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Hmm, I was attempting to reply to a post I thought was astute and most likely accurate. Haven't been on these forums for a while. Anyhow, I generally agree with the idea that the Schroders sales can be fairly readily explained, and do not indicate that the shares are seen as over-valued, indeed may well be clearing the way for another upward move.
It was clear to me, even before Myosotis attacked me personally for having the temerity to point out in detail some downside risks to the JPM-devised Stage 2 financing plan, that for all his apparent grasp of the project engineering risks he had a shaky understanding of the other risks for Sirius. At the time of the personal attack I had some support (much appreciated) from the likes of Casapinos but most on this board explicitly or implicitly followed Myosotis in dismissing my concerns.
And that was the problem with his posts, they were relentlessly upbeat and disdainful of anyone who was not similarly upbeat, leading surely to their persuading some (quite a lot maybe) to take an unbalanced view of the company's prospects.
I have lost a not insignificant sum on my investment, like many others who posted on this board, but that is down to my own misjudgments: I had decided to sell 80% of my shareholding into the bounce that would have followed a successful sale of the initial tranche of high yield bonds, having convinced myself that there was no way JP Morgan would fail to get that first tranche sold. Silly me. My further expectation was that during later construction at least one more equity raise would be needed to supplement debt financing, so I would have bought back in at some point after that. It was not to be.
There were always three distinct aspects to Sirius and I stick to my previously posted assessment: the build (the subject of Myosotis's expertise) is the least problematic of the three and securing an adequate market for the product is by far the most challenging. There is no longer an issue about the third aspect ie. financing, once AAL take charge. Watch out for AAL taking a little time to firm up the level of demand, then for the mine to be completed with comparative ease and the profits to start rolling in. Not for LT holders in Sirius Minerals however.
Truthfactory has a point (to put it mildly) about lack of cashflow, and the continuing development risk, making Sirius HY bonds unattractive. But as I pointed out in a post some weeks back, Chris Fraser and the Board were surely looking back to the successful example of Fortescue, which had no cashflow and had development risk. The problem with that as a model to follow, as I indicated, was that future cashflows for Fortescue were simply guaranteed, no question, if it could just be brought to the point of production - because it would be mining iron ore, a massively demanded commodity. It seems that the market did not really believe in the deals in place for the commodity that Sirius is selling. I increasingly think that that is the fundamental problem.
I am very reluctant to believe in conspiracy theories. However, AAL's imminent bid does look very much like an Aussie stitch up. It could nevertheless, I suggest speculatively, be a fallback plan ie. there was a genuine attempt to maintain SM as an independent company, right through until last summer's doubly failed HY bond sale, but thereafter CF and Gina turned to AAL as a backstop investor, and since then others who might have come forward have just not turned up, leaving it open to AAL to propose a derisory takeover offer. In this imagined scenario, I don't quite see what's in it for Gina compared to taking over herself but then again (a) maybe her Board could not be persuaded, and more immediately to the point (b) maybe AAL have promised that her royalty deal will not be diluted, so she has no incentive to contest the sale to AAL. I think that at this stage the only hopes of an outcome better than a miserable 5.5p sellout come down to (a) the Aussies falling out eg. Gina decides she is better off making a counter bid, or (b) another party, Glencore conceivably, recognises the (fantastic) opportunity on offer and puts in a counter-bid.
I tend to agree with Woolverstone, having come round to the view that my original assessment (going back to 2015 and set out in an earlier post) that by far the greatest risk to Sirius lay in failure to develop the market for polyhalite, is actually being borne out right now. That seems in one sense crazy, given the outstanding marketing success in concluding offtake agreements (and notwithstanding that some of that looks to involve potentially unreliable counterparties). But from another perspective it is readily explicable as a failure of modern day capitalism, which would seem to prefer to believe in and fund all kinds of pretty obvious hyped up nonsense - from Worldcomm to WeWork - as its version of "taking risks " and "being entrepreneurial " rather than finance the likes of Sirius, a project that already has realistic prospects of being completed ahead of time and budget. So is it, after all, that markets aren't so much sceptical about build overruns (although they are) but more that they are unconvinced that the product will generate the projected revenues? I think maybe that's been the major stumbling block, not so surprising if you are trying to raise high yield debt, where faith in cashflow is critical: CF was I imagine misled by the example of Fortescue, which promised to produce oodles of a very well known product, iron ore, for sale to reliably voracious customers in China. So going forward a plan which aimed at focusing the build on enabling substantive sales to be made asap, to demonstrate the market is there, might be best in my view.
