dug this out21 May 2019 12:54
product and the size of the market
1Keeping the project funded, on-budget and on-schedule
Sirius has already had to push deadlines back and experienced cost-overruns even during the early phases of the project. Although this is common for a new mining project, it is not ideal and the sheer size of the project heightens the risk of budgets being blown. The main reason Sirius had to raise equity (which was not part of its original plan) as part of the stage 2 financing was to plug a shortfall in its budgets.
However, the company has said it has learnt from the mistake of underestimating its funding requirements. Sirius said the $3.8 billion sum 'was made on the basis of much more reliable cost information' and that the risk of cost-overruns has been reduced since the end of 2017.
With the bulk of the work still left to do the risk of being hit by a setback or delay is still high. While Sirius has ensured the stage 2 financing is designed to provide it with a cushion to fall back on any delays will ultimately prolong the journey to production and, more importantly, the vital cashflow it will need to begin paying down the vast amount of debt it is taking on. Keeping the project on track is a priority.
2Shareholder dilution and pressure on the share price
Sirius Minerals shares are mostly in the hands of retail investors, with reports suggesting there are as many as 85,000 individual investors in the business, many of whom are based in the North Yorkshire region where the mine is based. Prior to the placing and open offer shares being issued the largest single shareholder in the business owned 6.8% of the business. The fact that the stage 2 financing is bringing on more institutional investors suggests the company is getting the backing it needs to convince the market it is onto a winner.
However, shareholders are rightly concerned about dilution. They have already been penalised for the latest cost overruns and seen their stakes watered down. It will have just shy of 7 billion shares in issue once the latest placing and open offer is formally completed – compared to just 4.8 billion at the end of 2018, 4.5 billion at the end of 2017 and 2.5 billion at the end of 2016.
In addition, the latest placing and open offer was priced at 15p, which was a large discount to the market price at the time and at the bottom end of its targeted range. In fact, Sirius shares were trading at around that level after it secured planning permission in 2015, demonstrating the pressure that continued dilution has had on the share price. This is significant as appreciation in the share price is the only way investors will be able to reap a reward on their investment over the shorter term. The value of Sirius shares has been cut in half over the last 12 months, even after announcing the stage 2 financing.
If the stage 2 financing is successful, the company should comfortably avoid having to raise any further equity for the foreseeable futu
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