23 Apr 2018 15:37
23 April 2018
Sirius Minerals Plc
Annual Financial Report
In accordance with Listing Rule 9.6.1R, Sirius Minerals Plc (the "Company") announces that the following documents have been posted to shareholders and submitted to the UK Listing Authority via the National Storage Mechanism:
· Sirius Minerals Plc Annual Report and Accounts 2017;
· Notice of 2018 Annual General Meeting; and
· Proxy Form for the 2018 Annual General Meeting.
The above-mentioned documents (except for the Proxy Form) are available on our website at www.siriusminerals.com and will shortly be available for inspection at www.morningstar.co.uk/uk/nsm. The 2018 Annual General Meeting will be held at 1.00 p.m. on Thursday 31 May 2018 at The Events Centre, The Principal York, Station Road, York, YO24 1AA.
The information set out in the appendix below, which is extracted from the Annual Report and Accounts 2017, is included solely for the purpose of complying with DTR 6.3.5R. It should be read in conjunction with the Company's 2017 Preliminary results announcement issued on 6 March 2018. Both documents are available at www.siriusminerals.com and together constitute the material required by DTR 6.3.5R to be communicated to the media in unedited full text through a Regulatory Information Service. This material is not a substitute for reading the Annual Report and Accounts 2017 in full. Page numbers and cross references in the extracted information refer to page numbers and cross references in the Annual Report and Accounts 2017.
For further information, please contact:
Sirius Minerals Plc Investor Relations Manager | Tristan Pottas Email: ir@siriusminerals.com | Tel: +44 845 524 0247 |
Media enquiries Edelman | Alex Simmons, Ed Brown Email: Siriusminerals@edelman.com | Tel: +44 7970 174 353 Tel: +44 7540 412 298 |
About Sirius Minerals Plc
Sirius Minerals Plc is focused on the development of the Woodsmith Mine, which will access the world's largest and highest grade polyhalite deposit located in North Yorkshire, United Kingdom. Polyhalite is a unique multi-nutrient fertilizer, which can be used to increase balanced fertilization around the world. Sirius Minerals' shares are traded on the Premium List of the London Stock Exchange. Its shares are also traded in the United States on the OTCQX through a sponsored ADR facility. Further information on the Company can be found at: www.siriusminerals.com.
Appendix
1. Identifying and managing risks (page 48)
Risk management and internal control
The Group's strategy exposes it to various risks. The Board is responsible for determining the nature and extent of the risks that the Group is willing to take in achieving its strategic objectives.
The Board has an ongoing process for identifying, evaluating and managing the principal risks faced by the Group.
The Board has performed a robust assessment of the principal risks facing the Group, taking into account those that would threaten its business model (see page 32), future performance, solvency or liquidity, as well as the Group's strategic objectives (see page 22). In addition, the Board considered how risks evolve and potential emerging risks. The most significant risks arising from this assessment, including details of their management and mitigation, are detailed in the Strategic Report on pages 49 to 52.
The Group has a system of internal controls which is designed to manage and mitigate these risks and which the Board is responsible for. This system is in accordance with the Guidance on Risk Management, Internal Control and Related Financial and Business Reporting as issued by The Financial Reporting Council and its key features include:
· a defined organisational structure with appropriate delegation of authority and clearly defined lines of reporting and responsibility, whereby the incurring of expenditure and assumption of contractual commitment can only be approved by specified individuals and within pre-defined limits;
· formal authorisation procedures for all banking transactions, expenditure and investment decisions;
· a comprehensive system for budgeting and planning whereby annual budgets are prepared and approved by the Board and subsequently monitored with variances reported to the Board at Board meetings; and
· regular and comprehensive information provided to the Board from the Group's senior management team, covering financial performance and key performance indicators, including non-financial measures.
The Group's system of internal controls (including each of those detailed above) have been in place for the year under review and up to the date of the approval of this Annual Report. This system is regularly reviewed by the Board and a review of the effectiveness of all material controls was carried out by the Audit Committee during the year. This effectiveness review considered the design of controls associated with key risks and the evidence as to their proper operation throughout the year. No significant failing or weaknesses were uncovered in the course of this review.
