TIDMSXX
RNS Number : 1434C
Sirius Minerals Plc
24 June 2016
24 June 2016
Sirius Minerals Plc
Capital funding requirement reduction
-- Contractor engagement has delivered an enhanced
implementation approach for the Company's North Yorkshire
polyhalite project
-- Total capital funding requirement has been reduced to US$2.91
billion (18% reduction)
-- Stage 1 capital funding requirement has been reduced to
US$1.09 billion (33% reduction)
-- Updated Project net present value ("NPV") of US$15.2
billion
-- Updated Project after-tax debt-free internal rate of return
("IRR") of 28%
-- Positive progress on the Company's financing plans with a
number of parties undertaking detailed due diligence
Sirius Minerals Plc (AIM: SXX, OTCQX: SRUXY) ("Sirius" or the
"Company") announces a material reduction of its capital funding
requirements for its North Yorkshire polyhalite project (the
"Project").
Since October 2014, in parallel with the preparation of the
Definitive Feasibility Study ("DFS"), the Company has been
conducting a detailed early engagement and competitive tendering
process with specialist contractors for critical aspects of the
Project's construction. The completion of the DFS and the selection
of the contractors for the mine site development ("MSD") and the
mineral transport system ("MTS") has now enabled the Company to
confirm a refined implementation plan for the delivery of the
Project.
One of the outcomes of this work is that the capital funding
requirement for the Project has been reduced to US$2.91 billion (an
18% reduction from the US$3.56 billion estimate detailed in the DFS
announcement). There has also been a significant reduction of the
capital required for stage 1 of the two stage financing strategy.
The revised stage 1 requirement is US$1.09 billion (a 33% reduction
from US$1.63 billion). This delivers an updated Project net present
value, after tax and debt free ("NPV") of US$15.2 billion and an
updated Project after-tax and debt-free internal rate of return
("IRR") of 28%.
Chris Fraser Managing Director and CEO said:
"By working closely with specialist contractors for almost two
years we have been able to further strengthen the delivery plan for
the Project. The reduced capital funding requirement will also be a
significant benefit to the already attractive economics that
underpin our world-class Project.
"We look forward to continuing to work with our contractors and
their local supply chains as we move into the delivery phase and
maximise value for both our shareholders and the wider
economy."
Background
The implementation and delivery of the Project is a critical
phase of value creation for the Company. In order to ensure the
most efficient and optimal implementation plan for the Project, the
Company has been undertaking a detailed early contractor engagement
process since October 2014. This process has involved running a
competitive tendering and value engineering process with specialist
contractors to identify opportunities to enhance the implementation
strategy.
This tender process has been run in parallel with the DFS
preparation and during that process it has served as a valuable
check on the validity of the DFS conclusions. At the time of the
completion of the DFS the competitive tenders for the MSD and the
MTS had confirmed critical aspects of the DFS estimate and
schedules and gave the Company the confidence in the DFS findings.
However, it was noted at the time of the DFS that the Company
considered it to be a conservative estimate and that opportunities
existed in the tendering process, the competitive dynamic around
equipment supply and the optimisation of construction methodology,
to reduce costs, schedule and risk.
The recent selection of preferred contractors has enabled the
Company to confirm the opportunities to adopt the contractor
solutions. This has been done by reviewing the proposed
contractors' proposals in detail against the DFS and revising the
capital requirements for the Project to align with those decisions.
The three key areas of change are detailed below.
Adoption of key contractor designs and estimates
The DFS estimate was based on designs using typical construction
methodologies prepared by specialist consultants for each of the
components of the Project. The consultants produced specific
quantities (such as volume and specifications of steel, concrete or
specific equipment procurement requirements) and schedules for each
component of the Project. Rates were then applied to the schedules
and quantities (both the direct costs and an estimate of the
related contractor indirect costs). An estimate of contingencies
and of owner's costs was also then added to deliver the DFS
estimate.
The DFS provides the Company with a detailed baseline for the
delivery of the Project but ultimately it is an estimate compiled
from various designs and assumed implementation approaches. This
detailed assessment puts the Company in a position to accurately
assess and benchmark the specialist contractor solutions and prices
throughout the Project. With the DFS complete, and the preferred
construction contractors now selected, the Company can now confirm
with confidence that the contractors' designs and implementation
approaches can be adopted as the basis for the delivery of the
Project. In addition to the change in the basis of the
implementation methodology, and the estimate of the capital cost
for those components, it also enables the Company to adopt a
refined approach to the management of the Project delivery and also
to update other components of the DFS estimate with current market
prices.
During the tendering process each of the construction
contractors' optimised their methodologies and designs which meant
they varied from those outlined in the DFS. This included different
assumptions on quantities, labour requirements, sequencing of work,
and ultimately detailed cost estimates. Following a review of the
detailed contractor design proposals, a reduction in the total
capital funding requirement for the Project of US$490 million has
been made possible.
