SIRIUS Metals delivered an impassioned plea to shareholders that they accept Anglo American’s 5.5 pence per share takeover offer – formalised today – saying it was the only option for the firm having failed to attract acceptable alternative finance.
Anglo announced had reached an agreement with the Sirius board for its takeover. Sirius is developing the polyhalite project, Woodside, in the UK. The move represents commodity diversification by Anglo American into the fertiliser industry. The polyhalite mineral contains nutrients including potassium which is used to boost crop yields in markets such as Brazil.
The Sirius board considered a revised financing option as late as January 9, a day after Anglo announced its takeover proposal. However, the finance alternative was unacceptable and it was unlikely to have a better alternative before March 31 which is when Anglo’s offer, conducted by scheme of arrangement, will become effective, Sirius said.
“We now face a stark choice,” said Russell Scrimshaw, chairman of Sirius. “If the acquisition is not approved by shareholders and does not complete there is a high probability that the business could be placed into administration or liquidation within weeks thereafter.” Anglo’s offer was the only option, he said.
From Anglo’s perspective, there have been questions about the pressure the opportunist dart at Sirius would present to the firm’s balance sheet. The offer is in cash totalling £404.9m and comes with the burden of Sirius’ own financing efforts.
Sirius had total net debt of $75m, including a royalty financing liability of £223m, a convertible bond of £505m, as well as restricted cash of £320m as of June last year which would have raised Anglo American’s pro-forma net debt to $5.3bn by the end of 2019.
However, Anglo’s financial leverage remains relatively low with a 2020 net debt to EBITDA of about 0.5 times. Analysts say that excluding spending on the Sirius project, Anglo will generate free cash flow at spot of $2.2bn in 2020.
“The proposed acquisition would not compromise Anglo’s balance sheet strength and should have only a relatively modest impact on free cash flow in 2020-21 while adding to the long-term growth optionality,” said RMB Morgan Stanley.
Responding to questions during a media call earlier today, Mark Cutifani, CEO of Anglo, said it was too early to say whether a syndication of project finance was necessary. The group wanted to get the first two years of development under its belt first.
Development work during the first two years following Anglo’s anticipated acquisition is expected to total $300m a year. Some 75% of Sirius shareholders have to vote in favour of Anglo’s proposal in order for the scheme to become effective.
Scrimshaw described Sirius’ decision to turn to a 100% takeover offer by Anglo as “a shock” to shareholders, but it was also a surprise to Anglo watchers. Bloomberg News said last week the offer represented a technical and market gamble.
Polyhalite accounts for a tiny sliver of the wider potash market, even among low-chloride alternatives, largely because it contains far less potassium, it said. That means the capacity of the Yorkshire mine dwarfs current demand.
Anglo said earlier this month that Woodsmith had a JORC reserve of 290 million tons, with a grade of 88.8%, and a resource of 2.69 billion tons. The resource includes four of the six key nutrients that plants need to grow – potassium, sulphur, magnesium and calcium.
“The use of fertilisers is one of the most effective ways to improve agricultural yields and therefore help to address the anticipated future imbalance between food, feed and biofuel demand and supply caused by a fast-growing global population and limited additional land availability for agricultural use,” the group said.
“Sirius has indicated that the project could operate at an EBITDA margin potentially well in excess of 50% leaving the project well positioned for strong through-the-cycle profitability with a long anticipated asset life,” said Anglo in a statement.