Brexit
The Group is aware that the referendum vote in June 2016 pursuant to which the United Kingdom has indicated its intent to withdraw from the European Union might present risks for companies, including uncertainty about the process, timings and consequences of the final withdrawal. The Group does not currently trade with Europe. It is also not in receipt of EU foreign direct investment (FDI). Most of the Group's future sales are likely to be in US Dollars. Therefore, the risk relating to Brexit is low for the Group and is not considered one of its principal risks. The Group continues to monitor political, regulatory and legislative aspects of the withdrawal from the European Union and is aware of the aspects of this potential risk.
Key to risk management
↗ Risk increasing ↔ No change ↙ Risk decreasing
Principal risks
| Mitigation | Trend | Strategy Link |
Strategic risks | |||
Exploration and development The Group is completely dependent on the ability of the Project and engineering team to successfully deliver operational mine and infrastructure facilities.
| The geological, mining, processing and infrastructure challenges of the Project are inherent in a mining and infrastructure Project of this size, and are not of an extraordinary level or nature.
Site investigation work through a program of seismic surveys and investigative boreholes continues as part of the Project. As engineering progresses this risk naturally reduces.
Development risks are assessed, evaluated and reduced as far as reasonably possible as part of the Project management function performed by our experienced owner's team. |
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Financial risks | |||
Liquidity risks The Group's current activities do not generate revenues and there is a risk that, despite raising the initial funds to commence construction, we will have insufficient funds to finalise development and construction of the Project to a point of production where the Group generates positive operating cash flows, which will affect our ability to manage operating costs and capital expenditure. There is no assurance that adequate funds will be available when they are required.
| We have a strong Board and management team with extensive experience in financing large, multi-billion Dollar projects.
We have been successful in raising funds in the recent past, including in 2016 to commence construction of the Project and signing a non-binding mandate letter with financial institutions in relation to a potential senior debt financing which would fund the majority of the remainder of the operating costs and capital expenditure required to finalise the development and construction of the Project and reach a point of production where the Project generates positive operating cash flows.
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Commodity price There is a risk that fertilizer prices, including potash and polyhalite, could fall to levels at which it would not be economically viable to develop the Project. Such conditions would materially and adversely affect production, earnings and the financial position and could result in the cessation of mining activities that become uneconomic or could result in the economics of the Project not being sufficient to enable the Group to raise the next stage of funding to take the Project to production, halt or delay the development of new areas to mine, and reduce funds available for proving reserves, resulting in the depletion of reserves. There is no assurance that, even as commercial quantities of polyhalite ore are produced, a profitable market will exist for it.
| Our research team continues to analyse various fertilizer markets, including NPK, potash and polyhalite. Current studies support the continued growth in world demand and a positive price outlook over the medium term.
Feasibility study work indicates that the anticipated cost of production for polyhalite is circa US$30. At this cost, the Project would rank in the bottom quartile of potash producers and is therefore well positioned for significant price downturns |
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Currency Sirius Minerals will have currency exposures arising from both its capital expenditure and operating costs and the sale of polyhalite ore.
Revenue from polyhalite sales and the majority of future financings for the Project are expected to be denominated in US Dollars, providing a natural exchange rate hedge. However, a significant portion of the construction, development and operating expenses for the Project will be incurred in non-US Dollar currencies, in particular Pounds Sterling.
Accordingly, appreciation of such non-US Dollar currencies, without offsetting improvement in US Dollar denominated polyhalite prices, could adversely affect the Project's profitability and financial position. | The Group has mitigated the currency risk in the medium to long term, by planning a capital structure where it has raised funds in Pounds Sterling and US Dollars, to broadly match the anticipated currency split of its expected capital expenditure and operating cost needs.
