Change of direction
Management did a good job of arranging the deal with china blue.
Its good that they have addressed their cash shortfall, but outside of giving them breathing room, I can't see where this gets them.
They now have a share count of around 250 Million.
The money they receive from china blue is not even 1/100th of the cost of building the mine.
In fact it is about 1/150th of what they will probably need.
When you compare that to the Krn deal, where they have achieved 10% of their capex in the deal with GFSC, the china blue deal, only seems good to me from a keeping the lights on perspective.
A couple of things don't add up for me.
“Our contribution would be the project,” Costigan explains. “Our partner would match that, depending on what the percentage is. If it’s 60/40, they’d put 60% in, which would be more than the value of our project, and that would be the first equity contribution to the project. Then together we could raise the debt, which we’d repay from operations down the road.”
Management has been saying for a long time that they are not interested in any small deal, but instead are looking for somebody to come in and fund the project.
So this deal with china blue, while very good, flies in the face of what they seem to have wanted.
I spoke extensively with IR and asked why management was not pursuing a deal like Krn achieved- An equity stake with an offtake agreement.
She was very open about the fact that they were not interested in an offtake
I went through my numbers on the debt side with her and she agreed that project interest cards would be to high to even consider(8% per year on say 2.5 billion). She confirmed that they are not interested in an off take with a company. As in they are not looking for what KRN did by selling a 20% stake and pursuing an off take agreement because it would be worth nothing to them, they know that they need serious dollars to build this mine.
This was the one area I was not satisfied with(admittedly a very important one). I pressed and pressed on this and can not figure how they can work a deal here, because she agreed that the interest rates would be RIDDICULOUS.
Now I can not for the life of me figure out how they can make this work without serious dilution. For example , why would a company with $1 billion, instead of just giving it to them, not just buy the whole project for $200 million(they easily could even for less because the float is big enough to allow for it. How many traders and beaten down investors would not accept $1.20 tomorrow for their shares. Enough for the sale to go through!)
Then they would own everything and not have to share any percentage of the company with others.
lets say they could raise $600 million in equity( coincidentally that is more than krn will need to complete their 625k facility) which is about 5 times wpx's current value and would be so dilutive that it would almost wipe out current shareholder value they still would need to RAISE $2.7BILLION IN DEBT.(and if its like Wpx's management claims, that the K&S project has an similar cost structure, they will need to raise $3.5 Billion in debt)
Now assuming they see able to do this, how much would their annual interest bill be. A company starting up like this would expect to pay 10% interest, but let us be generous and call it 8%. How much would that add per ton to their costs.
A $35 Billion company like POTASH CORP pays average interest rates above 5%, so please nobody post that Wpx will only pay 2-3%.
It would work out at about $230 million in interest PER YEAR. That would add about $100 per ton in costs .
plus add the fact that on a 3 year build and the banks(similar to construction financing) releasing funds in a staged fashion.
What do u think the interest would have added up to before production starts. Maybe around $500 Million IN INTEREST and that's before they sell a gram of potash.
so in their first year of production wpx would face a bill of $720 Million(500 million of backdated interest and 1 year of interest of about $220 million).
If as management claims the costs turn out to be similar as the K&S legacy project, then you can call it a cool $1 Billion in interest costs by their first year of production.
Quote below was spoken by Wpx's management less than 2 months ago....
“On this last note, it’s worth noting that Milestone is very similar in terms of its size and its commercialization costs to the Legacy potash deposit, which is now under construction. This is significant because this potash asset was acquired from one of our peers in the exploration sector by the German fertilizer giant K+S Ag for around $430 million a couple of years ago.”
Now add in several years of low production pumping salt and ramping up to full production and I believe it could rack up $1.5 billion in interest before earnings start to make a dent in this bill.
That would give you construction costs of around $5.6 Billion. An extremely tall order!