Large mining projects often take a long time and huge amounts of investment before they finally come to fruition and actually start producing the raw material and a revenue stream. During that time the share price can experience a lot of volatility and I remain to be convinced that the majority of PIs have the patience to invest long term in this type of company, and in some cases there is an argument for buying in closer to production once everything has been sorted out and financing has been finalised... Sirius Minerals (SXX) is a company that I have been a fan of for several years now as I have always believed that ultimately it would pay off for shareholders taking a long term view and holding through until the stage where it will be producing large revenues...
The finance deals that it has secured along the way haven’t exactly proven popular with the market, but then it is hard to know what people really expected when you have a company of this size raising billions of pounds – especially when a significant enough proportion of that is coming from equity raises and via bonds that can be converted into equity. Now the company - which is in the process of constructing a polyhalite mine in Yorkshire to extract one of the largest deposits of this type of fertiliser in the world - has announced its stage two financing package, and the share price has plummeted as a result of the news. But you do have to wonder where shareholders thought that the $3.8 billion needed was going to come from, given that the company has a market cap of around £870 million. The proposed funding will see a placing at a price of between 15p and 18p per share, but existing holders will also get the opportunity to take part in this via an open offer at the same price. Additionally, the company will be issuing $644 million of convertible bonds, with a repayment date of 2027, and these are also expected to replace the existing $244 million of 2023 bonds. These will carry a coupon of 5% which will be paid at maturity, giving an implied yield of around 10%. They will be convertible into shares at a premium of 20-25% above whatever price the equity raise occurs at. The rest of the funding will come from a secured revolving credit facility of $2.5 billion, plus senior secured bonds, of which there will be an initial offering of $500 million, and further down the line additional bonds will be issued in order to reduce the reliance on the credit facility. This funding will then be sufficient to take the company through to the stage where it is producing 20 million tonnes per annum and is generating net positive cash flows from the operation, which will be used to service the debt, amongst other things such as the costs of running the company.
Construction of the mine is already underway and the company has continued to secure offtake agreements for the polyhalite, and now has 10.7Mtpa in offtake commitments and with more expected to follow. I can see why some investors are upset by the way that the financing has been done as it will dilute potential returns in the future, as there will be a lot more shares in issue, but that was always likely to be the case as there was no way that amount of money was going to be raised solely from debt and with no equity element. In terms of the potential, if it does achieve 20Mtpa that gives the project an NPV of nearly $15 billion, and at that level of production it would have a life of around 14 years based on current reserves of 280Mt, but the overall resource stands at an estimated 2.66 billion tonnes, so there is plenty of potential to extend the life of the project for many years beyond that. Obviously it will be carrying a lot of debt, but it is forecast that it will be able to repay at least $3 billion of that over the first five years of production, and more should it achieve the upper end of its production targets. So although the figures sound huge, I don’t see any issues with it managing that debt, as long as polyhalite prices remain within the expected range – should they drop a significant amount below forecast and remain at that level, then it could have problems.
I still view Sirius as a long term investment, and if all goes to plan it should still work out well for investors, even allowing for the dilution from the stage two funding. For anyone who has been on the sidelines, the current drop presents a good buying opportunity in my opinion.
Filed under: Sirius Minerals, Optibiotix, Woodford, Next, Sainsbury, Westminster Group, ULS
RISK WARNING & DISCLAIMER - FiveFreeShareTips.com tips are provided by independent authors via a common carrier platform and do not represent the opinions of FiveFreeShareTips.com. FiveFreeShareTips.com does not accept responsibility for or make any warranties in connection with or recommend that you or any third party rely on such information. The information available at FiveFreeShareTips.com and via emails you receive from [email protected] are for your general information and use and are not intended to address your particular requirements. In particular, the information does not constitute any form of advice or recommendation by the tipsters or FiveFreeShareTips.com and is not intended to be relied upon by users in making (or refraining from making) any investment decisions. Trading shares involves the risk of loss. The tipsters and FiveFreeShareTips.com shall not be liable for any losses or other damages incurred. The value of investments can go up or down and the past is not necessarily a guide of future performance.
