The wait is over. Yesterday Sirius Minerals (LSE: SXX) finally announced that it had secured funding for its flagship Yorkshire potash project. Unfortunately, the market didn’t react in the way that management might have hoped. Rather than rallying, shares in the company slumped by a double-digit percentage and the shares are racking up further declines today.
These declines are understandable, however. As part of the funding, the company has issued new shares at a deep discount to the prevailing market price, undercutting and diluting existing shareholders at the same time. Sirius has raised £370m through the placing of 1.7bn shares issued at a price of 20p per new share, approximately a 40% discount to the prevailing open market price. The placing represents roughly 4.4% of the company’s issued ordinary share capital.
In addition to this placing, Sirius has managed to place $400m of convertible bonds through an offering. Unless these bonds are paid in full, they will lead to even more dilution down the road. Still, as a means of financing an early-stage mining project, these convertible bonds are a relatively good option. Sirius is getting away with paying only 8.5% per annum in interest.
Good news for the company
The long-awaited financing deal is, broadly speaking, good news for investors.
The company can now finally begin the construction of the first phase of its flagship potash project after years of legal work and waiting. However, by taking on $400m of debt, the risk of investing in Sirius has now substantially increased. On this debt alone, the company will be paying $34m per annum in interest, which is a huge sum for a business that has no income and won’t generate any revenue for two years at least. There are few (if any) mining projects that come in on time and on budget so I wouldn’t rule out further fundraising from Sirius further down the road.
Still, if you’re aware of the risks that come with investing in such an early stage mining company, Sirius could be an attractive buy.
Now that the first phase of the company’s project is fully funded, management can concentrate on the construction of the mine and while it may be several years before any profits are realised, the company is one step closer to generating a return for investors.
And these returns, when they come, could be worth the wait. Indeed, management estimates the project now has a current net present value of $15.2bn and an internal rate of return of 28% if everything goes to plan. If Sirius hits this target, it will mean that the company owns one of the most lucrative and productive mining assets in the world. Figures show the asset could generate annual earnings before interest, tax, depreciation and amortisation ranging between $1bn and $3bn through various volume and price outcomes. The firm’s current market value is less than £1bn.