Roundtable Discussion; The Future of Mineral Sands. Watch the video here.
Have checked the City Code and 5th Feb is the deadline for AA to make an offer or withdraw ("put up or shut up"). I think the window for other bids remains open until it's actually voted on, which would be towards end of Feb at the earliest and possibly into March.
Aubery "Why state that if the Strat Review is a wip"
Because to state otherwise would mean that they have to reveal their reasons for not recommending, which they can't do, as they don't want to disclose anything at this point (under scenario 2).
Final sentence was:
I have no idea which it is, but it does seem a very odd way to communicate this!
There is something very strange about the way that this has been announced today. There has been no statement or comment from the CEO or Chairman and absolutely no reference to the Strategic Review, which the market has been expecting an update on. No more fanfare than a holdings RNS for what ostensibly represents one of the most significant developments in the Company's history.
If the BOD genuinely think this is the only option left for us, wouldn't they be saying "we've tried every other avenue and believe this is genuinely in the best interests of shareholders" and "we will seek to secure the best possible outcome for all stakeholders in this world class project" etc. But they haven't said a word - Anglo American have said quite a lot, but the Sirius Board have simply issued a statutory notice and said nothing else.
I've been thinking about this all day and can only come up with two reasons for it:
1. It is what it is - the revised financing discussions have not yielded any viable options and the Company fully intended to update the market imminently, but were overtaken by events - perhaps a leak, or maybe the SP was getting too hot during the day yesterday (before the final spike - it's been bubbling up all week) and that was going to put the offer at risk, so they hurriedly lodged the RNS (prompting the final spike yesterday), and then all of the detail around the outcome of the strategic review etc. will follow in the coming days.
2. The strategic review is continuing as planned and this is one of a number of options, none of which have been finalised. If that was the case, perhaps they can't say anything about where the review has got to at this stage, but they have to make the announcement now because, either:
A. They have reached the point in the DD process with Anglo American where the terms of a takeover offer have been communicated to the BOD. In that circumstance, my understanding is that they would have to notify the market (even though it's within the context of a strategic review).
and / or
B. Of all the possible outcomes from the strategic review, a takeover has the longest timelines to complete (there are fixed timescales for each stage of a takeover), so working back from the end of March, they have to announce this now, to give shareholders adequate notice of the offer and to allow for the issue of circulars and voting etc. during February and March. It would seem sensible to me that such matters were not left until the company ran out of money, as we'd be (even more) over a barrel at that point. There being nothing else on the table for the BOD to consider as a viable alternative at this point, they would clearly have to indicate that they would be likely to recommend any formal offer, as to do otherwise would kill a viable way forward (and one which places pressure on any others still involved in the review process).
I have no idea which it is, but it does seem a very odd way to communicate th
There is something very strange about the way that this has been announced today. There has been no statement or comment from the CEO or Chairman and absolutely no reference to the Strategic Review, which the market has been expecting an update on. No more fanfare than a holdings RNS for what ostensibly represents one of the most significant developments in the Company's history.
If the BOD genuinely think this is the only option left for us, wouldn't they be saying "we've tried every other avenue and believe this is genuinely in the best interests of shareholders" and "we will seek to secure the best possible outcome for all stakeholders in this world class project" etc. But they haven't said a word - Anglo American have said quite a lot, but the Sirius Board have simply issued a statutory notice and said nothing else.
I've been thinking about this all day and can only come up with two reasons for it:
1. It is what it is - the revised financing discussions have not yielded any viable options and the Company fully intended to update the market imminently, but were overtaken by events - perhaps a leak, or maybe the SP was getting too hot during the day yesterday (before the final spike - it's been bubbling up all week) and that was going to put the offer at risk, so they hurriedly lodged the RNS (prompting the final spike yesterday), and then all of the detail around the outcome of the strategic review etc. will follow in the coming days.
