In its first major update since its bombshell decision to cancel previous funding plans, potash miner Sirius Minerals (SXX) said it has found a new way to get its project going which requires a lot less upfront cash.
The former FTSE 250 miner has fallen a long way since announcing it was cancelling plans to raise $500m through a bond sale, which in turn led to a further $2.5bn funding agreement falling through and threw into doubt its plan to build a polyhalite mine in North Yorkshire.
But in a progress update on the strategic review announced in September, Sirius said it has come up with a two-stage plan to get the project going.
$600M NEEDED FOR FIRST STAGE
In the first stage, called the initial scope, the firm said it needs $600m – in addition to existing cash reserves – to start getting polyhalite out of the ground, a significantly lower amount of money needed than before.
Sirius said that achieving this will ‘significantly de-risk’ the project in the eyes of debt investors, allowing the firm to ‘explore a wider and cheaper range of debt financing options’ to then fund the remainder of the project, called the deferred scope.
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Shares in Sirius Minerals shot up over 16% on the news this morning.
But that will be scant consolation to its tens of thousands of retail shareholders who have been invested in the firm for years, given its share price has moved from yesterday’s close of 3.2p, to around 3.7p this morning.
AJ Bell investment director Russ Mould has warned investors not to get carried away with the announcement.
STRATEGIC INVESTOR NEEDED
That’s because in order to secure the $600m funding it now requires, Sirius needs to get a strategic partner, also called a strategic investor, on board.
A strategic partner is typically a large corporate in the same or a similar sector who takes a large stake in a company in exchange for upfront cash.
The firm said it has made progress on this front, with ‘various parties engaged and assessing information’, but Mould pointed out that miners say this all the time, and in actual fact getting one on board is a lot more difficult that companies would make it seem.
In addition, even if Sirius can reach a deal with a strategic partner, it’s highly unlikely Sirius’ existing shareholders will feel any benefit.
EASIER SAID THAN DONE
Mould said, ‘A lot of miners make confident statements about finding strategic investors as if you can just pick them off the shelf.
‘In reality they are hard to come by, at least ones which will agree to a deal that doesn’t heavily dilute existing shareholders so they are left with next to nothing.
‘At this stage, Sirius has no cards to play. It is desperate for money and will have little bargaining power in any negotiations with a potential strategic investor.
‘A third party looking to bail Sirius out of a tricky situation will want the best possible deal for them, as they are taking on considerable risk backing a project which is not yet generating any revenue.’