Shareholders of Sirius Minerals (LSE: SXX) yesterday voted to accept a £405m offer for the company from FTSE 100 mining giant Anglo American (LSE: AAL). It wasn’t a great surprise. The alternative was placing the company into administration.
The deal with Anglo promises to secure the development of a vast polyhalite mine under the North York Moors. This will bring significant economic benefits to the region, and a multi-nutrient fertiliser to the world. However, an army of small shareholders stand to lose savings and pension money. This is because many invested at much higher prices than the 5.5p a share they’ll be getting back.
I know plenty of shareholders are angry with the Sirius Minerals board, but still have great belief in the project itself. So should those seeking to maintain a financial interest in it — and new investors attracted to exposure to it now its future is more secure — buy shares in Anglo American?
Impressive project
The polyhalite mine is an impressive and massive undertaking. It involves sinking two mine shafts to depths of up to 5,250ft, and building a 23-mile underground conveyor belt to take polyhalite to Teesside for processing and export. It’s expected further investment of over $3bn is needed to complete it.
Anglo American has the necessary financial resources, as well as considerable technical and product marketing capabilities. How will the polyhalite mine fit into its business and how substantial a part of the business will it be?
Diversification and valuation
Anglo is a diversified miner, and reckons the acquisition of Sirius “supports our ongoing transition towards supplying those essential metals and minerals that will meet the world’s evolving needs — in terms of the undoubted need for cleaner energy and transport, and providing infrastructure and food for the world’s fast-growing and urbanising population.”
Anglo’s shares are currently trading at around 1,950p. Investors at this price are buying into a company with a market capitalisation of £26.6bn, and an enterprise value (EV) of £30.2bn. EV is a company’s market cap plus its net debt. Anglo’s net debt at the year-end 31 December was $4.6bn (£3.6bn at current exchange rates).
Meanwhile, its net assets stood at $31.4bn (£24.5bn). Revenue for the year was $29.9bn (£23.4bn), and earnings before interest, tax, depreciation and amortisation (EBITDA) was $10bn (£7.8bn).
As such, the stock is trading at a price-to-net assets ratio of 1.09, a price-to-revenue ratio of 1.14, and an EV/EBITDA ratio of 3.9. The valuation appears very reasonable to me. And the balance sheet is strong, with net debt at less than 0.5 times EBITDA.
Substantial addition
What does the acquisition of Sirius bring to the party? It’s reckoned the mine could generate annual revenue of $3bn a year at full production, with EBITDA of around $2.35bn. On a pro forma basis, the mine would account for about 9% of Anglo’s total revenue, and — due to its projected high margin — a substantial 19% of Anglo’s total EBITDA.
I think Anglo is an attractive business, with polyhalite sitting alongside diverse other assets. Furthermore, with the company’s strong balance sheet, reasonable valuation, and a running dividend yield of 4.4%, the shares look very buyable to me.