Sirius Minerals’ (LSE: SXX) York Potash Project is slowly but surely taking shape.
After receiving planning permission from the North York Moors National Park Authority at the end last month, the company has issued a status update on the project today, which outlines management’s next steps.
The next steps
Sirius still needs to receive a number of approvals from other entities before the final planning decision notices are issued. These include permissions to construct the materials handling facility and temporary construction accommodation. Sirius is currently working with the authorities on these matters and expects the necessary approvals to be granted by the end of September 2015.
Additionally, the preliminary planning hearing for the proposed development consent order for Harbour Facilities at Teesside will take place on 21 July. The final decision is expected before summer 2016.
Away from the planning side, Sirius expects its Definitive Feasibility Study of the York Potash Project to be completed during the fourth quarter of 2015.
The final cost estimates produced in the DFS will be informed by the final tenders for the key construction contract packages. On this front, the company is also making progress. According to management, bids for site preparation, tunnel construction, and shaft sinking are now in their final stages.
Financing strategy
So, Sirius is making progress across the board with its planning for the development of the York Potash Project. However, one issue that remains is financing.
In today’s announcement Sirius revealed that the company had been working with advisers since January 2015 to arrange structured debt capital for stage one financing. Stage one of the project refers to the initial construction phase. Stage two of the project will account for the majority of the funding requirement and will be 100% debt based.
Sirius’ management believes that the economics of the project business model lend themselves to high leverage. As a result, the company is prepared to take on a high level of debt to fund development.
Call me sceptical, but I can see a lot of issues with this viewpoint. For example, it’s estimated that it will cost £1.8bn to get the potash project into production.
Now, the mining industry has the worst record of all industries for cost overruns and project delays. Since 1965, the average costs overrun has been 20% to 60% per project. During the mine’s construction period, Sirius won’t be generating cash and will have to fund interest payments, as well as cost overruns with more debt.
And with such a mountainous pile of debt towering over the company before production has even begun, Sirius could struggle to keep its head above water in the long term.
Impossible to predict
Of course, if the company does manage to bring the project online, on time and budget, the figures do stack up. Although, management’s figures rely on a lot of assumptions about future costs and potash prices.
As it’s almost impossible to predict future market trends, I’m sceptical about Sirius’ long-term outlook, especially when the company is taking on such a huge pile of debt to fund its ambitions.
