TIDMSXX
RNS Number : 9322S
Sirius Minerals plc
11 November 2019
11 November 2019
Sirius Minerals Plc
Strategic Review Progress Update
-- Development work across the Project now slowed to allow for a
six month strategic review period, funded by existing cash
resources
-- Review of development plan and optimisation opportunities has
produced a revised two-stage Project development plan
comprising:
o An Initial Scope to include progress of shaft sinking to
achieve first polyhalite and Drive 1 MTS, significantly de-risking
the construction of the Project. This work is estimated to require
US$600 million of funding to be raised
o A Deferred Scope incorporating the remainder of construction
activities required to deliver full production
-- Strategic partner and financial investor processes underway
with the aim of securing US$600m of Initial Scope funding, with
various parties engaged and assessing information
-- Strategic review demonstrates robust project values with
current project Net Present Values for the 13Mtpa business case
ranging from US$11 billion to US$13 billion and Internal Rates of
Return ranging from 29% to 35% for a range of development scenarios
subject to successful financing
On 17 September 2019 Sirius Minerals Plc ("Sirius" or the
"Company") announced that as a result of market conditions
impacting its ability to deliver its Stage 2 Financing, it would be
slowing the pace of development on its North Yorkshire polyhalite
project (the "Project") and undertaking a strategic review over a
period of six months.
The purpose of the strategic review is to consider and
incorporate optimisations to the project development plan and to
explore alternative financing solutions, including conducting a
process with the aim of identifying and securing a strategic
investor. The Company is pleased to provide an update on the
progress of this work.
Chris Fraser Managing Director and CEO of Sirius, comments:
"Our focus during the first phase of the strategic review has
been to reassess the best ways to unlock the value of our project
for our shareholders, our community, the UK, and our customers all
around the world.
"Our analysis has identified a two-stage development plan that
enables us to achieve the key de-risking milestone of first
polyhalite, when the service shaft reaches the polyhalite ore body,
with an upfront capital requirement of $600 million. The additional
works required to reach an installed and ramped up production
capacity of 10 Mtpa contemplates up to US$2.5 billion of capital
expenditure.
We are in discussions with potential strategic partners and debt
investors with the aim of securing the best route to finance our
revised initial scope of work and will update the market and our
stakeholders on the progress of those when appropriate.
The value of Sirius is unlocked by reaching production and
delivering POLY4 to our customers around the world. This approach
allows us to achieve that with less upfront capital while retaining
the significant return opportunity it presents for our shareholders
and stakeholders.
"I would like to thank our employees, contractors and partners
for their continued focus and commitment, and recognise that the
progress achieved on the ground in recent months remains a source
of huge inspiration for the whole team."
Background
Sirius' project development and financing strategies to date
have been built around two key objectives; first, to achieve first
polyhalite as soon as possible due to the transformative effect
that this will have on the Project's risk profile and, second, to
be in a position to ramp up to full production as quickly as
possible to generate returns for shareholders. This strategy
required the Company's former proposed Stage 2 Financing to be in
place in order to continue to achieve our goals of first polyhalite
by the end of 2021, and fully ramped up production in 2024.
As part of the strategic review process this strategy has been
reassessed with the feedback and outcomes of the Stage 2 processes.
The primary objective still remains to access first polyhalite as
quickly and as efficiently as possible, thereby removing the
greatest perceived construction risk associated with deep shaft
construction. This will then enable us to explore a wider and
cheaper range of debt financing options to fund the development of
the remaining Project infrastructure. In order to reduce the
upfront capital requirements, consideration has been given to the
rephasing and rescoping of other works required.
The Company has successfully identified a number of development
changes and optimisations that, together with a new approach to the
phasing of development, are aimed at reducing the initial capital
requirement to first polyhalite to US$600 million (in addition to
existing cash reserves).
The Company believes this balanced approach to development will
significantly de-risk the proposition for senior debt providers at
a later date and therefore facilitate the raising of senior debt to
fund the remaining infrastructure.
