A close reading of Sirius Minerals plc’s first-half results, released last week, could be a further cause of anxiety for investors in the Scarborough, England-based polyhalite mine developer. In the financial statements, auditors included an “emphasis of matter” disclosure, a matter highlighted by a recent UK Financial Times report.
“Without modifying our conclusion on the interim financial statements, we have considered the adequacy of the disclosure made in note 1 to the interim financial statements concerning the Group’s ability to continue as a going concern,” the disclosure states. “The Group is involved in efforts to complete the stage 2 financing to secure long-term project finance for the North Yorkshire Polyhalite Project, the timing and outcome of which is uncertain. These conditions indicate the existence of material uncertainties, which may cast significant doubt about the Group’s ability to continue as a going concern. The Group financial statements do not include the adjustments that would result if the Group were unable to continue as a going concern.”
The disclosure comes less than a month after the company announced an updated estimate of US$3.4-$3.6 billion for the capital funding (the “second stage” funding) that it would need to complete the development of its 10 million mt/y polyhalite mining project in North Yorkshire (GM Sept. 7, p. 1). The capital funding estimate was up from the previous estimate of US$3 billion.
The phrase “material uncertainties” has not appeared in Sirius’ accounts since the 2016 interim report, according to the UK Financial Times report, and not since the company secured its stage 1 financing in November 2016 (GM Nov. 4, 2016).
Sirius is targeting a maximum of US$3 billion in senior debt financing, and is not intending to increase the senior debt component, according to its finance director, Thomas Staley, speaking in a second-quarter earnings call on Sept. 27. The company said it is exploring other options to procure the additional US$400-$600 million required. Subject to the successful completion of due diligence and receipt of a satisfactory financing plan, it hopes to obtain bank commitment letters that will support the financing by the end of the fourth quarter of this year, and it now expects financial close of stage 2 financing in the first quarter of 2019.
A key unknown is the size of the contingency that lenders will insist upon to be funded, in addition to the further capital now required in case of additional upward project cost revisions, according to the UK Financial Times report.
The timing of the stage 2 financing is fundamental and critical to the delivery of the project on the current schedule, Sirius said. First polyhalite production is currently scheduled for 2021. The company’s board of directors continues to believe that stage 2 financing will be successfully completed, Sirius said in its first-half financial statements.
“However, there is a risk that a successful outcome may not be reached,” the statement added. “This, therefore, represents a material uncertainty that may cast significant doubt upon the group’s ability to continue as a going concern.”
According to the financial statements, Sirius’ latest cash flow forecasts indicate that it currently has sufficient liquidity to continue development of the polyhalite project on its current schedule into the second quarter of 2019, when the proceeds of stage 2 financing will be required.
Should, the company wish to continue to operate into late 2019 or early 2020 without the stage 2 financing proceeds, it would need to curtail discretionary expenditures from first-quarter 2019 until further financing was secure, and thus could continue to operate for a period of at least 12 months subsequent to the date of the approval of these first-half 2018 financial statements.