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Royalty funding deal for UK potash mine 27 Oct 2016

Peter Kenyon, TunnelTalk

Australian billionaire Gina Rinehart, owner of iron ore mining giant Hancock Prospecting, signs a royalty agreement with UK potash (polyhalite) mine developer Sirius that adds another US$300 million worth of funding for the US$2.9 billion scheme.

Sirius is looking to raise US$1.1 billion to fund Phase I of the development, which involves construction of a 37km long x 4m i.d. TBM-driven tunnel from the minehead near Whitby in North Yorkshire, under the North York Moor National Park, and on to a harbour facility and processing plant that will be constructed in Redcar as part of Phase II.

Australian mining and agriculture billionaire Gina Rinehart
Australian mining and agriculture billionaire Gina Rinehart

The underground contract was awarded to the Hochtief/Murphy JV in June, with the Thyssen/Redpath JV awarded a separate contract to sink the 1.6km deep minehead. The latest design calls for three TBMs, and tunnelling shafts of 330m and 360m deep.

Under the terms of the latest deal Rinehart’s company will invest US$250m for a 5% royalty on all polyhalite sales up to 13mtpa, and 1% on any sales up to the mine’s eventual planned capacity of 20mtpa. The cash will only become available to Sirius once the remaining, and yet to be financed, US$800 million has been sourced, but analysts agree that the billionaire’s involvement is a ringing endorsement of the project and should make sourcing the remaining cash balance easier to achieve.

In addition, Rinehart will take on US$50 million of new equity, which at today’s share price of 40p/share would imply the issue of 125 million new shares and an ownership of approximately 9% of the company. Under the terms of the deal, however, the price/share will depend on their market value at the time her investment cash is drawn down, in approximately three years time, at which time the substantially de-risked project could have a share price of £1.70, which would represent only 29 million newly issued shares and an effective ownership of only 2%.

At full production capacity, and at a projected price of US$125 per tonne for Sirius’s new enhanced potash product, polyhalite, total sales/year would be worth US$2.5 billion/year. Extensive crop trials commissioned by Sirius have confirmed that polyhalite is a superior fertilizer product to potash, and should command a premium price on the world market. Offtake agreements have already been reached with a number of potential buyers, but the fact that Rinehart’s business empire has diversified into food production is seen as a significant endorsement of the product itself.

Chris Fraser, Managing Director and CEO of Sirius, said: “We are delighted to have signed this agreement with such an experienced party in the mining industry, as well as one that has very successful and strong leadership and a long term and growing agricultural interest.”

Rinehart said: “This project delivers a new and natural product which is relevant to Hancock’s focus on agriculture and after years of field tests and across many crop types, demonstrated improved yields. Sirius has a large, high quality mineral resource and is located in a stable jurisdiction with a competitive tax rate.”

She added: “I am advised that Sirius is working to progress the project and has the potential to become one of the world’s leading producers of multi-nutrient fertiliser, and could have a life of 100 years, this fits with my approach of investing in strategic areas for the long term, and I hope the product is of assistance to many Australian farmers.”

Earlier this year Sirius announced a separate deal under which six financial institutions expressed an as yet unbinding agreement to finance up to US$700 million of Phase II costs, as well as acting as lead arrangers for the balance.

Sirius shares are up 20% since news of the deal was released to the market on Tuesday, and are now trading at 39.5p.

Financing milestone for Sirius potash project 06 Sep 2016

Peter Kenyon, TunnelTalk

UK potash mine developer Sirius Minerals has taken a significant step towards delivering a US$15 billion asset capable of generating US$2.5 billion a year in revenue – including the likely support of the UK Government in the form of loan guarantees.

The company needs to secure US$3.9 billion worth of funding before it can begin sinking the 1.6km-deep mine shaft to gain access to one of the world’s largest reserves of the crop nutrient polyhalite.

Explaining the construction concepts of the York Potash Project

In an update to the London Stock Exchange last week the company announced that six major financial institutions have come on board as Mandated Lead Arrangers (MLAs) and will themselves look to contribute US$700 million of the required US$2.6 billion of senior debt needed to fund Phase 2 of the project in 2018 – which includes the 37km tunnel, fit-out, installation of the conveyor system and construction of the port facilities in Redcar on the north east coast of England.

In a market update Sirius said: “Following a market sounding with potential senior debt lenders the company (Sirius) has now mandated a group of six financial institutions experienced in mining and infrastructure project finance, as Mandated Lead Arrangers (MLAs). Export Development Canada (EDC), ING, J.P. Morgan, Lloyds Bank plc, Societe Generale, Corporate & Investment Banking and The Royal Bank of Scotland Plc have been mandated on the basis of a non-binding but mutually agreed term sheet, having undertaken initial due diligence of project documents.

“The UK Infrastructure and Projects Authority (IPA), which was established in January 2016 by merging the Major Projects Authority with Infrastructure UK, and reports jointly to both the Treasury (HMT) and the Cabinet Office, has already prequalified the project for consideration for a HMT Guarantee. IPA has discussed the Stage 2 financing plan with the company and confirmed its interest in supporting the Stage 2 financing for the project.”

