Sirius Minerals (LSE: SXX) owns a unique asset. Located in North Yorkshire, it’s the world’s largest and highest grade deposit of polyhalite, a multi-nutrient mineral salt and valuable fertiliser. The mine the company’s constructing could have a life of 100 years, and is expected to make a significant contribution to the UK economy.
You can currently buy shares in the FTSE 250 firm for under 20p — around half the price of last year’s high. And with it potentially on the brink of announcing a multi-billion-pound financing deal to see the mine through to production, could it be the biggest bargain in the market today?
Shifting sands
Sirius has been in negotiations with lenders to secure $3bn of borrowings since 2016. Its aim from the outset was to use debt in order to avoid further dilution for existing shareholders. However, it announced in September it would need an additional $400m-$600m for the project, but that it would not seek to increase borrowings. This raised the spectre of a dilutive equity fundraising, as well as adding another layer of complexity to securing the full financing package.
Negotiations for the $3bn of borrowings — proposed to be split equally between a syndicate of banks and the UK’s Infrastructure and Projects Authority (IPA) — dragged on. On 22 January, Sirius announced it had revised its proposal to the prospective lenders. This envisaged borrowings being drawn sequentially in three stages — a high-yield bond, a commercial bank tranche, and the IPA guaranteed bond — linked to key construction milestones.
Sirius also stated: “Due diligence reports have been prepared by the lenders’ advisors and the company is engaging with prospective lenders and their consultants to address the due diligence matters that have been highlighted.”
The company didn’t reveal what these matters were, but said it was “confident of being able to address [them] through negotiation of the detailed terms of the finance documents.”
Surprising turn of events
Clearly, Sirius wasn’t able to satisfy the prospective lenders on the due diligence matters swiftly, because after seven weeks there was a surprising turn of events. On 12 March, the company announced “it has received a conditional proposal from a major global financial institution” that “potentially offers a more flexible and attractive solution… and therefore it is pausing discussions with its existing prospective lenders to pursue the alternative proposal.”
It told us it hopes to get a firm commitment for the alternative proposal before the end of April, but added that this was “subject to the finalisation of the financial institution’s due diligence and internal approvals.”
It remains to be seen whether due diligence matters, which appear to have been a continuing stumbling block for the original prospective lenders, also prove to be a thorny issue for the new mystery financial institution. Either way, though, it strikes me that lenders have the whip hand in the current situation.
Clarity needed
I see considerable risk that Sirius will be unable to get a deal with all-in interest costs as low as the 6-7% it has been targeting. Add in the aforementioned potential equity dilution of $400m-$600m, and I find it nigh on impossible to say whether the stock is currently undervalued, fairly valued, or overvalued.
As such, my inclination is to avoid it, until we have more clarity on the crucial funding.
