RE: Jefferies initiates coverage on Sirius Welcome gneissguy, this board can get quiet, so ask as many questions as you like, this is my take on comparing Sirius Minerals (SXX:London) to IC Potash (ICP:Toronto)
Sirius has 1.339 billion shares issued with a market cap of 241,000,000 GBP = $386,000,000 CDN https://www.iii.co.uk/investment/detail?code=cotn:SXX.L&display=fundamentals&it=le
ICP has 152 million shares issued, trading at 69 cents, resulting in a market cap of $105,000,000 CDN.
Sirius' primary development, York Potash, aims to exploit a large polyhalite resource base and produce a mix of sulphate of potash (SOP), epsomite, and gypsum.
York Potash will be developed in two stages: phase one will produce 1.4mtpa of SOP with first production in 2017 while phase two may add 2.7mtpa of SOP starting in 2020.
Big funding hurdles:
Phase one of York Potash should cost $2.7b while phase two will cost $3.3b.
Valuation/Risks
Should Sirius secure approvals and outside funding for York Potash, Jefferies see substantial upside potential to NPV-based fair value.
Jefferies' analyst has a 12-month price target of 25p implies 0.7x base case NPV.
Blue-sky value of $1.9b implies 86p per share.
IC Potash (ICP) is trading at a startling discount to Sirius Minerals (SXX:LN) taking into account Sirius’ concerns re:
$2.7bn (£1.68bn) capex for phase One, ICP's development capex is $706 million, which is extremely low relative to most junior potash projects.
As York Potash is located in a UK national park, the company's ability to secure regulatory approvals for mine, pipeline, and plant development is a concern.
Sirius still has to secure and sign offtakes
Sirius needs to progress toward confirming a JORC resource base and mine development plan, and securing outside funding and governmental approvals definitive resource statement and the completion of a PFS/JORC.
It is envisaged that Phase I capital costs will amount to $2.7bn (£1.68bn) and would allow Sirius to extract and process 5m tonnes of polyhalite ore, which, in turn, would produce 1.4m tonnes of sulphate of potash (SOP).
The next stage of development would ramp up annual production of SOP to 4.1m tonnes by 2024, and is expected to cost an additional $3.3bn.
ICP is squarely in the pole position in the race to develop low cost unconventional SOP supply with demonstrated ability of ICP management to advance and de-risk the project in a challenging market and the Yara partnership is transformational and the first of its kind in the junior potash development space.
Yara International ASA, the world’s largest distributor of plant nutrients made a strategic investment of $40 million into IC Potash and entered into an off-take agreement that guarantees the sale of 30% of ICP's production on a take or pay basis. The term of the off-take will begin upon the commencement of commercial production for a period of 15 years and will automatically extend every five years thereafter unless either party elects not to extend.
Yara paid $1.32 a share for 30.1-million ICP shares resulting in Yara owning 19.9% of the issued and outstanding common shares of ICP on a non-diluted basis.
All products will be sold to Yara based on market prices. Yara's ICP shares are subject to a 24 month lock-up or until all financing to complete construction is secured.
Yara is the ideal partner for ICP with a strong distribution network for potash products. Yara has a market cap of $13.5 Billion, revenues of $14 Billion, and EBITDA of $3 billion. The company has operations in 50 countries and annually distributes 20 million tons of fertilizer products into 150 countries.
Yara and ICP continue discussions about forming a joint marketing company to distribute products cooperatively. This partnership could result in the leading global supplier of Sulphate of Potash.
This partnership is transformational and the first of its kind in the junior potash development space. With Yara as a financial and commercial partner, this validates ICP as the world's leading potash development company and has set the precedent for all other potash development companies.
Post transaction, ICP has retained 100% of the project level equity allowing ICP to enter into additional JVs at the NPV of the project closer to production (current NPV of $1.3 Billion as of the release of the prefeasibility study). Selling 25% of project equity for +$250 million is all the equity capital required to build the project, based on development capex of $706 million, which is low relative to most junior potash projects.
Upon reaching production, ICP will generate $440 million of revenue and $315 million of EBITDA based on current market prices. This means at an 8x EBITDA multiple, ICP could obtain a valuation of more than $2.5 billion dollars.