contract is higher than originally anticipated by the Company in its previously announced optimised definitive feasibility study ("DFS") estimates announced in 2016. Since the DFS estimate, the Company's understanding of the geotechnical characteristics of the strata within which the MTS will be excavated has increased following further ground investigation and seismic work. This exercise has led to a refinement of the parameters set out in the geotechnical baseline report upon which the tunnelling contract has been determined. The MTS cost increase is driven by a combination of the following factors:
- optimisation of the tunnel design including an increase in the planned internal diameter of the tunnel from 4.3m to 4.9m and an increase in lining thickness from 250mm to 350mm;
- a decrease in advance rates as compared from 25m per day to 17m per day; and
- a commercial risk allocation which transfers construction and delivery risk to STRABAG.
The cost of the MTS Contract will be incurred in GBP and EUR.
Materials handling facility
The Company has also entered into an Engineer, Procurement and Construction ("EPC") contract for the MHF at Wilton with Jacobs UK Limited ("Jacobs"), a subsidiary of Jacobs Engineering Group, a Fortune 500 provider of technical, professional and construction services. The EPC contract with Jacobs is on a target price basis, with financial incentives for completing the scope of work under budget, and financial penalties should completion be late or the cost be above the target price. The target price of the EPC contract is consistent with the Company's optimised DFS estimates and the target dates are within the dates outlined in the existing Project schedule. The plant has been scoped to include 7 million tonnes per annum ("Mtpa") of granulated and 3 Mtpa of coarse product in its first phase of development but with a footprint for up to 20 Mtpa of granulated product.
The MHF contract is a USD target price contract. Cost under the EPC contract will be charged to Sirius in the currency in which they are incurred by Jacobs.
The procurement process is nearing completion for the major packages and the Company is currently in the final stage of negotiations for the outstanding scopes of work. The outstanding scopes of work are the MTS fit out, which includes the supply and installation of the MTS conveyor and the associated power supply, and the port facilities which includes construction of the outload circuit, wharf and product storage facility. The Company has identified STRABAG as its preferred contractor for the MTS fit out and is in advanced negotiations for provision of port facilities.
The Company has developed a construction programme which defers the upfront capital costs associated with the port facilities and has amended the scope of work to include temporary truck and train transportation of product from the storage facility at Wilton to the port facility. This enables the construction of the overland conveyor to be deferred until such time as it can be funded through operating cash flows, currently assumed to be 2025.
The Company currently expects that the costs of the outstanding procurement contracts will be in line with its optimised DFS estimates.
Capital cost and contingency estimate
The revised capital cost estimate has been compiled on the basis of signed contracts, tenders or quotations. The Company engaged a third-party consultant to assist in the preparation of a revised capital cost estimate. ..."
Stage 2 financing
All key stakeholders remain engaged in the stage 2 financing process and due diligence is ongoing. The Company has received detailed responses from potential lenders which support a commercial debt tranche of approximately US$1.5bn, subject to completion of satisfactory due diligence.
Following the lenders' review of the final procurement contracts, the Company and its lenders will assess the required contingency levels and determine the overall capital funding requirement of the Project. The Company then expects to present a revised financing plan to lenders in Q4 2018 which will incorporate the revised capital funding requirement.
Subject to the successful completion of due diligence and a satisfactory financing plan being presented by the Company, the Company expects to secure credit approved commitment letters from lenders in the fourth quarter of 2018 and to achieve financial close of stage 2 financing in Q1 2019.
The Company continues to be focused on shareholder value and pursuing the most efficient and cost-effective capital structure to develop the Project. The greatest driver of value for the Company is successful Project delivery. The Company believes that a US$3bn senior debt financing is the appropriate level of debt and will not seek to increase this amount. Incremental capital raisings must compliment and ideally enhance the stage 2 financing. It is intended that all sources of incoming capital (senior debt and other) will be raised conditional on the basis that the Project has a complete financing package.
The Company will review the most appropriate form of financing for the increased capital funding requirement including:
- strategic partner financing to provide capital at either the asset or Project level;
- completion support from potential stakeholders or financial investors to provide contingent funding for the purposes of mitigating cost overrun risk;
- alternative sources of structured capital including subordinated debt and leasing providers;
- accessing the capital markets through convertible notes or new equity where the value proposition is appropriate for all capital providers (existing and new).
The Company continues to believe that the robust economics and cash flow potential of the Project will support the expected increased funding requirement. It remains focused on de-risking its Project by continuing to construct the Woodsmith Mine and associated infrastructure and progressing various commercial arrangements with potential partners and customers.
The Company has revised its production capacity expansion plan to incorporate expected senior debt facility terms that would restrict the ability of the company to use cash flows from operations to fund expansion of the Project to 13 Mtpa production. Under the revised assumptions the Company expects to reach 13 Mtpa production capacity in 2026 and 20 Mtpa in 2029.
Revised Project economic analysis
The key assumptions underpinning the revised financial analysis are as follows:
- 50 year mine life from first production with no terminal value assumed;
- First polyhalite in 2021;
- 10 Mtpa production in 2024;
- Expansion to 13 Mtpa in 2026 - capital expenditure funded from operating cashflows;
- Expansion to 20 Mtpa in 2029 - capital expenditure funded from operating cashflows;
- Nominal unlevered Project cashflows;
- NPVs are after-tax applying a 10% nominal discount rate;
- Revenues are estimated using four FOB pricing cases as follows;
1. US$100/t (real today) flat pricing inflated at 2% per annum;
2. Contract case: contracted and uncontracted volumes are assumed to be sold at prices equivalent to existing offtake contract pricing methodologies. Nutrient prices are Sirius estimates;
3. Base case: contracted volumes are assumed to be sold at prices equivalent to existing offtake contract pricing methodologies. Uncontracted volumes are assumed to be sold at a discount to the full nutrient value of polyhalite with prices increasing to nutrient value in year 5 of production; and
4. US$200/t (real today) flat pricing inflated at 2% per annum
· Existing supply agreements are expected to deliver US$140-150/t FOB over the first five years of production;
· UK Corporation tax rate legislated to reduce to 17% from 1 April 2020.
Sales and marketing
Commercial discussions are continuing in the key target markets of the Company and its current priority is to conclude agreements in Europe and Brazil. Negotiations in both of these regions are well advanced. Together, the opportunities in Europe and Brazil represent more than 3 Mtpa of peak aggregate supply volume for Sirius and, if successfully concluded, would mean that Sirius' initial supply of POLY4 would be diversified across four of the five largest fertilizer markets globally.
A number of opportunities in other regions of the world are also being progressed.
Sirius Minerals' CEO Chris Fraser will host a webcast for investors and analysts at 9.00 am 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.
Keep digging ;-0
In short the CAPEX has gone up slightly increasing volumes & safety, and the OPEX has gone down by c 10%.
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