The Group monitors its exposure to currency risk based on the Project expenditure forecast and the stage of development. The treasury policy sets out appropriate risk tolerances for currency exposure and the treasury team implement appropriate hedges to ensure the Group is compliant with the treasury policy.
| ↗
This risk is increasing as the time frame for Brexit draws closer and drives increased volatility in the foreign exchange markets. As the proceeds from the stage 1 financing are spent, the Group's exposure to sterling is also increasing because the stage 2 financing is likely to be predominantly in US Dollars. |
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External risks | |||
Permits and licences The Project requires a range of permits and licences to operate. As the Project progresses, the details of the works will require changes to the planning permissions. There is no guarantee that these will be forthcoming. | The Group is in possession of the planning permissions required to commence the construction of the minehead, MTS, MHF and has also received a development consent order for the construction of the harbour facility. Any changes applied for do not affect these permissions, but rather either modify or replace the existing permissions once approved.
Up to this point the minor non-material changes sought have been approved. A minor material change for the Woodsmith Mine site has also been approved by the NYMNPA.
Sirius Minerals has a broad range of consultant advisers that specialise in obtaining the remaining permits, licences and secondary approvals and licences needed for the Project to operate.
|
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Competitors There are high barriers for potential new entrants into the market. The major competitors all have substantial existing infrastructure, less leverage and substantially greater financial resources. There can be no assurance that Sirius Minerals or its Project will be able to successfully respond to such competitive pressures or the competitive activities of the other major suppliers in its markets. | Our polyhalite product contains four of the six macro-nutrients (potassium, sulphur, magnesium and calcium) required for plant growth. Polyhalite is an effective, direct application, multi-nutrient fertilizer and can also be combined with nitrogen and phosphorous to create high-value NPK fertilizer products that contain all six macro-nutrients. As such, we are less exposed to the existing potash supply structure with respect to product supply and demand dynamics. The Group continues to develop its marketing and sales strategy to utilise the unique characteristics of polyhalite.
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Operational risks | |||
Construction delays The Project may experience construction and schedule delays due to unforeseen technical issues. | Detailed assessment and planning will be carried out continuously by the management team and external consultants as part of the Project's continued development to mitigate and de-risk the Project during construction.
The Group also continues to pursue all acceleration options available to reduce the time required to reach first production. Contractors are incentivised to bring their scopes forward.
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Contractors and suppliers The performance of our contractors and suppliers is critical to the success of the Project. Performance issues or a lack of alignment could introduce cost and schedule risks to the Project. | This risk would manifest itself in cost, delay and/or quality issues.
An active and experienced management team is in place with a focus on being clear about expectations, verifying performance, and doing everything possible within the contracts to ensure the success of our contractors and suppliers. Performance is actively monitored and managed, with mitigating change instigated should performance not meet expectations.
In working with our contractors we are focussed on ensuring that they are working within their area of specialisation, that their senior management are engaged in our Project, that regular communication and progress updates are maintained and that major construction contractors are incentivised around the success of the Project.
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Construction cost overruns The Project may experience construction cost overruns due to unforeseen technical issues or scope change.
| The owner's team has a strong focus on cost.
Confidence in the final cost will increase as detailed engineering progresses and contracts are put in place for the works.
Prices received from contractors and suppliers so far have been in line with the DFS and budget. In addition, the Project was costed with significant contingency and escalation provisions in case of cost pressures. The fall in the value of the pound also provides comfort in this area.
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Safety and environmental performance A significant safety or environmental incident would affect the delivery of the Project and the Group's reputation.
| We continuously assess the risk and ensure that we have the right people in the right place. Nonetheless, the Group is not complacent about the risks in this area.
The owner's team is set up to manage safety and the environment effectively. A key part of our work in this area is in ensuring that we engage contractors who have the right attitude and systems, and that we welcome expertise and improvement from employees, contractors, and external parties.
Ongoing focus areas include leadership activities, work with our contractors (including onboarding processes and auditing), developing the culture of the Project team, and the identification and control of major hazards. |
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Viability statement
In accordance with provision C.2.2 of the Code, the Directors have assessed the prospects of the Company over a five-year period, taking account of the Company's current position and principal risks.
Timeframe
The Board believe that five years is the most appropriate timeframe over which the Board should assess the long-term viability of the Company. The Company's current activities do not generate any revenues or positive operating cash flow, and construction of the Project and the development necessary to commence production and generate revenues will require significant capital expenditures. The Project is not expected to generate positive net cash flow until approximately 2022, some four years from now.
