International mining company Anglo American (LSE:AAL) today confirmed a formal bid to take over struggling Sirius Minerals (LSE:SXX) at 5.5p per share.
This values Sirius Minerals at £405m, which is a lot less than touted to prospective investors last year.
Shareholder losses
The Sirius Minerals story is a depressing one, particularly so for the locals of Sneatonthorpe, Whitby. Many of the residents bought shares in SXX, after being seduced by the dream of big returns. Some sunk their life savings into the mining venture and will be lucky to get 12% of their investment back if this takeover happens.
Accepting the SXX share price at 5.5p is a bitter pill, the shares having reached a high of more than 37p in July 2018. Therefore, many long-term holders incurred extreme losses.
The firm employs many locals at the mine which makes the current situation doubly disappointing for the community, although the prospects of a rescue would be good news.
Do or die
The fact is, SXX is running out of money and shareholders have little option but to accept the offer from FTSE 100 company Anglo American. If they don’t, there’s a likelihood the company will go bust and shareholders will get nothing. The decision will be made within 28 days and 75% of shareholders must support the bid for it to go ahead.
Sirius’s Woodsmith mine plan has proved overly ambitious. Poly4, the product it aims to mine, is new to the market. It comes from the naturally occurring mineral polyhalite and is touted as a sustainable fertiliser that might sell very well. However, demand remains to be proved.
The project also has a complex financing model with the company having needed to reach certain milestones to access the cash it needs. For instance, the share price has fallen 80% since August when Sirius failed to sell a £385m bond offering to realise a $2.5bn loan from JP Morgan Cazenove.
Escalating costs
Anglo American is a much better-financed prospect. The British mining company produces 40% of the world’s platinum. It also produces diamonds, copper, iron ore, nickel and coal.
It has a price-to-earnings ratio of 7, earnings per share of £3.20 and a 4% dividend yield. The share price has risen 112% over the past five years.
However, mining is not for the faint-hearted and it’s had its fair share of hurdles to0. These included rising debts, plummeting commodity prices and a major divestment programme.
For Anglo, the appeal of this takeover is its strategic fit. It presents a scalable asset with a long life at a relatively low cost. Poly4, the final product, is sustainable and offers the potential of over 50% EBITDA margins.
A successful takeover is not the end of the story though. For the Woodsmith mine to succeed, it will need continuous funding.
The project at the deep potash and polyhalite mine entails sinking two major shafts and building a 37km ore transport tunnel.
Anglo has forecast that it will require $600m to cover operating costs for the first two years. This would be to continue sinking the service shaft and reaching the orebody.
It’s more likely that close to $4bn is required for Sirius’s project outline to come to fruition. Time will tell whether Anglo American can cope with such a massive undertaking.
The Sirius Minerals board recommend that shareholders accept the bid. I agree.