Well actually it will be six. One every week day and one on Sunday, each landing with you at 11 AM sharp.
Unlike other services (which may always have a vested interest) we pride ourselves on our impartiality and cover all small caps including AIM. the Standard List, The Wider Main Market and NEX.
We cover small caps, penny shares, FTSE 350 stocks and blue chips. We look for red hot penny shares, Warren Buffett style value investments with yield and growth stocks. There is no technical analysis in our work just solid fundamental analysis from a team of experts with decades of stockmarket experience.
You will not agree with all we publish but if you are interested in small caps you cannot afford to ignore it either. Yo'll never be charged for the free share tips from Five Free Share Tips and given the star writers involved you know that they will move share prices.
There's no telephone number or postal address required and there is no charge, ever, for your Five Free Share Tips membership. Just free shares tips every day apart from Saturday And each day's share tip will not just be a few thoughts cobbled together but will be detailed analysis from experts.
Our experts do not just earn their living from writing. All own shares. If they own shares in a stock they cover they will declare it and will not sell until after advising a sell to our readers. And why not our tips are so good that why shouldn't our readers put their money where their mouth is?
Don't just take our word for it! Judge us on the calibre of our free share tips and join today to start receiving them from September 1 2017. If you don't like what you get delivered to your inbox unsubscribe and you will never hear from us again. So why not give it a go? Sign Up Now
We've put together a panel of top tipsters, including:
Tom Winnifrith, in his 27th year writing about shares, noted fraudbuster & dubbed "The maverick Tipster"
Chris Bailey, City whizz kid turned financial guru, rated as one of the top 50 commentators on shares on twitter, founder of Financial Orbit
Steve Moore, has worked with Tom Winnifrith for all bar 3 weeks of his working life - a noted commentator on value stocks
Malcolm Stacey, The Grandfather of Share Blogging, the founder of ShareCrazy & a best selling autthor of stockmarket books
Lucian Miers, the Bard of the Boleyn, one of the UK's best known short sellers
Gary Newman, writes about value investing on AIM, speciality is in share tips on oil and mining companies
Nigel Somerville, The Deputy Sheriff of AIM, an expert in forensic analysis a skill used to bust frauds but also to tip true value investments
The team from HotStockRockets, specialising in AIM and small cap shares which will fly on a three month view
Remember to book your place at the UK Investor Show 2018. The UK’s top investment show taking place on Saturday 21 April 2018 at the Queen Elizabeth II Conference Centre in Westminster, London. The show will feature a unique line-up of top speakers including Nigel Wray, tech queen Vin Murria, Dave Lenigas, Mark Slater, Tom Winnifrith, Adam Reynolds, Ed, Croft, Nick Leslau Luke Johnson and Dr Johnny Hon as well as 135 exhibiting small cap companies.
The hot share tips given here are of necessity, general. They cannot relate to the individual circumstances of investors. Anyone considering following the share tips contained here should seek independent advice from a Financial Conduct Authority authorised Stockbroker or Financial Adviser. We cannot be held liable if individuals suffer losses through following share tips contained on this site or emailed out as free share tips. The value of investments can go down as well as up. The past is not necessarily a guide to future performance. Investing in shares can lose you part or all of your capital although the potential returns are theoretically unlimited. The difference between the buy share price and the sell share price for smaller company shares (penny shares) can be significant. Profits from dealing in shares may be liable to tax - the level of tax and bases of relief from tax are subject to change. Changes in the rates of exchange may have an adverse effect on the value or price of an investment in sterling terms if it is denominated in a foreign currency. Some of the shares recommended on this site will be smaller company shares. By their nature such investments can be relatively illiquid and thus hard to trade. And that makes such investments more of a high risk than larger company shares (or 'small caps'/'penny shares'). FiveFreeShareTips.com & its sister site ShareProphets.com defines a smaller company share as any stock traded on AIM or NEX or which has a market capitalisation of less than £300 million.