Anglo American (LSE: AAL) confirmed to its investors on Wednesday that it was indeed considering making an offer of 5.50p per share for the entire equity stake of Sirius Minerals (LSE: SXX).
Sirius is developing a polyhalite fertiliser deposit in North Yorkshire. It failed to deliver its stage two financing last year, had to slow development, and embarked on a strategic review. Share prices collapsed below IPO levels and had been in a downtrend since mid-2018 as delays, equity raises, and debt issues disgruntled investors.
Sirius blamed market conditions and Brexit for the failure. I think lenders were asking for more compensation for the risk they saw in the project than Sirius was ready to acknowledge.
Unstable ground
Sirius’s strategic review concluded that a two-stage development plan was needed, starting with de-risking the project by getting some polyhalite out first for approximately $600m, then spending $2.5bn to ramp up production. The review also mentioned discussions with potential strategic partners, which is where Anglo comes in.
Anglo would pay around £386m in cash for control of Sirius. There were £800m of liabilities sitting on Sirius’s balance sheet in June 2019, which Anglo would have to take on. Anglo had £5,143m of cash on its balance sheet at the end of 2018, so would have no problems in swallowing Sirius.
Riding to the rescue
Anglo believes the polyhalite project can be a world-class, low-cost, long-lived asset. There are already millions of tons per annum (Mtpa) in off-take agreements, negotiated by Sirius, in place. Based on producing 13Mtpa, the net present value of the project is estimated to be $12bn, which includes the $3.1bn spending needed for the two-stage development plan.
$12bn is roughly £9.2bn, and if we knock the £1.2 million in debt and equity Anglo might pay for Sirius, the project is worth something like £8bn to Anglo. Anglo’s market capitalisation is about £29.4bn at the moment, so this acquisition – assuming it’s valued accurately and Anglo can get it going – could add value for shareholders.
Anglo undoubtedly has the technical expertise and financial clout to get the project up and running. It wants the polyhalite deposit because fertiliser helps to feed people, and its coal deposits may become worthless in the future; it needs to go green.
Deal or no deal
Anglo is offering a significant premium to the pre-offer share price, but shareholders in Sirius may still believe the offer short-changes them, given the potential value to Anglo. For this reason, there is a chance that even if Anglo makes a firm offer, Sirius shareholders may reject it.
They would not be wise to do so in my opinion. Sirius needs to pay back about £500m in loans soon and does not have the cash to do it. Its prospects for getting further loans to stop the company going bankrupt are bleak. If that happens, then the value of the polyhalite deposit to shareholders is gone. Accepting Anglo’s offer means the value of the deposit to shareholders is 5.50p per share.
I think there is a good chance that this acquisition is going ahead. I have owned shares in both companies for years and will be saying yes to both corporate actions if they come. Buying shares in Anglo American might be your only chance to get a piece of a successful UK polyhalite mine.