Although the Project delivery will now occur on a different
schedule of key milestones the effect on the value of the project,
when assessed using the measures of net present value ("NPV") and
internal rates of return ("IRR"), is not materially altered. At the
time of the Stage 2 financing the NPV of the 13Mtpa project scope
(i.e. not including value for 20Mtpa business case) was assessed as
US$11.6 billion. Using the revised approach to development and
subject to successfully financing the Project, the estimated
current NPV of the Project for the 13Mtpa business case ranges from
US$11 billion to US$13 billion across a range of development
scenarios.
Current construction status
The first phase of the strategic review was to adjust the
ongoing scope of work across the Project to preserve sufficient
funds for the six-month review period. This has been effectively
implemented with positive engagement and involvement with the
Company's employees and contractors. Since the start of the review
period on 17 September 2019, the Company has continued work across
a number of areas on the Project:
-- Successfully driven Drive 1 of the mineral transport system
("MTS") from Wilton to a distance of 2,250m. Even at this early
stage, over the last one kilometre of tunnelling the tunnel boring
machine ("TBM") has averaged 19 metres per day - this is 40% ahead
of the rate expected for the current ground conditions;
-- Completed sinking of the inner Service Shaft to a depth of
119m using conventional sinking and segmental lining. This shaft
has now been slip-form lined to the current base of the shaft. Work
is proceeding in the foreshaft in preparation for the launch of the
shaft boring roadheader ("SBR");
-- The SBR for the Service Shaft has been delivered to site and
has been modularised to the point where it is ready for lifting
into the shaft once full development scope recommences;
-- Development work on the Production Shaft has now been
suspended. The foreshaft has been excavated to a depth of 45m. The
inner shaft to 120m has been pre-lined with diaphragm walls,
although this has not been excavated.
-- Lockwood Beck MTS shaft site is being made safe and secure;
-- Woodsmith MTS temporary headframe construction is nearing
completion with the Galloway sinking stage installed in the shaft
and being prepared for commissioning. This shaft has been excavated
and lined to 115m;
-- The demonstration granulation plant at Wilton, for production
of POLY4 granules, has been successfully installed and will be
commissioned in December.
Revised development plan
The second stage of the strategic review has been to assess the
development options available to the Company. When reviewing
development options, the Company's ongoing objective has been to
protect and maximise shareholder value. The outcome has been to
redefine the Company's base case development plan to commercial
production to incorporate certain identified opportunities (the
"Revised Base Case").
The Revised Base Case development plan has been defined into two
phases of work: an initial scope of work (the "Initial Scope"), and
a deferred scope of work (the "Deferred Scope").
Phasing of Development
The Initial Scope will comprise shaft sinking activities for all
four shafts until first polyhalite is achieved and the excavation
of Drive 1 of the MTS tunnel to Lockwood Beck. This scope has been
selected to deliver the elements of the Project perceived to be
higher construction risks (e.g. shaft sinking) and / or of having
the greatest de-risking benefit (e.g. establishing clear
track-record on tunnelling by completing Drive 1).
The Deferred Scope incorporates the remainder of construction
required to deliver 10mtpa capacity ramped-up and operational. The
remaining work comprises a more 'infrastructure' style risk
framework more consistent with civil construction and more commonly
financed in large scale by project finance banks.
The aim of this approach is to materially de-risk the
implementation of the remaining elements of required funding and
ultimately aim to reduce previously anticipated funding costs of
the additional financing required to fully fund the Project to 10
Mtpa capacity.
The two-phase development approach enables the Company to
significantly reduce the initial further capital requirement to
US$600 million for funding of the Initial Scope. The Deferred
Scope, which has estimated capital costs of up to US$2.5 billion,
will only be committed to once full financing of the Project has
been secured. The Company will target full financing 12 to 24
months from the commencement of the Initial Scope. The earlier date
is to enable time for sufficient track-record on shaft sinking to
be demonstrated (i.e. lower the perception of risk and increase
cost certainty) and time for the detailed work with the financial
providers in terms of due diligence and documentation. The latter
date assumes all of the Initial Scope is completed prior to
commencing the Deferred Scope.
