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Sirius Minerals (LON:SXX) Roger Bade at Whitman Howard

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Sirius Minerals (LON:SXX) Roger Bade at Whitman Howard

Post Thu Jul 02, 2015 1:24 pm

Winning permitting approval for its York potash mine this week was a major hurdle cleared for Sirius Minerals (SXX). There will be other obstacles, but the decision from the North York Moors National Park Authority clearly eliminates some of the risk involved in this mammoth project. And that has an impact on prospects for the share price.

House broker WH Ireland has bashed in new numbers and updated its model. Construction should begin next year, but analyst Paul Smith has pushed back the first year of production to 2019 and modified assumptions for capital cost and operating cost from $2.3 billion (£1.47 billion) to $2.5 billion and $28 per tonne to $30 per tonne, respectively. Another $0.4 billion will be needed to complete underground development. Ireland also models a 50-year mine life and revenue at $150 per tonne of polyhalite (fertiliser).

The biggest change is the reduction in risk. "We had previously modelled the discounted cash flow for the York potash project using only 0.3x of the NPV [net present value] 10%, we have raised this to 0.45x NPV10% now the permitting hurdle has been passed," says Smith.

He also pencils in net cash of £50 million - £12 million in February, £15 million placing in March and £32 million from the exercising of all of the warrants from the 2014 placing, minus costs since March.

"We raise our target price to 50p (from 37p) mostly on the de-risking of the project NPV in our model," explains Smith. "Whilst this is only the first hurdle to complete we feel the fate of the project is back into Sirius' hands. The company can now deliver a feasibility study and bring the story properly to the attention of those who can fund the development of the mine."

Roger Bade at Whitman Howard is more conservative. "From the tone of the company's announcement, it doesn't appear the planning permission conditions are too onerous," says the mining analyst. "Although they did trade around our 25 pence price target yesterday, we will leave it and the recommendation unchanged awaiting these details."

And we may even hear something on where the money might come from. Think sovereign wealth funds, traditional debt sources like private equity and institutions, offtake funding and equipment funding, says Smith.

That said, it's still an awful lot of cash to raise, and 20-30p looks to be the range, at least until a funding source commits money to the project.
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