It was the news that shareholders had been waiting for and Sirius Minerals (SXX) has finally launched a $3.8bn fundraising to continue building the North Yorkshire-based Woodsmith potash mine.
But investors took fright at the deep discount on the $400m equity part of the cash call.
The mining company said today that it will issue new shares via a placing and open offer, yet these are likely to be priced at between 15p and 18p, representing a discount to yesterday's 21.9p close of anywhere between 18% and 32%.
Little wonder that shares tanked on Tuesday. The stock crashed 18% to 17.95p slashing nearly £190m off the previous £1.05bn market value. That makes Sirius the biggest faller on the FTSE All Share index.
WHY THE NEED FOR NEW CASH
The Woodsmith potash project has drawn enthusiasm from investors in the past. This is because of the exciting potential of polyhalite, a form of potash used in fertiliser products found in concentrated levels at the mine.
But investor backing has been tested recently because of the project's soaring costs, and how the company planned to pay for development. In March the company said it received an alternative financing proposal but declined to reveal what that proposal was.
Getting the Woodsmith mine on stream is now expected to cost an estimated $4.2bn, with $400m having already been spent on the project.
STILL IN THE PIPELINE
Production from the mine is expected to begin in 2021 and be fully operational by 2024, when the miner anticipates producing up to 10m tonnes of polyhalite a year. Once up and running Sirius anticipates operating costs of around $30 per polyhalite tonne.
Investment bank Liberum has modelled a selling price of $125 per tonne during the first seven years of production, implying attractive profit margins and cash flows from which the company can begin paying down its borrowings.
Shore Capital analyst Yuen Low believes today's news is short-term pain before long-term gain for investors.
‘The next few weeks represent the crucial juncture for the company’, says Low. He says that securing the necessary funding is the key to unlocking the vast potential he believes exists in the Sirius investment story.
‘We expect it should catalyse a major re-rating of the shares,’ says Shore Capital's Low.
Liberum is forecasting that the business will be in a net cash position by 2028.
