Interactive Investor

Sirius Minerals attracts 25% upgrade

19th August 2016 17:22

Lee Wild from interactive investor

Experts have had some thinking time since Sirius Minerals published a largely irrelevant set of half-year results Tuesday. Sirius shares have rocketed over two-thirds in the past month, ever since it received the last major approval needed for its north Yorkshire potash mine project. But one analyst now thinks they're worth at least 92% more.

It's little surprise that Shore Capital's Yuen Low made negligible changes to financial forecasts, but his per share valuation number has altered dramatically in reaction to the recent rally from 23p on 20 July.

Using a higher Stage One fundraise equity price assumption of 35p a share, Low's revised "base-case" post-tax 2016 net present value (NPV) valuation is now 146p. Applying a 50% discount gives a risked NPV of 75p, up 25% from 60p previously.

"If all goes to plan, there would be no further need to raise equity after Stage One. Dilution would cease to be a concern, and we believe the resulting improved clarity on potential equity returns could trigger a significant re-rating," argues Low.

"While Sirius is currently at development stage and still some years from becoming a cash flow-generating company, an investment in Sirius will become progressively de-risked and should enjoy significant value uplift as it advances towards production, we believe. 'Buy'."

Sirius received final approval from the government for its harbour facilities four weeks ago, and the window during which legal challenges can be mounted closes at the end of this month.

Focus has now shifted more heavily onto financing the project. Sirius wants to raise $2.9 billion (£2.2 billion) in two stages - $1.1 billion to start with, then the rest in two years' time. The first tranche should be agreed during the autumn, reckons Low, split 50:50 between equity and structured debt.

If Sirius raises the cash on time, construction could begin as early as next month, with Shore Cap modelling first commercial production in the second half of 2021. In 2023, production could hit 13 million tonnes per annum (Mtpa), rising to 20Mtpa from 2028.

With its valuation racing toward £1 billion, Sirius is bound to move from AIM to the Main Market at some point, possibly ahead of, or in conjunction with, the equity raise, Low suggests. Expect automatic qualification for inclusion in the FTSE 250, obligating tracker funds to buy the shares.

A 10% rise in polyhalite prices increases the valuation by 15.9%But Low thinks many of his assumptions are still conservative and that there are "many potential sources of upside" to his valuation - discount rates, polyhalite prices, a strong dollar and volumes.

A 10% decrease in discount rates increases the valuation by 23.4%, he says, arguing that lower discount rates can be applied as a project approaches production and is progressively de-risked.

Shore Cap's model assumes a constant 10% discount rate, giving NPV of 468p by 2028. A simultaneous reduction in the discount rate to 5% gives a 2028 value of 806p per share. Drop the discount rate from 10% to 8% and 2016 NPV increases by 53.4% to 224p a share.

A 10% rise in polyhalite prices increases the valuation by 15.9%, and a 10% strengthening of the dollar adds 9.4%.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

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