The Sirius Minerals (LSE: SXX) share price is up 9% at 3.5p at the time of writing after the company revealed details of a new financing strategy.
The new plan is effectively a three-stage financing process, replacing the failed two-stage plan. In this piece I’m going to look at how this might work. I’ll also explain the pros and cons of the new plan, as they appear to me.
How it could work
Sirius now plans to raise $600m by March to finance what it says are the riskiest parts of the mine construction.
These involve digging four mine shafts down to the level at which polyhalite can be mined, and completing the first stage of the transport tunnel. When completed, this 37km-long tunnel will run from the Woodsmith Mine near Whitby to port facilities at Teesside.
To complete the mine and bring it into production, further funding of about $2.5bn would be needed. However, chief executive Chris Fraser says that this work would mostly be fixed price and would be comparable in risk to a typical civil engineering project. Mr Fraser believes it should be easier to arrange conventional debt funding when shaft sinking is excluded.
Where’s the $600m cash coming from?
Mr Fraser has to find $600m by March or the business could run out of cash. In today’s update he says that the company is “in discussions with potential strategic partners and debt investors”. Nothing is fixed yet.
One possibility mentioned today is that money will come from a new strategic investor. Any such investor would be almost certain to want an ownership stake in the business, in my view.
Indeed, I think a sizeable part of this $600m is likely to come from the issue of new shares. Given that Sirius’s market cap is now just £260m (c.$333m), existing shareholders could face heavy dilution if the plan goes ahead.
Good news
Delaying the main debt element of the fundraising should cut interest costs. This is because the debt should be needed for a shorter period of time before production starts and repayments can begin.
This could deliver big savings — Sirius says that its original financing plan included $1.5bn of financing costs.
I can also see the logic of separating out the risky shaft-sinking work from the less risky mine fit-out.
What’s bad
I recently overheard a conversation about the project between two non-investors. They couldn’t believe that construction of the mine had been started without funds to complete the project.
It was certainly risky. And in some ways the firm’s latest plan just extends this risk.
Even if Sirius gets the initial $600m needed to resume work, there’s no guarantee that the remaining c.$2.5bn will be available. The project could suffer from further delays and uncertainty.
My view
I continue to see Sirius Minerals’ Woodsmith Mine as a risky and speculative project. It’s technically challenging and will produce a type of fertiliser that’s not commercially proven for large-scale use.
In my opinion, there’s still a real risk the whole project will collapse. Even if the mine is eventually completed, I don’t think existing shareholders will do very well out of it.
With heavy dilution or a cash crunch possible in the near future, I’d continue to avoid this stock.