I entirely agree with 15LIVES about the Mail on Sunday article but then utter crap is what the great majority of journalists deal in, selling their wares by pandering to their readers with hackneyed, stereotypical storylines, rather than attempting to assess what's actually the case. Unfortunately, individual investors and in particular recent inexperienced ones, may be misled by such stuff.
I meant to say that although many aspects of the 1980s case I was involved with are unrelated to the situation with Sirius, the one really striking similarity is the pause occasioned by failure to hit a previous target date. That also happened just ahead of a holiday period (by comparison, the US doesn't become fully operational again until the first week of September), and in the event the delay made no difference.
My first post on this BB was basically in defence of Chris Fraser, and I continue to have faith in him. This post is about the parallels between SM's current situation and the position of a multinational manufacturing company that I helped to emerge from financial difficulties in the 1980s.
Sounds bizarre to make the connection but in both cases the parties involved were (are) working on the basis that failure to clinch a deal would lead to the insolvency of the company. The objectives for my job (back then) were to ensure the company's benefit to the UK was maximised, which probably but not necessarily involved its rescue as a going concern.
There are many differences but one is striking. As with Sirius now, expected closure of the critical deal was pulled just ahead of the sign off date, and so the prospect of failure arose. That was not down to market turbulence but to last minute shenanigans involving a handful of the many parties involved. It meant nevertheless that the widely expected closure of the deal was very publicly postponed.
I would hope that the SM case pans out much as was the case with the company I have alluded to. In that case, everyone paused for over a week for the Easter holidays, then we got back down to further negotiations, and finally a deal was agreed mid-May and signed off.
It's over 30 years ago but I am pretty sure that a number of waivers had to be granted to enable negotiations to carry on into May - whereas in SM's case we have until the end of next month to raise $500m of bond finance and the RCF commitment runs through to the end of October.
And another thing about that 1980s experience: in the days before hubris and the Great Financial Crisis claimed their proud independence, our lead bankers were Merrill Lynch, and they taught me that American investment bankers are driven to finish what they start. JPM will be the same.
The Spectator disappoints me as a subscriber because it's generally better than most journalism but yes the latest AOB column is just plain wrong in terms of the status of the HY bond offering. It basically goes for a cliché ie. hard-nosed professionals fleece terminally naive small scale investors. But that's what journalism essentially is, the purveying of stereotypical and cliched approximations to reality. What will count in the next few weeks is the judgement and action of financial markets professionals.
Thanks very much for the calm supportive response casapinos, and to others who have sought to engage with issues I raised in my last post rather than taking offence. Yes I am trying to take a balanced view.
My basic point was that selling $500m of Initial Bonds successfully is not sufficient to gain access to the RCF. That's a fact, not a matter of opinion. Three more conditions precedent have to be met first, as set out for example on pages 12-13 of the Prospectus. Condition (iv) ie. receiving the further $50m from Gina that you have referred to should be no problem provided the first three conditions have been met. My continuing concerns about RCF access are not to do with that $50m payment but with another aspect of the continued involvement of Gina's company, and also with the offtake agreements.
The relevant wording from the financial documents issued in May is as follows: ".. drawdowns under the RCF will be subject to conditions precedent, including....(ii).... amendments to clarify certain specific areas in some of the Offtake Agreements, (iii) entry into intercreditor arrangements, including an intercreditor agreement with Han****..." (see eg. pp 12-13 of the Prospectus). Now it may be that the Offtake amendments and the intercreditor arrangements required are little more than technicalities that will be readily sorted out, and naturally I hope that will prove to be the case. I don't know, maybe the substantive actions have already been agreed and Sirius just hasn't got around to finalising the documentation yet; or there is something in the recent flurry of new Stage 2 documents that addresses these concerns and that I have not picked up; or indeed, I may have missed relevant information already posted on this board. However, as things stand I find it hard to judge whether the conditions I have quoted above are something to worry about, or not. And of course I am not demanding that anyone else on this board should even share this concern, let alone address it.