Development options incorporated into the Revised Base Case
Based on the work undertaken so far in the strategic review, the
Company has identified a number of options with the potential to
improve the cost and delivery timelines within the Deferred Scope
and intends to incorporate those options into the Revised Base
Case. The cost and schedule estimates incorporating these options
are subject to detailed engineering and procurement work that is
currently ongoing and will be finalised prior to implementing
financing for the Deferred Scope. The Strategic Review has also
identified some further significant opportunities which could
potentially benefit the Project through cost reduction and schedule
acceleration. These may be added into the Revised Base Case prior
to commencing the Deferred Scope but are not committed to yet.
MTS tunnelling rates
Based on performance to date, the Company is increasingly
confident in the capabilities of the tunnel boring machine ("TBM")
to deliver the tunnel at much faster than expected rates of
progress and this has been evident in the performance of Drive 1 to
date. The initial three kilometre near surface drive from Wilton
was expected to be the most difficult and time-consuming component
of the MTS development. Over the last kilometre of excavation, the
average rate of 19m per day is approximately 40% ahead of the
expected advance rate for this shallower, wetter ground.
Drive 1 was originally expected to achieve a long-run average of
17.5m per day but this drive is now expected to achieve an average
of 25m per day over the balance of the drive from the 3km mark. As
a result, Drive 1 is expected to be complete (reaching Lockwood
Beck) by the end of 2020, ahead of the original base schedule.
This change to the expected schedule does not adjust the
contracted rates but does create a number of opportunities for the
Company to align other components of the project and make
implementation decisions which are detailed below.
MTS - Continuation of Drive 1
With the successful launch and operation of the TBM in Drive 1
and the higher rates of advance experienced, the Company has taken
the decision to continue Drive 1 TBM from Lockwood Beck. This
removes the requirement for the Drive 2 TBM as well as the large
launch cavern required for that machine.
Once the TBM from Drive 1 reaches Lockwood Beck it will undergo
underground refurbishment before continuing on to complete Drive 2
(a further 12 kilometres). This change is expected to deliver a net
saving of approximately US$100million. This saving is achieved by
no longer procuring and assembling the second TBM, reducing the
size of the cavern at the base of the Lockwood Beck shaft, and
continuing to utilise the infrastructure already installed at
Wilton.
MTS - Phased Conveyor Capacity
The idea of better utilising the temporary conveyor
infrastructure that is being installed in the MTS tunnel for
construction has been investigated. The plan is to now re-use and
upgrade the construction conveyor instead of the original plan of
removing that system and replacing it with a new large capacity
operational conveyor system.
The conveyor system, once converted to its operational
configuration, would then be progressively upgraded and expanded.
Initially the Company is anticipating a capacity of approximately
6.5 Mtpa which could be increased quickly to 13.5 Mtpa and
ultimately to approximately 20 Mtpa.
This change is expected to result in a saving of approximately
US$100 million and see the MTS commissioned with commercial
capacities earlier than the original plan. Further work on
optimising this changeover from construction to operations may
further expedite the commissioning of the MTS and accelerate the
Company's ramp-up plans.
Optimisation of the MHF capacity
The Company has decided to change the configuration of the
materials handling facility ("MHF") in Teesside. By changing the
size of the High Pressure Grinding Rollers and associated air
classifiers the Company can enable the initial single granulation
train to produce up to 13 Mtpa of POLY4 granules and chipped
product. We previously estimated a total cost of US$518 million
associated with the MHF, US$309 million relating to the initial
development to 10 Mtpa and US$209 million relating to the
construction of a second granulation train, which was included in
the cost estimate for expansion to 13 Mtpa but is no longer
required. This change is expected to increase the cost of the
initial MHF installation by US$41 million, but reduces the net
overall costs associated with the MHF by US$168 million. As the
Company now has purchase commitments that exceed 13 Mtpa the
Company is confident in making this design change in the MHF plant
configuration now.
Potential additional development opportunities - not
incorporated into the Revised Base Case
Rates of progress - deep shafts
The Project's schedule to first polyhalite is driven by the
sinking rates for the deep shafts. The Company, along with its
shaft sinking contractor DMC Mining Ltd, SBR manufacturer
Herrenknecht, and external consultants have been working to
identify an optimised detailed working plan for the shaft sinking
programme. Significant process improvements and design
modifications have been made to the SBRs, building on best practice
and lessons learned from previous SBR driven shaft sinking
programmes. The aim of this work was to maximise and crystallise
the potential of these machines to sink the deep shafts as quickly
and as safely as possible
A series of detailed work programmes have now been developed to
identify expected and target schedules for all activities across
the construction period. The original base case schedule was for a
total period of sinking to first polyhalite of approximately 23
months. A revised schedule has now been developed based on changes
and initiatives that are expected to reduce this by three months.