Assessing viability
The main assumptions are that the stage 2 financing of up to US$3 billion is completed in the second half of 2018 and that the U$300 million royalty financing due from Hancock British Holdings Limited is paid on or around the same time. If these transactions are not concluded in this time frame the Company may not be able to ensure that the Project will become operational, nor that commercial production will commence on schedule (or at all).
Principal risks
In addition, in making their assessment, the Board has taken into account the principal risks as described in detail on pages 49 to 52 and also the scenario modelling and sensitivity analysis undertaken by the Company and various consultants which has been conducted as part of the development of the Project. The modelling demonstrates profitability over a range of negative assumptions, both individually and in aggregate. The scenarios considered took into account the impacts of:
- a Project capital cost overrun;
- a delay in Project completion;
- lower realised polyhalite sales prices;
- lower long-run polyhalite sales volumes;
- higher long-run operating costs; and
- a reasonable downside scenario taking into account a combination of the above.
Based on the financial impact of the analysis outlined above and the associated risk, management actions and controls that are either in place or could be implemented, the Board has been able to conclude that the Group will be able to deliver the construction of the Project, provided the stage 2 financing is completed as described.
Confirmation of viability
Taking account of these matters, the Directors have a reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they fall due over the period to December 2022, assuming that the stage 2 financing referred to above is completed as described.
The Group's going concern statement is detailed in note 1 on page 114.
2. Directors' Responsibilities (page 102)
The Directors are responsible for preparing the Annual Report and the financial statements in accordance with applicable law and regulation.
Company law requires the Directors to prepare financial statements for each financial year. Under that law the Directors have prepared the Group financial statements in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union and Company financial statements in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards, comprising FRS 101 'Reduced Disclosure Framework', and applicable law). Under company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and Company and of the profit or loss of the Group and Company for that period. In preparing the financial statements, the Directors are required to:
· select suitable accounting policies and then apply them consistently;
· state whether applicable IFRSs as adopted by the European Union have been followed for the Group financial statements and United Kingdom Accounting Standards, comprising FRS 101, have been followed for the Company financial statements, subject to any material departures disclosed and explained in the financial statements;
· make judgements and accounting estimates that are reasonable and prudent; and
· prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Group and Company will continue in business.
The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Group and Company's transactions and disclose with reasonable accuracy at any time the financial position of the Group and Company and enable them to ensure that the financial statements and the Directors' Remuneration Report comply with the Companies Act 2006 and, as regards the Group financial statements, Article 4 of the IAS Regulation.
The Directors are also responsible for safeguarding the assets of the Group and Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.
The Directors are responsible for the maintenance and integrity of the Company's website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
We confirm that, to the best of our knowledge:
· the financial statements, which have been prepared in accordance with IFRSs as adopted by the European Union, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and the undertakings included in the consolidation taken as a whole;
· the Strategic Report includes a fair review of the development and performance of the business and the position of the Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face; and
· the Annual Report and financial statements, taken as a whole, are fair, balanced and understandable and provide the information necessary for shareholders to assess the Company's performance, business model and strategy.
By order of the Board
Chris Fraser
Managing Director and CEO
Thomas Staley
Finance Director and CFO
3. Related Party Transactions (page 128)
There have been no material related party transactions in the year ended 31 December 2017 (2016: nil), except for key management compensation. The key management compensation below includes eight (2016: seven) Sirius Minerals Plc Directors and three (2016: four) further executive management employees who are not Sirius Minerals Plc Directors. Key management personnel received the following compensation during the period:
2017 | 2016 | |
£000s | £000s | |
Salaries and short-term benefits | 4,415 | 1,482 |
Post-employment benefit contributions | 11 | 9 |
Share-based payments | 1,431 | 581 |
Compensation for loss of office | - | 157 |
Total key management compensation | 5,857 | 2,229 |
Total Directors' emoluments and emoluments of the highest paid Director, together with full details of Directors' remuneration, pensions and benefits in kind are given in the Remuneration Committee Report.