When I covered Sirius Minerals (LSE: SXX) at the beginning of 2018 year, I claimed that the stock could surge to 40p by the end of 2018 (up from 23p at the time) as the company progressed on its journey to become one of the world’s biggest suppliers of polyhalite.
The share price came close to hitting my 40p target earlier last week after the company revealed that it had signed yet another off-take agreement this time with ITL Trading, one of the largest suppliers of fertiliser to Nigeria.
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And based on this development, I believe that my previous 40p share price target is now out of date.
The road to 60p
My new target for the Sirius Minerals share price is 60p because I believe this firm’s potential is hugely understated.
The agreement the company signed last week was relatively small in comparison to some of the previous deals the group has inked, but it takes Sirius one step closer to production. Under the terms of the deal, Intercontinental Trade DMCC Dubai has agreed on a seven-year basis to buy up to 350,000 tonnes of polyhalite annually when the miner commences production from its flagship North Yorkshire potash mine.
Following this deal, the company has now secured binding agreements for 4.7m tonnes of fertiliser a year. To access the second stage of financing for the development of the Yorkshire mine, Sirius and its lenders have set a target for binding agreements of 6m to 7m to be signed with third parties to buy production.
So far, there has been a positive reception from buyers of the future miner’s product. The last deal was signed towards the end of 2017 when the company signed a 750,000-tonne off-take agreement with Wilmar for sale of its product in South East Asia. Since this deal, progress on further off-take agreements has been slow, but Sirius has been working on other issues — mainly the early stages of construction of its mining complex.
After raising $1.2bn in funds from lenders and shareholders during 2017, management has been hard at work trying to make Sirius’s dreams a reality. Success at this crucial juncture is vital because most mining companies fail in these early stages. The firm has already proved that it is better than most of its early-stage peers by locking in funding for the first stage of the project.
To progress to the second stage, management has been seeking reassurances from the government, which would make it a less risky bet for investors.
Earlier this year, management declared it was “essential” to secure $2bn in debt guarantees from the Treasury before pushing ahead with the next stage of the construction process, which includes a 23-mile tunnel linking its mine with a port on Teesside.
Overall, the company has to raise another $3bn to fund stage two of the project, to hit the target of reaching completion in 2021. Production is scheduled to reach 10m tonnes per annum by 2024 and 20m tonnes by 2026.
At this stage, it’s vital that there are no setbacks or delays in the fundraising process as any pushback of the final production deadline could rattle investor confidence in the project.
The good news is investors should soon find out how much progress the company has made putting together its financing package. According to the latest shareholder presentation, commitment letters are expected from lenders this month before the deal is finalised in the fourth quarter. Sirius is looking for $1bn of commercial debt and $2bn of UK guaranteed bonds to fill the $3bn quota. And if the proposed financing deal is completed successfully before the end of the year, I believe the share price could take off.
Set for take-off
If Sirius can successfully convince lenders its project is worth backing, the company will have overcome the most significant headwind most small mining companies face — finding the money to chase global ambitions.
The final hurdle will be actually building the mine itself, but assuming it has got its sums correct, this process should be relatively straightforward (although in the mining business nothing is ever 100% guaranteed).
Construction is already well underway. Only last week the enterprise broke ground on the 23-mile tunnel beneath the Yorkshire Moors connecting the mine with Teesside. The company has already completed substantial infrastructure work on the roads surrounding the mine site as well as work on the four mining shafts required.
The further along the construction timeline Sirius progresses, the less risky the company becomes as an investment. With production costs estimated at being $30 to $40 per tonne and long-term supply contracts already signed at $145 per tonne,the group believes that it will be highly profitable when the North Yorkshire project is completed. So, when construction is complete, investors should be well compensated for their patience.
Still, before it reaches the production stage the company needs to get financing commitments in place. When it has commitments from lenders, however, City analysts believe the stock could jump to 60p as one of the most substantial risks to the success of the group is removed.
I believe over the longer term, the upside could be even higher. Peer CF Industries is currently trading at a valuation of 7.2 times earnings before interest, tax, depreciation and amortisation (EBITDA). According to Sirius’s own figures, when its mine is running at full production, producing the targeted 20m tonnes of polyhalite per annum, in the most optimistic scenario, the company’s annual EBITDA could hit $3.4bn.
If the stock attracts the same valuation as CF, Sirius’s market cap could hit £18.5bn, up from £1.5bn today. However, in the meantime, I believe the Sirius Minerals share price could reach a more conservative target of 60p as it get the final stage of financing in position.