Two other target schedules have also been developed - a
"reasonable" target that identifies another two months of savings,
and a "stretch" target identifying a further two months of
opportunity. None of these schedules change the Company's
conservative position on the level of grouting required through the
Sherwood Sandstone but do include varying degrees of process
improvements in that part of the work programme.
These schedules, if delivered, would see first polyhalite
delivered between three and seven months earlier than in the
Company's Revised Base Case schedule. Although focussed on
delivering on these, the Company's Revised Base Case schedule will
retain the original base case excavation assumptions and the
Company will pursue the accelerated schedules to deliver either
early completion or contingency in the delivery schedule. Once a
successful track-record has been established the Company will look
to adopt a revised schedule.
Potential change of methodology for Drive 3
The Company has identified an additional opportunity to change
the methodology used to construct Drive 3 of the MTS from Woodsmith
Mine towards Lockwood Beck. Currently the base case is a
segmentally lined tunnel constructed using a similar single-shield
TBM to that being used on Drive 1. This system requires the
construction of a large launch cavern to enable the TBM to be
assembled underground, launched and operated.
The two alternative methodologies analysed use a different style
of TBM, a Gripper TBM, or a mining system primarily utilising a
large bolter-miner machine. Both of these systems incorporate a
change in the lining methodology for Drive 3 from a full segmental
system to a bolt and mesh system. This results in a significant
saving in cost and is considered possible due to the expected
competency of the rock, the depth of Drive 3 and the expected dry
conditions.
A comparison of these methodologies with the base case plan
shows that the fastest methodology would be the Gripper TBM. This
would result in the MTS being available 6 months earlier than using
a single shield segment system. It could also deliver a saving of
approximately US$125 million. The mining system is the cheapest
option (approximately US$215 million less than the single shield
TBM and segment lined plan) and could be approximately three months
quicker. This time saving is possible with this methodology,
despite having a slower expected advance rate, due to the quicker
set up time from the bottom of the MTS shaft. The Company estimates
that incorporating a Gripper TBM into the Revised Development Plan
would result in an estimated NPV of US$13.1 billion and an IRR of
35 per cent., assuming a 12 month deferral period and the receipt
of funds to fully finance construction of the Project to 13 Mtpa
production capacity. The estimated NPV of incorporating a mining
system into the Revised Development Plan is US$13.0 billion and IRR
35 per cent.
The potential represented by these two options is significant
and the Company intends to continue assessing them during the
following 12 months and will confirm the methodology as part of the
final development plan integrated into the full debt financing of
the Deferred Scope.
Indicative development scenarios - economic analysis
The Company has analysed the impact of the phased development
plan scenarios on the capital costs, schedule and economic
parameters of the Project. The Company's initial analysis indicates
that the potential scenarios preserve significant value in the
Project, which is outlined in the table below.
Reference Case(1) Revised Based Case(2)
12mth deferral 24mth deferral
of Deferred of Deferred
Scope Scope
------------------- ---------------- ----------------
Capital costs (US$m) (US$m) (US$m)
------------------- ---------------- ----------------
Total capex(3) 4,240 4,098 4,176
------------------- ---------------- ----------------
Total cost to complete(3) 3,129 2,987 3,064
------------------- ---------------- ----------------
Variance to Reference
Case - (142) (64)
------------------- ---------------- ----------------
First 12 months capital 837 354 352
------------------- ---------------- ----------------
First 24 months capital 1,774 1,154 600
------------------- ---------------- ----------------
Milestones
------------------- ---------------- ----------------
First polyhalite Q2 2022 Q2 2022 Q2 2022
------------------- ---------------- ----------------
MTS available Q4 2023 Q1 2024 Q1 2025
------------------- ---------------- ----------------
10Mtpa ramped up Q2 2025 Q3 2025 Q3 2026
------------------- ---------------- ----------------
Economic parameters(4)
------------------- ---------------- ----------------
NPV (US$bn) 12.5 12.4 11.3
------------------- ---------------- ----------------
IRR 30% 32% 29%
------------------- ---------------- ----------------
Production to end
2025 (Mt) 20.2 11.6 2.6
------------------- ---------------- ----------------
Notes: 1. Reference Case - assumes development recommences on 1
April 2020 in line with the Company's previous development plan as
set out in the Company's prospectus dated 1 May 2019 with
adjustments related to the impact of delaying certain development
until 1 April 2020. 2. Revised Base Case - assumes Initial Scope
commences on 1 April 2020. Deferred Scope proceeds in line with the
Revised Base Case described in this announcement and commences 12
months or 24 months after the Initial Scope commencement. 3.