Involvement of the six major institutions is likely to make raising the US$1.1 billion needed to fund development of the mine in Phase 1 significantly easier. Sirius has said it intends to raise this money through a mix of debt and new equity issue, and an announcement on this is expected before the end of October if the timeline of a March 2017 start is to be maintained.

Sirius said: “The company intends to progress the Stage 2 financing, with the MLAs and IPA commencing detailed due diligence, following the successful completion of the Stage 1 financing. The company continues to progress the Stage 1 financing and is in active discussion with a number of parties undertaking due diligence. The details of the Stage 1 capital structure and timing will be subject to further announcement at an appropriate time.”

In the lead up to the latest financing announcement shares in Sirius reached a peak of 52p, before settling back to 40p.

Sirius CEO and MD Chris Fraser, who owns 124 million of the 2.3 billion shares in issue, said: “The company is now focused on the finalisation of the Stage 1 financing to enable construction to commence as soon as possible.  This positive step on the senior debt financing should provide Stage 1 investors with greater clarity and confidence on the total financing of our world class fertilizer business.”

UK potash mega-project design changes 17 Aug 2016

Peter Kenyon, TunnelTalk

Significant design and engineering modifications are made to the excavation strategy for the UK’s longest planned tunnel.

Instead of five TBMs, the strategy for excavation of the 37km long polyhalite (potash) mineral transportation system (MTS) of the York Potash Project now calls for three TBMs. Construction risk is also reduced by cutting the number of deep-level intermediate shafts from three to one (Fig 1).

Fig 1. Revised York Potash Project design
Fig 1. Revised York Potash Project design

The changes – which mean the previously planned and permitted shafts at Lady Cross (362m) and Tocketts Lythe (144m) are no longer required – will result in the tunnel being excavated in three almost equal-length 12km drives. Additionally, it has been decided to construct the whole length of the tunnel using a concrete segmental lining between the cavern excavations at the bottom of the main shaft at Dove’s Nest minehead and the intermediate shaft at Lockwood; and between the Lockwood shaft and the portal at Wilton.

The owner’s construction design team includes Arup (tunnel and tunnel shafts), WorleyParsons, Royal Haskoning, Home International and SRK Consulting, with Bechtel managing production of a detailed Definitive Feasibility Study (DFS) to inform the critical finance-raising aspect of the project.

Selected MTS tunnel contractor Hochtief/Murphy is expected to begin on-site preparatory works within six months of the conclusion of the capital-raising exercise that is now believed to be in its final stages. Sirius Minerals – owner of the York Potash Project – announced earlier this week that it only has £16 million of capital reserves remaining to fund the project, but said that during the last six months it had “set the platform for the advancement of our financing strategy”. Sirius Minerals chief executive Chris Fraser, who was part of the team that propelled Fortescue of Australia from penny-share status to global mining giant, has said recently that he expects the project to be “shovel ready” next month (September 2016).

Fig 2. Three TBM strategy for 37km tunnel
Fig 2. Three TBM strategy for 37km tunnel

Market speculation has been mounting as to when the identity of the “cornerstone” partner/investor for the project will be released, along with details of the debt/equity split of the US$1.1 billion that is required to move the project into its first phase of construction.

This phase includes the majority of works associated with excavation of the production and service shafts of the minehead (awarded to Thyssen/Redpath), as well as the two MTS tunnel shaft excavations (Dove’s Nest and Lockwood) and portal works (Wilton).

The US$1.8 billion cost of Phase 2 of construction will include the majority of the TBM excavations and tunnel fit-out, the outstanding balance of works needed to complete the minehead, and the mineral processing/port facility at Redcar – permission for which was granted by the UK Government last month (July 2016) but for which a six-week objection period is still active for another two weeks. Once this window is passed Sirius Minerals will have in place all the final permissions it needs to move to construction, subject to finance.

According to the latest construction schedule released by the owner, Hochtief/Murphy will begin site preparation and shaft sinking at Dove’s Nest and Lockwood once six months of mandatory highway improvements are completed. These shaft sinking works are expected to take two years. TBM assembly, excavation of the 4.1m i.d. segmentally lined tunnel, cavern construction, and fit-out is scheduled to take a further three years – to run alongside the separate contract to excavate the 1,600m deep production and service shafts.

Over the last few weeks speculation in Sirius Minerals on the London Alternative Investment Market (AIM) exchange has intensified sharply, with shares now trading at a record high of 36p, up sharply from the 10p they traded at as recently as February (2016) and 72 times higher than the 0.5p they traded in the project’s early 2009 days (Fig 3).

Fig 3. Historic Sirius Minerals share price
Fig 3. Historic Sirius Minerals share price

Once completed, the mine will have an initial capacity of 10 million tonne per annum (mta), much of which has already been pre-sold under various offtake agreements spanning 5-8 years. This will be ramped up to 13mta (the maximum currently permitted), but the tunnel and conveyor system will have an installed capacity of 20mta to meet possible future demand.

Following a seven-year construction schedule, Sirius Minerals anticipates the mine will start generating cash in 2023/24, and at full capacity in 2030 will be generating US$3 billion a year. As an additional revenue stream, the company says future roadheader construction of a 1,500m-long access ramp from the main polyhalite seam will expose a significant reserve of salt for export for de-icing.

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