As I write, shares in the popular Sirius Minerals (LSE: SXX) are down 26% since their closing price on 29 April.
It’s all down to the much-awaited phase 2 funding for development of the company’s polyhalite potash mine in North Yorkshire, which was announced on 30 April, with a further update Wednesday.
The announced share placing has been completed, raising approximately $425m. That’s the good news, but the not-so-good is that it was at 15p per share, the low end of the 15p-18p range initially indicated. The new shares amount to around 28% of the total equity now, so that’s the amount of dilution existing shareholders have already suffered. But there’s more.
Even more dilution
There’s also a new convertible bond offering, raising an additional $400m, in which proceeds from the new bonds maturing in 2027 will be partly used to refinance existing 2023 bonds. The bad part? The bonds can be converted into ordinary shares, with the price originally expected to be between 18p and 22.5p. Today we heard the price, and at 18.8p it is within that range — just. That’s more future dilution.
The conversion price can be adjusted lower later too. Oh, and the new bondholders will also receive a ‘make whole’ amount on conversion, so it seems they can’t go wrong. Why do I get the feeling that the fat cats have made off with the cream? I did expect dilution, though I hoped it wouldn’t be quite to this level. But things could have been a whole lot worse.
Better deal?
Sirius had been in long-term talks with potential lenders over its phase 2 funding, but they were quickly abandoned when the firm was approached by JPMorgan, which was responsible for putting together the replacement plan.
That suggests to me that the original plans could have been considerably more painful for existing shareholders, though the fact remains that the equity portion of the new deal (including the share placing and the convertible bonds) is larger, and at a bigger discount, than analysts had expected.
And Sirius still needs to place $500m worth of high-yield bonds by September as a condition of getting a $2.5bn overdraft from JPMorgan.
But there’s upside too. Providing project costs don’t overrun (which they have already, though only by a modest amount), the funding should shortly all be in place to take it through to first commercial production by 2021, with volumes expected to reach 10m tonnes by 2024.
Results
Full-year results were somewhat overshadowed by the funding announcements, but they did include impressive progress in securing customer contracts.
The firm told us that “Total peak aggregate take-or-pay supply agreements increased to 8.2 Mtpa in the year, and to 10.7 Mtpa post period end, materially exceeding 2018 targeted level of 6-7 Mtpa.” And there are also binding take-or-pay supply agreements in place for China, Africa, Brazil and 12 other South American countries.
Earlier in the week, the company revealed that it has “has entered into an exclusive 10-year supply and distribution agreement with a leading European agribusiness group, BayWa Agri Supply & Trade” for the distribution of its potash in Europe.
What am I going to do now? The big uncertainty has at least been lifted, and I’m still in for the long term.