Initial capital expenditure required to achieve full production.
Excludes expansion capital expenditure of US$157m to deliver 13Mtpa
and US$80m of mobile mining equipment which is assumed to be
outsourced. Includes US$243m of costs relating to harbour and ship
loading infrastructure which had previously been assumed to be
outsourced. Includes contingency and escalation of US$467m, which
assumes contingency at a P65 level and of which US$432m remains as
residual cost to complete. 4. As at 31-Dec-19. Subject to
successful financing of the Project to 13 Mtpa production
capacity.
Financing Options
The Company is now exploring pathways for funding the Initial
Scope of the Revised Base Case. The Initial Scope is estimated to
require US$600 million of new capital (in addition to existing cash
resources) which would need to be committed prior to the end of Q1
2020 to recommence development from 1 April 2020, as per the
development scenarios outlined above. The Company estimates that
this new funding will be sufficient to fund the Project to the
point of first polyhalite subject to ongoing discussions with
potential capital providers.
The Initial Scope will comprise;
-- progressing shaft construction to deliver completion of two
TBM shafts and progress the production shaft and service shaft to
achieve first polyhalite on the service shaft;
-- permanent and temporary infrastructure required to deliver
shaft sinking including power and concrete supply and other site
services;
-- progress MTS Drive 1 to Lockwood Beck and associated support costs;
-- owners team costs; and
-- estimated contingency, subject to ongoing review.
The Company is seeking to have the Initial Scope funded from the
proceeds of either the strategic investor process or through a
structured debt financing package, either of which may incorporate
the issue of new equity or an equity-like component to the
financing package.
One benefit of a strategic investor supporting the Initial Scope
funding is that it may reduce the overall perceived risk for the
Project from the point of view of potential financers of the
additional financing required for the Deferred Scope. Various
interested parties are in the process of undertaking due diligence
related to the capital requirements of the Initial Scope.
The Deferred Scope contemplates up to US$2.5 billion of capital
expenditure which is expected to fund the Project to 10 Mtpa
installed and ramped-up production capacity. The Company would seek
to have the Deferred Scope funded by a senior debt financing
executed as either a traditional bank-based project financing or a
debt capital markets solution (or a combination of the two),
similar to the structures of the Company's previously envisaged
Stage 2 Financing.
The Company believes that the scope-based approach to
development ought to significantly reduce the risk allocation
compared to the Stage 2 Financing in the areas outlined below:
-- Technical risk (reduced) - funding and progressing the
Initial Scope separately removes the higher risks typically
associated with deep shaft construction from the scope of the
funding provided by the senior debt providers. As described above,
this transitions the construction risk away from a "mining" context
and into a more "infrastructure" style risk framework where the
main risks are consistent with civil construction. In addition to
this, progressing Drive 1 of the MTS further reduces the
uncertainty around execution risk and establishes a clear
track-record of delivery for the remaining tunnel scope.
-- Commercial risk (lower) - Funding the shaft sinking through
the Initial Scope removes the amount of "risk sharing" style
construction contracts for senior lenders. In particular, the
balance of the scope is predominantly fixed price.
-- Time to cash flow (reduced) - The senior debt financing would
be required at a time which is closer to the point where the
project is generating operating cash flow. This could ultimately
reduce the funding required to pay interest during construction,
subject to the cost of the capital required for the Initial Scope,
and a portion of the operating cash flow during ramp-up can be
utilised to fund the Deferred Scope. The amount of operating cash
flow assumed will ultimately be subject to discussion with the
lenders.