Separately, I have been unable to estimate to my own satisfaction how far Sirius can get towards first production in 2022 (on the assumption that progress is as currently scheduled) before it is faced with having to refinance its initial drawings from the RCF. To set against that, I am very optimistic about the prospects for beating the planned schedule - as I said in an earlier post, I thought from the start of my investment in Sirius that construction was a much lesser risk than building the market for poly4 and raising sufficient finance, and so far (cross fingers) that's looking like a reasonable judgement.
I suggest that some fellow posters are getting a little carried away in their enthusiasm for the news of the imminent HY bond issue. It is indeed very good news that this vital debt raise is in train, and that increases my personal optimism about Sirius - but I don't think it's quite: slam dunk, all future finance through to production secured, high five.
Stage 2 financing is only unlocked fully once four separate conditions precedent have been met, and only one of those four is the successful raising of $500m of Initial Bonds (as they are called, for a reason). So what about the other conditions? Nobody (that I have noticed) has commented on this board in response to my earlier query about the condition precedent which invokes changes that are required to existing offtake agreements. And it's also quite unclear to me what still has to be agreed with Gina Rinehart but the conditions precedent imply that there's something of significance outstanding in that respect.
And assuming that all the conditions precedent are met, in good time, what does that actually unlock, for certain, going forward? The number I would suggest is $1,790m, a figure that's exclusive of ongoing interest costs and which adds up: the net amount Sirius said it raised from its latest equity issue (ie. $405m); the net sum Sirius said it raised from the new convertible bonds (ie. $385m), to be released from escrow; the final $50m due from Han****, and a further sum of $950m which assumes that fees alone reduce the amount available to Sirius from a combination of the Initial Bonds sale plus the first $500m drawdown from the RCF, by a slightly outrageous $50m. Is that going to be enough to see the Company through to Q1 of 2022 on the planned schedule under which positive operational cashflows would then be achieved? That's notwithstanding the interest cost of the outstanding bonds and of RCF borrowing , which of course reduces the cash available for capital and operational expenditure.
Partly because of uncertainty about debt servicing costs, I do not feel confident that Sirius will not need to launch at least one further bond issue of $500m (and maybe two), in order to refinance its borrowing from the RCF, before we get to the stage where positive operational cashflows have kicked in. That's if the planned schedule is achieved. To my mind, the Company is now actively promoting the prospects of getting ahead of schedule because build progress will have a critical impact on the ease and cost of access to the RCF going forward, as per the Prospectus (p 37): "...the Company believes that its intended capital structure once the Stage 2 Financing is in place will provide the opportunity for reduced financing costs through refinancing and an improved credit profile over time, as the Project progresses..."
Which is not to say that I am pessimistic about the future of the Project, far from it, I'm just not so gung-ho as some!
The latest quarterly update seemed to me reassuring, it was in line with my best expectations.
I suggest that Sirius and JPM are continuing to target September for raising the forthcoming $500m debt tranche because it's important to offer the ratings agencies and potential holders of the debt the best possible updated picture of SM's progress and prospects, in order to improve the chances of achieving an interest rate below the 15% cap that's been set. I noted that an earlier poster referred to a plan for the HY bonds offer document to include updated technical reports on how Sirius would reach output of 13mtpa, which alone would explain why the process for the debt raise is said to be partly dependent on third parties. To press ahead with securing this cash asap is unnecessary given that the company already has cash to take it through to the end of September, and if we assume it's confident of maintaining for another dozen weeks the terrific progress to date on the build.
I can't see the initial HY bonds going for 12% let alone 11% or 10%, notwithstanding what was reportedly said at the AGM. The new convertibles have an annualised yield of 10% if held to maturity and the conversion rights add value to that yield, so it seems unlikely that a 10% bond with no equity component would be attractive enough. But achieving a percentage point or two below 15 is worth aspiring to, I would contend: the first $500m will create a sort of benchmark.
Myosotis has already pointed out that the reference to another form of debt being raised highlights what was already in May's Prospectus, so it's not new and I don't personally find it sinister - more like the lawyers have advised that shareholders needed to be reminded of this wrinkle.
