Sirius Minerals (SXX) secures funding for long delayed project

Having been one of our top-traded shares all week, one of our analysts discusses their recent announcement.

Article updated: 3 May 2019 2:00pm Author: Ian Forrest

AIM-listed Sirius Minerals has received a big boost to its plan to build one of the largest mines in the country. US investment bank JP Morgan has agreed to provide a large chunk of the financing necessary to complete construction on the $5bn project, through a combination of credit and underwriting. The company is also offering new shares to its shareholders in an open offer at a rate of 1 new share for every 22 currently held at a price of 15p.

Sirius is looking to extract polyhalite, a mineral commonly used as fertiliser, from under the North Yorkshire moors, but the complexity of the project and the sensitivity required due to the location have meant long delays and extensive planning.

Major investors proceeding with caution

Production should start in 2021 but the company still has to create two deep shafts and a 40km tunnel which will transport the mineral away from the site to Teesside. Those who’ve followed the company for the past few years will be familiar with the unexpected delays and rising cost projections which have come along at regular intervals, and there is a strong probability that more will follow.

Trying to value a company which is still at a relatively early stage of its development is very difficult for investors and it was notable that when major investors were offered the chance to buy new shares recently, at a price between 15p and 18p, they opted for the bottom of the range, which represented a hefty 32% discount to the previous market price. While it is positive that investors were prepared to put £327m into the project at this stage the price indicates a degree of caution in terms of valuation and it remains to be seen just how much Sirius is paying in fees to JP Morgan for the new funding.

The future is beginning to look brighter

From a big picture perspective it is certainly good news that the main question is moving more from whether the mine will actually be completed towards what sort of return it will generate once production finally begins. Profits and dividends are clearly still many years away but the agreement with JP Morgan represents a significant endorsement, not just of the business model but also as a vote of confidence in the management to deliver the finished mine and repay the large amount of debt it has built up. We don’t have an official recommendation on the stock, which is trading at a two-year low, but there is currently no dividend and they are certainly high risk.

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Ian Forrest portrait photo
Ian Forrest

Investment Research Analyst

Ian’s background in investments, financial journalism and research has seen him advising private investors on equities and helping to manage portfolios. His qualifications include the Certificate in Financial Planning and the Chartered Institute for Securities & Investment’s Investment Advice Diploma.