-- Quantum of debt (reduced) - The Deferred Scope contemplates a
capex requirement of up to US$2.5 billion. The potential to
incorporate material operating cash flow into the financing plan
combined with the reduction in interest during construction
provides significant benefit to the financing plan. This
proposition would remove one of the key challenges of previous debt
financing activities (where over US$1.5 billion was required to
fund financing costs during construction).
-- Credit metrics (robust) - The previous Stage 2 Financing was
provisionally rated B/B- by Fitch and S&P respectively. The
enhancements to the contemplated debt financing outlined above seek
to reduce the total debt required and the perceived execution risk
of the Project.
-- Other enhancements - From a product perspective, the Company
has continued to increase the volume of production under long term
contract and has now established a global distribution platform
with peak contracted volumes now in excess of 13 Mtpa.
Any senior debt financing put in place for the Deferred Scope
will be materially shaped by the outcome of the financing pathway
for the Initial Scope. Following execution of the financing of the
Initial Scope, the Company will commence engagement with senior
debt providers with the aim of structuring a comprehensive
financing plan for the Deferred Scope.
Investor webcast
Sirius Minerals' CEO, Chris Fraser, will host a webcast for
investors and analysts at 9.30 am today.
The webcast can be listened to live by clicking on the link
below. A replay will be available on the Company's website in due
course
https://event.on24.com/wcc/r/2133980/1CBDBC9E51DDBE94558C259077A35C28
For further information, please contact:
Sirius Minerals Plc Jennifer Wyllie, Tristan Tel: +44 845
Investor Relations Pottas 524 0247
Email: ir@siriusminerals.com
-------------------- ----------------------------------- ---------------
Media enquiries Alex Simmons, Ed Brown Tel: +44 7970
Edelman Email: Siriusminerals@edelman.com 174 353
Tel: +44 7540
412 298
-------------------- ----------------------------------- ---------------
About Sirius Minerals Plc
Sirius Minerals Plc is focused on bringing large scale volumes
of POLY4 to the global agriculture industry. POLY4 is the Company's
trademarked name for its unique multi-nutrient fertilizer to be
produced from the world's largest and highest grade polyhalite
deposit located in North Yorkshire, United Kingdom, 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.
Forward-Looking Statements
This announcement includes "forward-looking" statements within
the meaning of U.S. securities laws and the laws of certain other
jurisdictions. Forward-looking statements are based on the beliefs
of management as well as assumptions made by, and information
currently available to, the Company's management. These
forward-looking statements include all matters that are not
historical facts and statements regarding the Company's intentions,
beliefs or current expectations concerning, among other things,
future operating results, financial condition, prospects, growth,
expansion plans, strategies, the industry in which it operates and
the general economic outlook. The words "believes", "estimates",
"anticipates", "expects", "intends", "plans", "may", "will" or
"should" or, in each case, their negative or other variations or
comparable terminology, and similar expressions are also intended
to identify forward-looking statements. By their nature,
forward-looking statements involve risks and uncertainties because
they relate to events and depend on circumstances that may or may
not occur in the future and therefore are based on current beliefs
and expectations about future events. Forward-looking statements
are not guarantees of future performance and actual operating
results and financial condition, and the development of the
industry in which it operates, may differ materially from those
made in or suggested by the forward-looking statements contained in
this announcement. In addition, even if the Company's operating
results, financial condition and liquidity, and the development of
the industry in which it operates are consistent with the
forward-looking statements contained in this announcement, those
results or developments may not be indicative of results or
developments in subsequent periods. Such forward looking-statements
speak only as of the date on which they are made. You should not
place undue reliance on forward-looking statements and the Company
does not undertake publicly to update or revise any forward-looking
statement that may be made herein, whether as a result of new
information, future events or otherwise.
This information is provided by RNS, the news service of the
London Stock Exchange. RNS is approved by the Financial Conduct
Authority to act as a Primary Information Provider in the United
Kingdom. Terms and conditions relating to the use and distribution
of this information may apply. For further information, please
contact rns@lseg.com or visit www.rns.com.
END
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