Further to Myo's comments on my previous post, I should explain that I didn't intend to cast doubt on the adequacy of the market for Poly4 that Sirius has built up to date, it's just that once the company had the planning consent to press ahead with developing its mine I found myself assessing the main risk factors of the project as, in order of riskiness: first, getting wide enough acceptance of the product at the right price; second, raising enough finance; and, a long way back in third, getting everything built in timely and cost-effective fashion. I basically trust that the first risk has been addressed well enough to date, so a successful debt raise in September would generate the tantalising prospect of a sort of virtuous circle developing, whereby build progress at least in line with schedule makes it progressively easier for the remaining debt finance requirement to be met.
That's a best case scenario and it's not sensible to be complacent about the JPM plan working out swimmingly; however, I remain positive.
There's a certain amount of speculation going on about the debt servicing burden for SM going forward. I would suggest that it's important to hold on to the company's assertion that Stage 2 financing includes (repeat, includes) financing costs, albeit that begs the question of what assumptions were made about the imminent (I do hope it is imminent!) issue of HY bonds, which have a maximum yield of 15% but could come in lower in the event.
SM state that they expect to start using the RCF no later than June 2021, as set out in the Prospectus. In my experience, that's a latest possible date. So I would assume that SM would be in the business of debt servicing $1bn of HY bonds at least 9 months before scheduled sales (generating positive cash flows) in Q1 of 2022, at an assumed bond interest rate of 15%. That's on top of convertibles.
We will know fairly soon (we all hope!) the rate at which the HY bonds have actually been sold, and let's hope it's at less than 15% . At that point, with a benchmark having been set, I would suggest that the interest rate on further bond tranches will be a function of build progress plus marketing progress ie. if the build goes well and further offtake agreements accumulate then the later bond issues will attract a higher credit rating and lower interest rate than the initial ones. But conversely, delays in completing the mine and marketing complications would tend in the opposite direction.
I have not seriously attempted to estimate how much of the cash raised from Stage 2, added to pre-existing cash resources, will of necessity be devoted to transaction fees and debt servicing between now and the scheduled generation of positive cash flows from production in Q1 of 2022. In any case that couldn't be attempted, except on a worst case basis, until the first HY bond tranche has been sold successfully and we know at what cost.
I have mentioned transaction fees because they are a very significant part of Stage 2 financing costs - the Prospectus mentions that they amount to US$161 million, and I suspect that that figure does not include all the costs associated with selling the HY bond tranches.
These fees also matter because they reduce the amount of working capital available from Stage 2 financing eg. the net amount available for capital expenditure from the equity raise was US$405m from a US$425 total, and similarly the net amount available from the US$400m of new convertibles dedicated to raising fresh cash to fund the Project was US$385m.
So I don't think that the table in the post from Myosotis last night is comparing like with like.
Which is certainly not to say that I think the amounts raised for Stage 2 - always assuming the first HY bond tranche gets away - are insufficient: I would stick my neck out even at this stage and assert that they will prove perfectly adequate.
I was always much more concerned about creating a big enough market for the product.
Some doubts seem to have been raised (at least implicitly) about my previous assertion that SM need to minimise any slippage on getting to initial production early in 2022 because the company is partly relying on working capital from cashflows from early sales to take it through to the 10mtpa target by mid-2024. I don't believe I have got that wrong but I base it on wording from the Prospectus, repeated in several places ie. "...over the Initial Construction Phase....remaining capital expenditures to be funded are estimated at US$2.9bn (which excludes financing costs). This amount is expected to be funded by (i) the Stage 2 financing of US$3.8bn (which includes financing costs), which is expected to fund the Project to the point at which it generates positive operating cash flows, and (ii) operating cash flows once they are generated."
That wording doesn't say to me that SM get all the way through to 10mtpa in mid-2024 just off the back of Stage 2 financing. But I have only skimmed through the Prospectus noting what I took to be key points so maybe this is a misinterpretation disproved elsewhere in that document? Others might wish to comment.
I think this matters because of its bearing on how time critical the path to initial cash-generating sales is.
I also remain curious as to whether amendments required to the existing offtake agreements are a minor tidying up issue or potentially problematic.
