Anglo American pursues potash mine developer Sirius Minerals

Anglo American (LON: AAL) may be the company that throws a much-needed lifeline to Sirius Minerals (LON: SXX), the British junior struggling to build a huge fertilizer mine beneath a national park, thanks to a last-minute takeover bid that values the developer at almost £386 million (US$507 million).

The diversified miner confirmed on Wednesday that it was in advanced talks with Sirius over a cash offer of 5.5 pence a share, equivalent to one-third more than the targeted company’s market value at close on Jan. 7.

Sirius, however, was worth more than US$2.3 billion 18 months ago, before its funding plans failed.

The company, which is midway through building its Woodsmith fertilizer mine in the North Yorks Moors national park, has seen its share price collapse after warning last September that multibillion dollar funding for the next stage of the project had fallen through. It warned at the time it only had enough cash to last another six months.

The company has already raised £920 million (US$1.2 billion) to develop Woodsmith and received the backing of thousands of local retail investors, but needs a further US$3.8 billion to turn it into the world’s biggest producer of polyhalite, a form of potash used in plant fertilizers.

As a last resource, Sirius launched in November a rescue plan involving the participation of a potential strategic investor and a revised two-stage development plan for the mine.

Anglo American seems to be just what Sirius has been waiting for. The British junior said it was prepared to recommend the offer provided it can secure satisfactory assurances around jobs and other “stakeholder interests”.

If the deal goes ahead, it could save more than 1,000 jobs in one of England’s most underprivileged areas, which goes hand in hand with Prime Minister Boris Johnson’s pledge to revive poorer regions of the United Kingdom.

Anglo American, which is looking to retreat from thermal coal, hinted the unexpected bid had been in the works for months. It noted it identified the project as being of potential interest “some time ago” due to its quality in terms of scale, resources and costs.

“We are unashamedly transitioning our portfolio to later cycle products that we believe the world will need as it goes forward,” chief financial officer, Stephen Pearce, said on a call with reporters.

If successful, the takeover would mark a comeback to the fertilizer sector for Anglo American, which owned some phosphate assets in the past but in recent years has focused on “four pillars” — copper, iron ore, diamonds and platinum.

It would also add a second major project to Anglo’s $5 billion Quellaveco copper mine in Peru, at a time when most rivals are reluctant to expand.

“We fundamentally believe part of our responsibility is to keep an eye on growth over all the aspects of different time frames,” Pearce added.

Analysts, such as Humphrey Knight, senior potash analyst at CRU, consider Anglo’s move risky. “Sirius’ planned production is around 30 times larger than the total polyhalite market size in 2018. The company’s plan to rapidly increase production to over 10 million tonnes only a few years after starting operations, which adds to concerns of significant disruption to wider fertilizer markets — even with its numerous offtake agreements,” Knight told MINING.COM in September.

He noted that the underlying uncertainties around polyhalite, including potential market size and pricing, remain.

The Woodsmith mine, poised to be one of the world’s largest in terms of the amount of resources extracted, is set to generate an initial 10 million tonnes per year of polyhalite, a form of potash that is used in plant fertilizers. Output is forecast to reach 13 million tonnes in 2026.

Construction involves sinking two 1.5 km shafts and is expected to create about 1,800 jobs during construction, as well as 1,000 permanent positions once it opens.

The ore will be extracted through the shafts and transported to Teesside on the world’s longest underground conveyor belt via a 37-km underground tunnel. It will then be granulated at a materials handling facility, with the majority being exported to overseas markets.

Under UK takeover rules, Anglo American has until Feb. 5 to announce a firm intention to make an offer or walk away for six months.

Bank of America and Centerview Partners are the joint financial advisers to Anglo American, while JPMorgan is advising Sirius Minerals.

Edward Sterck of BMO Capital Markets comments in a research note that “whilst Sirius’s North Yorkshire polyhalite project has significant scale, there is substantial capex still to be spent, and we think there are questions over the competitiveness of POLY4 fertiliser versus potash, especially in the context of the latter being in oversupply. To us, this appears to be a speculative foray into a ‘green’ commodity for Anglo American.”

Sterck estimates that potash “is likely to remain in oversupply until 2027, meaning that the near-term take-up of a commercially unproven alternative may be limited.”

“Whilst there are question marks over the nearer-term demand for POLY4, Anglo American is clearly attracted to the scale of the project,” he summarized. “This would certainly be a counter-cyclical investment (for the fertiliser market), but given the extremely long mine life, this may present an interesting opportunity in a ‘green’ commodity over the longer term.”

This article first appeared on our sister publication, MINING.com: https://www.mining.com/anglo-american-goes-after-potash-mine-developer-sirius-minerals-with-507m-offer/