2. The strategic review is continuing as planned and this is one of a number of options, none of which have been finalised. If that was the case, perhaps they can't say anything about where the review has got to at this stage, but they have to make the announcement now because, either:
1. They have reached the point in the DD process with Anglo American where the terms of a takeover offer have been communicated to the BOD. In that circumstance, my understanding is that they would have to notify the market (even though it's within the context of a strategic review).
and / or
2. Of all the possible outcomes from the strategic review, a takeover has the longest timelines to complete (there are fixed timescales for each stage of a takeover), so working back from the end of March, they have to announce this now, to give shareholders adequate notice of the offer and to allow for the issue of circulars and voting etc. during February and March. It would seem sensible to me that such matters were not left until the company ran out of money, as we'd be (even more) over a barrel at that point. There being nothing else on the table for the BOD to consider as a viable alternative at this point, they would clearly have to indicate that they would be likely to recommend any formal offer, as to do otherwise would kill a viable way forward (and one which places pressure on any others still involved in the review process).
I have no idea which of the above it is, but it does seem a very odd way to c
Anyone who has any interest in being part of this venture - alternative bidders, strategic partners, financiers and Government now have 4 weeks to step forward. If nobody does so during that time, then whatever offer is made is what SXX is then worth.
Exactly Appchap- presumably that's why the NPV remains almost the same as what it was previously, in spite of the delayed ramp-up. It would be good to see how all of this flows through to steady state EBITDA too, which was $1.3Bn to $1.5Bn previously, but updated numbers behind that aren't included in the latest presentation - you would imagine that will go up a bit with the debt being repaid within 3 years of commercial production starting, so that could be some additional value that doesn't really show up in the latest NPV due to the effect that the discount calculations have on the outer years.
My thinking is that the NPV is really important right now as a measure of how robust the investment case is and therefore what the share prince might head towards in the next couple of years, but becomes less relevant as production starts to ramp up, at which point the projected steady state EBITDA will be the thing that drives the sp. Not easy to work out what the projected EBITDA would convert into in terms of earnings per share, but if we assumed that maybe 65% of EBITDA flowed through to earnings per share (i.e what's left after the ITDA bits are factored in), that would suggest net annual earnings of around $845m $975m, which equates to an EPS in the region of 9p to 10.5p before the reduced finance costs are factored in, but also without any further dilution. My previously suggested worst case 'dilution' of 25% (to reflect the impact of the strategic partner's slice of the pie for the initial scope) would reduce that to a range between 6.8p and 7.8p. That's annual earnings of course - the sp would be many multiples of that.
It gives a real sense of the value of this project that, even if the strategic investor takes 25% of the pie, the remainder could provide long term holders with annual returns that are double the current value of their shares today.
Just been the November Strategic Review Update. Slides 22 onwards set out the essence of what the revised approach will mean in terms of reducing the risks associated with the deferred scope and this often gets lost in the noise around what's going to happen with the initial ($600m) scope. A couple of recent posts have highlighted a number of these and they get referenced on here quite a lot as separate upside considerations, but I think it's really important that we see them as a collective, as the revised approach is a package that has two very definite sides to it:
1. We take some kind of equity hit on the initial scope.
2. That equity hit MASSIVELY reduces the risks (and therefore costs) of the deferred scope. Slides 24 and 25 highlight this very clearly:
Technical risk (lower)
- Reduces technical risk of shaft sinking by delivering Initial Scope prior to debt financing
- Further demonstrated progress provides option to incorporate upside opportunities
Commercial risk (lower)
- Reduced scope of risk sharing contracts as shaft sinking scope delivered
- Balance of scope predominantly fixed price
- No port leasing assumed in the underlying funding requirement
Time to cash flow (faster)
- Financing drawn at or around the time of first revenue
- Financing ramp-up increases operating cash flow contribution and reduces interest during construction
Quantum of debt (lower)
- Net capex of up to US$2.5bn
- Opportunity to include material operating cash flow during ramp up
- Potential to deliver fully funded financing plan
Credit metrics (robust)
- Previous stage 2 financing structure rated B/B
- Gearing level further reduced (debt:equity basis)
- Debt fully repaid within 3 years of commercial production
Other enhancements
- Strategic investor would provide traditional “Sponsor” halo to financing
- Contracted volumes substantially increased since prior project financing process (now 13.8 Mtpa at peak)
The presentation doesn't include any assessment of what the above adds up to in terms of likely reductions in the financing costs for the deferred scope (beyond the obvious impact of the quantum reduction in capital from $3.1Bn to $2.5Bn). By definition, reduced risks equals reduced financing costs, so once the funding for the initial scope is secured, we will be raising 20% less debt at significantly cheaper rates. There is also then the possibility that the Govt Guarantee might come back into play, as the risks of the deferred scope are essentially the same of any major infrastructure project.
