Sector News

Mining company Anglo American today agreed to buy Sirius Minerals for £404.9 million ($526.2 million) in cash, marking Anglo American’s return to the fertilizer business and rescuing Sirius.

Sirius shareholders will receive 5.50 pence per share in cash, a 34.1% premium to the closing price on 7 January, the day before Anglo American said it was in talks to buy Sirius, a company developing a polyhalite potash mine in the north of England.

Sirius has been struggling to secure bank financing to complete its project since it began fundraising with retail investors in 2017. The company started a review after scrapping plans to raise $500 million in a bond sale. “We now face a stark choice. If the acquisition is not approved by shareholders and does not complete there is a high probability that the business could be placed into administration or liquidation within weeks thereafter,” says Russell Scrimshaw, Sirius chairman.
Scrimshaw adds that if the deal falls apart, it would most likely result in shareholders losing all their investments, putting at risk the future of the entire project and its associated benefits for the UK. The acquisition will see Anglo American expand its portfolio back into fertilizers after the company sold its remaining fertilizer project in Brazil in 2016, when it was recovering from a commodity market crash.

Sirius announced in September 2019 that it was undertaking a strategic review, to assess the development plan for its polyhalite project and an appropriate financing structure to provide relevant funding. Sirius also announced that the review would include a broader process to seek a major strategic partner. Sirius provided an update in November on the progress of the review, including a revised two-stage development plan.

The mine, once developed, is expected to produce a premium potash fertilizer that has the potential to generate demand on a standalone basis and when blended with other products at a competitive cost that would support attractive margins, Sirius says.

Anglo American identified the Sirius project as being of potential interest some time ago, given the quality of the underlying asset in terms of scale, resource life, operating cost profile, and the nature and quality of its product. The project has the potential to fit with Anglo American’s established strategy of focusing on world-class assets, particularly in the context of Anglo American’s portfolio trajectory toward later-cycle products that support a fast-growing global population and a cleaner, greener, more sustainable world, the company says.

Anglo American says it believes the offer provides certainty to Sirius shareholders, employees, and wider stakeholders, and that Anglo American can bring financial, technical, and marketing resources and capabilities to progress the project over time, with the potential for associated employment and economic benefits for the local area. In the first two years after successful completion of the acquisition, development work on the project is expected to be broadly in line with Sirius’s revised development plan although Anglo American intends to update the development timeline, optimize mine design, and ensure appropriate integration with its own operating standards and practices. As part of that process, Anglo American will review the residual capital for the project under its ownership. Sirius currently expects incremental capital of approximately $3.3 billion to reach a production level of 10 million metric tons/year (MMt/y). During the first two years and subject to the update, development work of approximately $300 million/year is expected. In line with its capital allocation framework, Anglo American will also keep potential syndication of the project under review.

Anglo American says it believes the project has the potential to become a world-class, low-cost, and long-life asset. Sirius has progressed the development of the project to an advanced stage, and construction has been under way for more than two years. Sirius has said that this is the world’s largest known high-grade polyhalite deposit with a JORC reserve of 290 million metric tons, with a grade of 88.8% and a resource of 2.69 billion metric tons. Anglo American expects that this could result in total unit costs of $40-50/ton at an initial level of production of 10 MMt/y. Sirius has said that the project could operate at an EBITDA margin potentially well in excess of 50%, leaving the project well positioned for strong through-the-cycle profitability with an anticipated long asset life.

As at 30 September 2019, $1.1 billion had been invested in the development of the project, with construction supported by the appointment of contractors including DMC Mining Services, Strabag, Worley Parsons, and P. J. Carey Contractors. All material-development, operational, and export approvals are in place and access rights secured for the current development plan including the sinking of operation and service shafts, the construction of the proposed mineral transport system, and the material-handling facility as well as the refurbishment of the port-handling facility.

Sirius’s polyhalite product, POLY4, is a multi-nutrient fertilizer certified for organic use and has the potential to generate demand at a competitive cost that supports a strong margin, the company says. POLY4 is an attractive low-chloride alternative to, and suitable for blending with, traditional fertilizer products on a cost-effective basis. It includes four of the six key macro-nutrients necessary for plant growth—potassium, sulfur, magnesium, and calcium—and has been certified for organic use.

Sirius has entered into a number of offtake agreements with well-established parties including ADM, BayWa, Cibrafertil Companhia Brasileira de Fertilizantes, Indian Farmers Fertilisers Cooperative, Wilmar Group, and Qatar Chemical and Petrochemical Marketing and Distribution Co. A large proportion of these agreements have specific price levels recognizing the value from key nutrients and have been established on a take-or-pay basis. These offtake arrangements together account for production in excess of 10 MMt/y.

Analysts consider the acquisition a positve move for Anglo American because it is a serious project that could potentially be disruptive to the potash market, as evidenced by the several offtake agreements Sirius has in place that involve peak sales greater than the initial planned capacity. “The problem was that potential financiers decided that the project was too big and too risky to be carried out by a small, undercapitalized company like Sirius. The Anglo American ownership will remove this obstacle,” one observer notes.

By Natasha Alperowicz

Source: Chemical Week