The most significant component of this reduction has been the
optimisation of the shaft design and construction methodology by
the preferred mine site construction contractor - AMC. The AMC
design for the shafts aligns with the 50 year design life for the
MTS. The change of design is not expected to impact the operating
cost assumptions during the first 50 years of the operations. AMC's
plans have a more effective and efficient construction methodology,
reducing the amount of temporary construction equipment (such as
the number of temporary winding towers) and the early utilisation
of the permanent equipment.
Change of implementation approach
Early engagement with the construction contractors, particularly
with respect to the integration between site preparation, shaft
sinking and tunnelling, has resulted in replacement of multiple,
concurrent construction contracts with a single shaft sinking
contract for the mine and mineral transport system shafts. The
proposed shaft sinking contractor would therefore be largely
self-contained, particularly for the first 18 months to two years
of construction. As a result, the Company reassessed its approach
to project management to adopt an 'owner's team' management
approach, which is a change from the 'PMC' based approach
considered in the DFS.
This change results in a removal of the costs of the PMC from
the DFS estimate and the addition of costs for the procurement of
certain systems and the cost of recruiting the additional in-house
team. This change results in a net reduction in the total capital
funding requirement of US$63 million.
Value engineering
During a value engineering review of the DFS estimate a number
of items were identified that no longer aligned to the timing of
the construction approach or were surplus to the requirements of
the chosen design. The net result of these changes is to remove
some costs and defer others to later in the Project schedule
resulting in a reduction of the capital funding requirement by
US$103 million.
Improved project economics
The following table outlines the revised capital funding
requirement of the Project.
Table 1: Capital funding requirement
US$ millions Stage Stage Total DFS Variance
1 2
----------------------------- ------ ------ ------ ------ ---------
Mine site development 656 321 977 1,426 (449)
----------------------------- ------ ------ ------ ------ ---------
Mineral transport system
(tunnel) 61 796 857 935 (78)
----------------------------- ------ ------ ------ ------ ---------
Materials handling facility
and Port - 229 229 237 (8)
----------------------------- ------ ------ ------ ------ ---------
Other infrastructure
and facilities 1 81 82 88 (7)
----------------------------- ------ ------ ------ ------ ---------
Owner's Costs 118 163 280 344 (63)
----------------------------- ------ ------ ------ ------ ---------
Contingency (including
escalation) 180 265 445 445 -
----------------------------- ------ ------ ------ ------ ---------
Working capital and
other 71 (34) 38 88 (51)
----------------------------- ------ ------ ------ ------ ---------
Capital Funding Requirement 1,088 1,821 2,909 3,565 (656)
----------------------------- ------ ------ ------ ------ ---------
DFS Capital Funding
Requirement 1,634 1,930 3,565
----------------------------- ------ ------ ------ ------ ---------
% Reduction 33% 6% 18%
----------------------------- ------ ------ ------ ------ ---------
Notes: The capital funding requirement is the capital funding
required by the Company to the end of the first quarter in which
the Project generates positive net cashflow and is calculated on
the same basis as for the DFS subject to the adjustments outlined
above. Allocation of the capital funding requirement to stage 1 and
stage 2 is based on scheduled activities with management allocation
of indirect costs.
The updated Project net present value ("NPV") is US$15 billion
today rising to an NPV of US$27 billion upon commencement of
production. The updated Project after-tax debt-free internal rate
of return ("IRR") is 28%. Further to this the NPV and IRR of the 10
Mtpa case are US$7.1 billion (up from US$6.7 billion) and 22.9% (up
from 20.7%) respectively.
The key changes to the assumptions underpinning the financial
analysis are as follows:
-- Capital funding requirement reduced from US$3,565 million to US$2,909 million;
-- Revenues estimated based on expected free on board ("FOB")
prices derived from existing offtake contracts, including the
recent Dian Huang offtake agreement, and regional sales forecasts;
and
-- UK Corporation tax rate legislated to reduce to 17% from 1 April 2020.
The following tables outline the updated Project economic
analysis.
Table 2: Project cash forecasts: capital funding period
(nominal)
US$ millions Year Year Year Year Year Year H1 Year Total
1 2 3 4 5 6 7
---------------- ------ ------ ------ ------ ------ ------ -------- --------
Development
Capital (138) (313) (502) (545) (679) (580) (113) (2,871)
---------------- ------ ------ ------ ------ ------ ------ -------- --------
Revenues - - - - - 34 66 100
---------------- ------ ------ ------ ------ ------ ------ -------- --------
Opex and other
costs(1) (51) (15) (6) (4) (4) (28) (20) (128)
---------------- ------ ------ ------ ------ ------ ------ -------- --------
Royalties - - - - - (1) (2) (3)
---------------- ------ ------ ------ ------ ------ ------ -------- --------
Tax /working
capital adj. - - - - - (1) (3) (7)
---------------- ------ ------ ------ ------ ------ ------ -------- --------
Net Project
Cashflow(2) (190) (328) (508) (550) (683) (577) (73) (2,909)
---------------- ------ ------ ------ ------ ------ ------ -------- --------
Notes: 1) Other costs include funding of Section 106 security
arrangements. 2) Net Project Cashflow includes operating cash flow
and investing cash flow. All financing cash flow items including
interest are excluded.
