Share in Sirius Minerals (LSE: SXX) are down by 4% at the time of writing on Tuesday, after the firm admitted it still hasn’t secured any of the $3.6bn (£2.9bn) funding needed to complete the development of the Woodsmith polyhalite mine in North Yorkshire.
For shareholders who’ve seen the fertiliser firm’s stock fall by nearly 40% over the last six months, it’s disappointing news.
However, I expect a solution to be found, eventually. And the company is continuing to make solid progress with the construction of the related mine shafts and transport tunnel.
Could this share price weakness be the last great buying opportunity for Sirius investors?
Funding keeps slipping
Sirius needs $3bn (£2.4bn) of debt to complete the mine build. In September, chief executive Chris Fraser said that commitment letters from lenders were expected during the fourth quarter of 2018. In November, this deadline was extended to “December 2018 and January 2019.”
The company is now saying that it hopes to have “agreed commitment letters as soon as possible.”
Fraser says that the firm’s unrestricted cash balance of £230m is enough to keep construction operations going into the second quarter of 2019. Workers won’t have to down tools just yet. But the fact that this has been mentioned at all suggests to me that the timetable for financing is far from certain.
This $3bn plan has changed
Today’s update has revealed some changes to Sirius’s stage-two financing plans.
The company was previously hoping to borrow $3bn, with half of the loans guaranteed by the UK government’s Infrastructure and Projects Authority (IPA).
That’s changed. Sirius is still aiming to raise $3bn from lenders, but the cash will be released in three stages. Each of these will be dependent on a certain set of construction milestones being completed.
The IPA-guaranteed debt will be the last to be released. This should reduce the risk to the taxpayer as, by then, Sirius expects to have started selling POLY4 fertiliser to commercial customers. However, I suspect this approach will increase the cost of the first and second stages of funding, which won’t be protected by government guarantees.
What about the extra cash?
Back in September, Sirius said that an extra $400m-$600m would now be needed to complete the build, on top of the $3bn originally planned.
Today’s update didn’t provide any further information on where this extra cash will come from. However, the company has repeatedly ruled out borrowing this money.
I expect that the extra funding will come from shareholders, either directly or through some kind of partnership deal with an outside investor. In either case, this seems likely to be dilutive for existing shareholders.
The right time to buy?
I think that Sirius will eventually secure the funding it needs. But I expect the costs will be higher than expected. This could reduce future shareholder returns.
At the last-seen share price of 22p, Sirius equity is still valued at £1bn. That seems high enough to me. It’s still nearly three years until production is due to start, and the project is currently unfunded.
I continue to see Sirius Minerals as speculative and quite risky. For me, it’s one to avoid.