We should therefore expect an update on the likely deferred scope financing costs as well as the initial scope arrangements when the RNS lands, plus an update on the construction cost saving options, some of which weren't included last time. So, while the headlines will no doubt determine the sp reaction on the day, there could be some real positives to look out for in the detail when the RNS comes.
PhilBanks,
The reason I don't think that will be the case is that doubling the number of shares in issue gives away half of the future worth of the project and trebling the number of shares in issue gives away 2/3rds. That's an NPV $5.65Bn or $7.53Bn respectively for an initial investment of $600m. It just isn't credible when we already had bond investors lined up ready to hand over more money than we need on terms that were a quantum below those numbers in a market that was virtually closed for business back in September.
Seems to be all sorts of wild speculation on here over the last few days about how bad the deal will be for shareholders and the scale of likely 'dilution' ahead. The presentation provided by the Company in November (less than two months ago) highlighted that the revised NPV of the project under the proposed phased approach to the remaining financing is $11.3Bn - and that's with the pessimistic case of 24 month deferral of the deferred phase (the NPV is $12.5Bn with the 12 month deferral). Whether it's done through royalties or convertible instruments, what the Company is effectively 'selling' to a potential new partner (and the thing the new partner will evaluate as a business case) is a slice of that NPV, in return for the investment funding.
The Company has said that it is seeking to raise $600m through the strategic investor / financial investor process. So, they only actually need to raise approximately 5% of the latest confirmed NPV of the project at this point. So the question is, what would be a sensible slice of the Company to give away to the new investor(s) for that?
What about 5% of the project? Well, that just gets the investors their money back, so not very attractive.
What about 10% of the project? OK, that doubles the investor's money - attractive, but probably not attractive enough given the risks.
15% trebles their money i.e. turns $600m into $1.8Bn and 20% quadruples it to £2.4Bn. By way of comparison, it would take a high yield Bond Holder 20 years to make that kind of return on a coupon of 15%.
You can keep on working the sums, but there will surely be a point where one of the multiple parties involved thinks that they are getting a better deal for their money than they can get anywhere else in the world and that the risk is worth the reward (having undertaken their due diligence). I would personally be surprised if we give up more than the equivalent of 3 to 4 times the amount that the investors provide in NPV terms (i.e. if they provide $600m, I don't think we will give up more than $1.8Bn to $2.4Bn in NPV terms, which equates to between 16% and 21% of the Company). But lets say it goes to 25% of the NPV - that's approaching five times their initial investment back for the investor (which is a hell of a return) and still leaves 75% for existing shareholders (including CF of course).
It's not the most scientific way of estimating the premium we're likely to be paying to a new partner, but I think it's the simplest way of thinking about it.
- CF has entered the den with just a little black book in his hand
- He makes his pitch
- He's personally invested everything
- He's spent ten years working on this
- He's got a virtually unlimited supply of a unique and disruptive product
- He's confident about his numbers
- Deborah Meaden wants to probe him about his revenue forecasts
- She heard him say billions, but he obviously meant millions?
- CF tells her she was right the first time
- The dragons laugh, look incredulously at each other and then look dismissively at Chris
- Peter says "that's ridiculous, I'm out"
- CF gets out his order book
- He shows them that he has secured orders of over 13 MTPA already
- He reminds them that the base revenue case is $140 per tonne - NPV between $11Bn and $13Bn
- The dragons glance nervously at each other and start scribbling in their books
- They're all working the numbers (due diligence)
- Peter Jones is chewing a wasp
- But who's going to be the first to move?
- CF's as cool as a cucumber
- Three remaining dragons look at their piles of cash and suddenly realise they don't have enough
- They rush for the lift, heading for the bank
- Deborah's relaxes, looks CF in the eye and says "would you take a cheque?"
