Sirius Minerals (SXX) shares: is this the beginning of the end?
Sirius Minerals has failed to secure the vast sums it needs to build its huge polyhalite mine. It now has a matter of months to plug a huge funding shortfall, and investors are rightly concerned.
Joshua Warner | Writer, London | Tuesday 24 September 2019 15:07
What has happened to Sirius Minerals?
'Due to the ongoing poor bond market conditions for an issuer like Sirius we have not been able to deliver our stage 2 financing plan. As a result, we have taken the decision to reduce the rate of development across the project in order to preserve funding to allow more time to develop alternatives and preserve the significant amount of inherent value in this world-class project.' – Chris Fraser, chief executive of Sirius.
Sirius Minerals has cancelled its plans to raise $500 million of loan notes, without which it can’t access a $2.5 billion credit facility from JPMorgan that formed the backbone of the financing it needs to build its polyhalite mine in North Yorkshire.
The company originally postponed the issuance of the loan notes in early August and said the market conditions have not improved since then, stating no company with a similar credit rating (of B/B- range) has tried to raise debt through the bond market recently.
What’s at risk?
Ultimately, with a $3 billion-plus funding gap to fill, the entire company and project is at stake. The company has £180 million in cash, of which £117 million isn’t already accounted for. It says this will last for the next six months but that it will need more funding by the end of March 2020 if it is to survive. Plus, if it wants to secure such a large and complex funding package it will have to have something in place much sooner, preferably before the end of 2019.
Although Sirius is confident it can find the funding it needs, the situation is precarious enough to raise doubts about its survival. 'The board of directors believes that additional financing will be secured in the coming months, however there is a risk that a successful outcome may not be reached. This therefore represents a material uncertainty that may cast significant doubt upon the group's ability to continue as a going concern,' the company said in its recently released interim report.
If no solution is found, then over 1000 jobs could be lost in a neglected area where jobs have already been lost. There could be further job losses if it spills over to any local contractors or suppliers. The story is a local one even when it comes to investors, with many of the company’s 85,000-plus retail investors thought to be from the surrounding area.
What now for the SXX share price?
The company has had to halt major development of the project and slow down the pace of work in order to hoard cash to survive over the next six months. Sirius intends to conduct a full strategic review during that time in the hope of finding the funding it needs.
Option 1: secure government support
As far as Sirius is concerned, its project is not only integral for the local area but for the country as a whole. It therefore hoped that it would secure support from the UK government, but this has proven to be an incorrect presumption. The company’s original funding plans for the project were based on the 'anticipated participation' of the Infrastructure and Projects Authority, part of the Treasury. But it abandoned those plans when JPMorgan stepped up and offered the credit facility.
Sirius went back and pleaded for the government to reconsider when it decided to postpone the bond issuance last month. It asked the government to guarantee $1 billion worth of the debt to get the wider financing plan over the line but was unsuccessful. This would have provided more confidence to those considering lending money to Sirius, because the government would act as a guarantor for a substantial portion of it.
'The government has reviewed the case for the provision of the support requested to facilitate the financing of the project and has decided not to provide the support requested. The company believed this commitment would have enabled the company's financing to be delivered as planned,' Sirius said.
There may still be hope for Sirius. There is still some political pressure being applied, mainly by local politicians. The Labour MP for Redcar, Anna Turley, for example, has said the project is 'as important for Teesside in terms of jobs created as Crossrail is for the South' and warned it threatened the country’s reputation as a sound place to invest in major infrastructure projects.
It seems very unlikely that Sirius will secure the support of the government. However, there is widespread expectation that a general election will be held sooner rather than later. The government’s tune toward the project could change depending on the result.
Option 2: an alternative financing arrangement
Sirius is also looking for other lenders and considering alternative forms of funding to get the project back on track. It has said that 'a number of different investors and advisers have indicated the potential for a range of alternative approaches'.
This opens up the risk that any new financing package could be materially different to the previous one, or possibly more expensive if lenders decide to charge more to account for the added risk now attached to the company.
Debt will have to remain the main source of any new funding package because issuing equity now would be ineffective considering how much shares have slumped. But the main reason Sirius decided not to issue the bonds is because the poor market conditions meant it may have had to offer a yield of over 15%. That would have been regarded as too high to satisfy the conditions to access the larger pool of debt from JPMorgan. This initially casts doubt over the ability to raise money through debt or equity.
However, Sirius said it has received feedback that issuing loan notes 'could potentially be successful should the offering include warrants', but said this would also would have failed to meet the conditions needed to secure the support of JPMorgan. Sirius asked JPMorgan to waive the condition, but was rejected by the bank. This suggests that any new financing arrangement could cause further dilution to existing investors, which is clearly a concern to existing investors.
There is good reason to doubt Sirius will find an alternative lender, or that JPMorgan will change its tune. It already stepped up to save Sirius when its original funding plan fell through and seems unwilling to budge, and if JPMorgan, which is already invested in the project, considers it too risky then there is little reason to think another major lender will think otherwise.