2018 was always going to be a tough year for Sirius Minerals (LSE: SXX). Throughout 2017 the company pushed ahead with the development of its North Yorkshire potash mine, (expected to be one of the largest in the world when operational) securing finance to progress with the first stage of the project and starting construction.
Now the group has to secure the financing for stage two. It needs an estimated $3bn, more than double the amount raised last year to move ahead.
The question is, can the company hit this target or will management have to rein-in their ambitions?
Not all it seems?
Sirius has come under fire this week following the publication of a highly critical article in the Financial Times. One of the claims the report makes is that the market for polyhalite, the specialist type of potash Sirius will eventually produce, is much smaller than the company believes.
What’s more, the author questions the viability of offtake agreements signed with third parties. Sirius and its lenders have set a target for binding offtake agreements of 6m to 7m tonnes to be in place before the $3bn package is agreed. So far, the company has agreements totalling approximately 5.7m tonnes.
The FT article argues that some of these agreements are not all they seem. Specifically, there are several agreements with Chinese businesses that have repeatedly been changed. Some customers are anonymous, and other agreements involve a multi-year ramp-up with supply only peaking in the final year.
Bull vs Bear
Some shareholders have expressed anger at the FT article for presenting misleading information but before making any investment, it is always vital to consider both the bull and bear arguments. The FT article does a good job at rounding up the bear argument against the enterprise.
Sirius has always had its critics, as any business does. Indeed, no company is perfect, and it would be silly to ignore all of the risks associated with a giant, multi-million dollar mining project. The record of small mining companies completing such projects is not good.
However, over the past three years, Sirius has provided the best defence against critics possible – progress.
The company has already accomplished what many analysts believed would be impossible. It has steered the project through the planning process and started construction. Also, some of the offtake agreements already in place might not be as good as they look, but it is clear the demand for the product is there. The most significant vote of confidence in the business is the $1.2bn financing package agreed last year, supported by Australian mining magnate Gina Rinehart who put up $300m.
The bottom line
Sirius has made substantial progress over the past 24 months, proving its doubters wrong in the process. Nevertheless, as I have written before, the company’s future depends on the second $3bn tranche of financing. If it can find the money, the shares could surge, and easily outperform the FTSE 100. On the other hand, if no financing package is agreed, Sirius’s North Yorkshire dream could come to an end.
Personally, I would wait until Sirius has commitments from lenders for the next stage of financing before investing. Although I might miss out on some gains by waiting, I believe this is a price worth paying for the extra security.