Due Diligence usually takes between 30 and 60 days. When did it start? Will the interested parties politely wait for everyone else to complete their due diligence, or will one of them try to preempt the rest and make Chris an offer that he can't refuse?
I've posted previously about what a deal with a strategic investor might look like, but it's worth updating the numbers in light of the knowledge we now have about the next phase of funding. My view remains that the best deal for the company and shareholders (including the influential investors already on board) would be a royalty deal with some equity to help de-risk the investment for the strategic partner. I've set out how this might work below. It's important to note that the real value for the strategic investor in this scenario comes from the return provided by the royalties - the equity provides some additional value for them, but with the SP where it is currently, the purpose of the equity is to de-risk the investment as early as possible for the investor.
Looking at Gina's royalty deal, for $250m she gets a 5% royalty on the first 13m tonnes each year and 1% on anything above that. On the company's base case of $140/tonne, that's $65m in royalties annually at 13MTPA, rising to $72m annually for 20MTPA. So, yes she took a massive risk with her $250m, but if the mine gets to production she’ll receive a whopping 26% - 29% annually.
So, there could be, for example, a $600m capital injection plus $35m of new equity at 3.5p (1Bn new shares issued). If the $600m was on the same terms as Gina’s deal, that would mean a 12% royalty, which would give the new investor a return of $156m (rising to $170m) annually, in perpetuity. In addition, they would have immediate upside on the new equity - let’s say that (conservatively) the sp jumps back to 15p on the news, then they’ve made £115m overnight, which reduces their exposure by about a quarter immediately. As the build progresses and assuming the deferred phase gets financed (which it is now reasonable to assume will be senior debt, as the risks are more akin to civil engineering risks rather than mining risks, so no further dilution), then we would expect the SP to rise progressively. At an SP of 50p, the strategic investor would recoup their entire investment and can then sit back and watch the (very significant) royalties roll in.
There could, of course, be many variations of the above, but the key thing is that the terms of the deal are focused on the future value of the project, not the current SP, so dilution is kept to a minimum.
When considering the absolute likelihood and terms of the $600m fundraise, I think it's important to recognise that, prior to the Stage 2 financing being pulled, the company already held $400m in convertible bonds in escrow (at a conversion price of c18.75p) and was then given indications by potential investors that the next $500m could have been successfully raised if the offering had included warrants (see Sept 17th RNS). We don't know how many warrants and we don't know what price, but with the sp around 11p at the time, it would almost certainly have been at multiples of the current sp).
It seems clear from the text of the Sept RNS that the only thing that stopped this deal going ahead was JPM refusing to waive the terms of the Revolving Credit Facility. That was, of course, their prerogative, but the important thing to note is that this suggests Sirius have, very recently, had strong indications that they could secure a total of c.$900m in combined bond issuance from the market, with the equity element priced at an average of maybe 13-14p across the two issuances.
In other words, the company has already had a very strong and recent indication that there are lenders out there who would be willing to fund 50% more than the project now needs on terms that were not overly onerous to the company. I think that is important context for both the likely outcome and the terms of the current negotiations.
DHC - CF pretty much did say all of those things at the time, the trouble is that most people on here never took the time to listen to the webcast until the damage was done.
John, I had the same thought a while ago, but when you look at the terms of the bonds (coupon of 5% and conversion price 18.75p, I think), I couldn't see why they would hold on to them - any new issue we get as part of revised finance package would probably offer a lower conversion price. I'm not sure that Sirius could use the money for anything else anyway, as it was all held in escrow pending the withdrawn bond issuance, so probably better off all round to repay, clear the balance sheet and remove the interest charge.
I agree that we are overdue an RNS to confirm the position.
I don't think Citi have sold anything - Sirius have just redeemed the $400m convertible bonds that were issued in May, as they said they would when they announced that a new financing plan was needed. I would expect an RNS from the company at some point to confirm that all the bonds have been redeemed as expected. Worth noting that this also removes about 1.6Bn of possible future share issuance due to the conversion option that was attached to these bonds.