Table 3: NPV (US$bn) sensitivity to Capex and Price at full
capacity (20 Mtpa)
Capex sensitivity Long-term POLY4 price sensitivity
------------------ ------------------------------------------
-20% -10% Base +10% +20%
------------------ --------- ------- ------- ------- ------
-20% 11.4 13.5 15.7 17.8 19.9
------------------ --------- ------- ------- ------- ------
-10% 11.2 13.3 15.5 17.6 19.7
------------------ --------- ------- ------- ------- ------
Base 11.0 13.1 15.2 17.4 19.5
------------------ --------- ------- ------- ------- ------
+10% 10.8 12.9 15.0 17.2 19.3
------------------ --------- ------- ------- ------- ------
+20% 10.5 12.7 14.8 16.9 19.1
------------------ --------- ------- ------- ------- ------
Table 4: IRR sensitivity to Capex and Price at full capacity (20
Mtpa)
Capex sensitivity Long-term POLY4 price sensitivity
------------------ ------------------------------------------
-20% -10% Base +10% +20%
------------------ --------- ------- ------- ------- ------
-20% 27% 29% 31% 32% 34%
------------------ --------- ------- ------- ------- ------
-10% 25% 27% 29% 31% 32%
------------------ --------- ------- ------- ------- ------
Base 24% 26% 28% 30% 31%
------------------ --------- ------- ------- ------- ------
+10% 23% 25% 27% 28% 30%
------------------ --------- ------- ------- ------- ------
+20% 23% 24% 26% 27% 29%
------------------ --------- ------- ------- ------- ------
Financing progress
The Company is focused on shareholder value and pursuing the
most efficient and cost effective capital structure to develop the
Project. The Company is making good progress with the previously
articulated two stage approach to financing. The material reduction
in the initial capital funding requirement results in a consequent
reduction in the envisaged equity requirement for the Project.
As previously announced, the Company is seeking to finance the
stage 1 capital requirement via a combination of structured capital
and equity in approximately equal proportions. The structured
capital is likely to take the form of various instruments such as a
royalty, debt plus warrants or a convertible note. Various parties
are in the process of conducting due diligence to support
structured capital proposals and the Company will provide an update
on the outcome of this process at an appropriate time.
Work on the stage 2 financing has progressed with the Company
conducting a market sounding with potential senior debt lenders.
Fifteen prospective lenders participated in the sounding process
with positive feedback received from the majority of participants.
The Company continues to work with a select number of banks with a
view to forming a small group of mandated lead arrangers. It is
envisaged that once this process has concluded (in advance of the
stage 1 financing), the Company will have indicative terms for its
stage 2 financing and support from the mandated bank group. On the
basis of feedback provided so far, the Company is confident that a
commercial bank transaction will be capable of meeting the entire
revised stage 2 capital funding requirement of US$1,821
million.
The Company's AGM presentation has been uploaded to the website
and a webcast of the presentation is planned to be uploaded next
week.
For further information, please contact:
Sirius Minerals Plc
Investor Relations Email: ir@siriusminerals.com Tel: +44 845
524 0247
------------------------- ------------------------------- ---------------
Joint Brokers
Liberum Capital Limited Neil Elliot, Tel: +44 20
(NOMAD) Clayton Bush, 3100 2222
Jill Li
J.P. Morgan Cazenove Ben Davies, Jamie Tel: +44 20
Riddell 7742 4000
WH Ireland Adrian Hadden Tel: +44 20
7220 1666
------------------------- ------------------------------- ---------------
Media Enquiries Jos Simson, Mike Tel: +44 20
Tavistock Bartlett, 7920 3150
Emily Fenton
------------------------- ------------------------------- ---------------
About Sirius Minerals Plc
Sirius Minerals is the fertilizer development company focused on
the development of its North Yorkshire polyhalite project, the
United Kingdom. It has the world's largest and highest grade
deposit of polyhalite, a multi-nutrient form of potash containing
potassium, sulphur, magnesium and calcium. Incorporated in 2003,
Sirius Minerals' shares are traded on the London Stock Exchange's
AIM market. 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.
This information is provided by RNS
The company news service from the London Stock Exchange
END
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