Last three characters cut off although I was supposed to be within the allowed ration! It was a question at the end ie. would anyone else know about the changes to take and pay agreements that still need to be made?
I wanted to thank those who have made kind comments about my first post and to add a few key points about what's in hand since stage 2 financing was launched (happy to have any errors corrected).
There seems to be a certain amount of confusion on the board about the timeline for first production - to which Sirius has contributed perhaps by its decision to refer to "first polyhalite" being reached at the end of 2021. Actual production of saleable fertiliser is not scheduled to begin until early 2022, ramping up initially to 10mpta by 2024.
At this point, the schedule looks realistic although of course it's still relatively early days. I tend to agree with Myosotis that there's genuine scope for SM to get ahead of schedule, it's a myth that any and every large scale construction project is more or less fated to overspend and come in behind schedule. On the other hand, the claim that SM is at least 5 years away from production (for which there is no current evidence) amounts to saying that the stage 2 raise is inadequate. That is because it's pretty clear from last month's documentation that cashflows from early production are factored into the financing of the later stages of the work needed to hit that 10mpta target in 2024, so SM cannot afford much delay in getting to initial production, albeit the contingency funding would kick in before any more external finance had to be raised.
On the extent of actual and potential dilution, I think it is fair enough as others have said to assume roughly 10 billion shares in issue after all conversions and the completion of the Royalty agreement with Gina Rinehart. The stage 2 documentation listed a total of 9,698,628,759 issued and underlying shares ie. 6,977,537,829 immediately following the equity raise + 2,073,679,901 underlying the new convertible bonds + 447,334,200 underlying the remaining old convertibles + 200,076,829 to go to Gina for her final slug of $50m in exchange for the 5%/1% Hancock royalty. That total should rise as conversion rights are re-set but it's perhaps because the way that will pan out is unknowable in advance that SM management were reluctant to engage in any detail about dilution at the recent AGM.
It looks a little academic at this point to ponder how much equity would be in play in the event of a takeover bid but the relevant terms and conditions of the convertibles should specify the obligations and options for bondholders in that scenario. Clearly, none of that matters in any event if the first tranche of HY bonds is not taken up - the likelihood is that Hancock would then assume control. I note also that certain unspecified changes to some of the existing take and pay agreements have to be put in place before the financial stuff is fully tied up and the main focus can switch to the build progress. There's nothing I have seen on what those changes are or how difficult it may prove to be to secure them (I haven't read the Prospectus in full). Would anyone else kn
I am joining this forum because I am invested in Sirius for at least a further 2-4 years and I hope I can contribute positively on the case for backing the company, taking into account the risks.
Over the last four years I have traded this stock in the course of building up a substantial holding - but I confess that I determined to halve my holding last summer, before persuading myself that I could afford to hold the lot through the likely (as I saw it) further downturn in the share price as stage 2 financing approached, and on into the recovery as the mine got built.
I think it's worth my explaining why I planned to offload 50% of a shareholding I had spent over 3 years building up, as it bears on the criticism of Chris Fraser and the SM board for turning to JP Morgan to devise stage 2 financing. I had discovered earlier last year that two of the senior IPA officials who would have been very likely to be heavily involved in negotiating the mooted tranche of guaranteed debt were people I knew and had worked with. If my experience was any guide, their influence would favour heavily restricting Government support, and it would take an awful lot of wrangling to get even such qualified support agreed. If that was how progress panned out the project's completion might be imperilled.
Seems I was right and should have followed my initial judgement about mitigating the risk. But that's my problem, the wider point is that I firmly believe CF really had no choice in the end but to shift away from IPA involvement. When I was listening to CF talking about the IPA in January's quarterly update webcast I thought "Oh dear, I think I recognise that tone of restrained exasperation! At least something has finally been agreed on a guarantee, hope they can get on with timely implementation now." Evidently not, which given the talent for procrastination of one of those two officials (and I mean procrastination not prevarication) was not altogether surprising. Of course I have no inside knowledge of how negotiations on the original stage 2 plan played out but my settled conviction is that Sirius management were placed in a very difficult position not of their own making. Furthermore, I think the alternative financing plan, notwithstanding the massive dilution, is impressive and should work.