Aubery, I agree, but I don't think it needs to be hugely dillutive - a royalty deal with a bit of equity (same as Gina's deal) would be the best way forward in my view. I posted previously what that kind of deal look like, but it's worth repeating here as I'd be interested in an (informed) discussion about it.
Looking at Gina's royalty deal, for $250m she gets a 5% royalty on the first 13m tonnes each year and 1% on anything above that. On the company's base case of $140/tonne, that's $65m annually at 13MTPA, rising to $72m annually for 20MTPA. So, yes she took a massive risk with her $250m, but if the mine gets to production she’ll receive a whopping 26% - 29% annually.
So, there could be, for example, a $500m capital injection plus $30m of new equity at 3p (1Bn new shares issued). If the $500m was on the same terms as Gina’s deal, that would mean a 10% royalty, which would give the new investor a return of $130m (rising to $142m) annually, in perpetuity. In addition, they would have immediate upside on the new equity - let’s say that (conservatively) the sp jumps back to 15p on the news, then they’ve made £120m overnight, which reduces their exposure immediately.
There could, of course, be many variations of the above, including the strategic investor taking a much higher stake (just double or treble the numbers above and it still looks attractive for shareholders from where we are today), but the key thing is that, once the high risk bit is sorted, all the other finance options come back into play, including potentially the Govt guarantee, so the remaining finance can then be on much better terms.
Not seen that video before DenFos - if you ignore the abject hypocrisy of it, given what ICL were saying about this product pretty much since Sirius started the project, it's a very polished advertisement. In fact, it's very good of them to warm the market up for us :-)
I've said before, but will say it again - whether it's the reason he did or not we'll never know, but the practical effect of CF buying 10,000 shares (the smallest possible number you could imagine him buying) is to place him at the top of the directors buys table on this forum, making his whole 124 million shares visible to all of us. It wasn't visible previously because the table only shows the last five buys and none of them were his, so if he wanted to remind us how much he has riding on this project, that's as good a way as any to do it!
I've been considering what would be the best way forward from where we are now and concluded that anything funded largely from equity just won’t cut it as, quite apart from the impact on shareholders (including CF), it wouldn’t raise enough money to provide a secure way forward. So that means that we’re looking at alternative ways of getting a strategic investor involved that make it sufficiently attractive to them while retaining as much value for existing investors as possible.
It seems to me that a royalty-based deal to secure the funds for the high-risk shaft sinking would be the most attractive option for shareholders, as it focuses the deal on the future value of the product, rather than the current value of the project, thereby providing an extremely healthy return for the new investor without much dilution for existing shareholders, or taking much away from future revenues.
So what might that kind of deal look like? Well, looking at Gina's royalty deal, for $250m she gets a 5% royalty on the first 13m tonnes each year and 1% on anything above that. On the company's base case of $140/tonne, that's $65m annually at 13MTPA, rising to $72m annually for 20MTPA. So, yes she took a massive risk with her $250m, but if the mine gets to production she’ll receive a whopping 26% - 29% annually. That is a massively higher return than anything the bond-holders have been looking at and it runs in perpetuity, whereas bondholders have a much shorter investment horizon, so a different attitude to risk. So, it is a VERY attractive proposition to the right kind of investor.
Now, you might say that the market is much more risk averse today, so would want an even higher return than that, which may be true, but of course Gina won't be very happy if someone else gets offered better terms than her when she took the bigger risk by coming in earlier in the project. So, I think we could see something offering similar terms. There could be, for example, a $500m capital injection plus $30m of new equity at 3p (1Bn new shares issued). If the $500m was on the same terms as Gina’s deal, that would mean a 10% royalty, which would give the new investor a return of $130m (rising to $142m) annually, in perpetuity. In addition, they would have immediate upside on the new equity - let’s say that (conservatively) the sp jumps back to 15p on the news, then they’ve made £120m overnight, which reduces their exposure immediately.
There could, of course, be many variations of the above, including the strategic investor taking a much higher stake (just double or treble the numbers above and it still looks attractive for shareholders from where we are today), but the key thing is that, once the high risk bit is sorted, all the other finance options come back into play, including potentially the Govt guarantee, so the remaining finance can then be on much better terms than the JPM deal, as the major risks have been removed.
Just wanted to show that there are ways thro