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Sirius needs investor support to resuscitate Woodsmith project, Liberum says

Sirius Minerals PLC shares plummeted on the London Stock Exchange after it announced plans Sept. 17 to terminate its proposed US$500 million senior secured notes offering due to ongoing poor bond market conditions.

The scope of construction activities on the company's Woodsmith potash project in the U.K. will be adjusted while it carries out a strategic review over up to six months. The company will look to reschedule development of the shafts and other major aspects of the construction program to reduce the perceived risk and provide better cost and scheduling certainty for debt providers.

Richard Knights of Liberum Capital, which counts Sirius as a client, said the company appears to be looking at ways to reallocate risk in the financing structure to appeal more to debt capital providers.

The company can soon return to the market with a debt offering that excludes exposure to the highest risk component of the project, the shaft, and bring on third-party or strategic investors to finance it.

"Sirius could be coming back to market in 3-6 months with a debt offering that doesn't include exposure to the highest risk component (shaft), has the backing of a strategic investor and has a significantly lower overall gearing ratio due to strategic equity investment and lower overall capex bill," Knights said in a Sept. 18 note.

Liberum retained its "buy" rating for Sirius, but downgraded the target price to invested capital of US$1.10 billion, equivalent to 9 British pence per share, from 40 pence per share, "until further progress on a financing solution can be articulated."

The investment bank noted that Woodsmith's economics would make Sirius an ideal target or strategic investment for a major mining business, agribusiness or a sovereign fund.

The project could deliver a net present value per share of 40 pence to 50 pence, down from 68 pence, which would look attractive to potential strategic investors.

According to Liberum, a strategic investor will need to invest at least US$400 million to US$500 million, compared to the US$770 million cost in the prospectus, as they would only need to fund the shaft to be sunk to the polyhalite extraction level, not the entire fit-out of the shaft.

The key driver of shareholder returns will be the size and price of the equity investment. "What matters for shareholder returns from here is the structure of any future financing solution and its likelihood of success," Knights wrote.

Proactive Research analyst Christopher Ecclestone does not share Knight's optimism, saying the Woodsmith project always seemed "way too big" and has proven to be a "trial that's failed."

Ecclestone said he was not surprised by the collapse of the financing. "It had always seemed like a stretch."