Procurement and capital estimate update

06/09/2018

  • Design and build contract signed with STRABAG for the remaining mineral transport system drives.
  • Materials handling facility EPC contract signed with Jacobs UK Limited.
  • Finalising procurement and the associated risk allocations expected to result in stage 2 funding requirement increasing by US$400 - 600m.
  • Company to review the most cost effective and efficient sources of capital to fund the additional capital requirement.

Sirius Minerals Plc ("Sirius" or the "Company") announces the signing of two major construction contracts and a revised capital estimate for the Company's North Yorkshire Polyhalite Project (the "Project"). The Company has entered into design and build contracts for the construction of Drive 2 and 3 of the Company's mineral transport system ("MTS") and an EPC contract for the construction of the materials handling facility ("MHF") at Wilton. In addition, following the signing of these contracts which substantially completes procurement across the Project, the Company has finalised a revised estimate of the Project's capital cost, funding requirements revised operating costs.

Chris Fraser, Managing Director and CEO of Sirius, commented:

"The signing of the contracts for the remaining tunnel drives and the materials handling facility at Wilton are significant steps forward for the business with almost all procurement now complete. The expected increased funding requirement coming from this process reflects an optimisation of the MTS tunnel design and a significantly improved risk allocation for Sirius to support the senior debt financing. The Project's economics remain extremely compelling and we are confident they support the expected additional funding requirement."

Procurement and capital estimate

MTS Drives 2 and 3

Sirius has entered into a design and build contract with STRABAG AG, a subsidiary of STRABAG SE ("STRABAG"), for the construction of Drives 2 and 3 of the MTS between the Woodsmith Mine and Lockwood Beck (the "MTS Contract").

The MTS Contract is effectively a lump sum arrangement, with fixed rates for tunnelling advance. The price is based on a defined and agreed geotechnical baseline report, with firm pricing for a range of expected support classes within the build.

The cost of the MTS Contract is higher than originally anticipated by the Company in its previously announced optimised definitive feasibility study ("DFS") estimates announced in 2016. Since the DFS estimate, the Company's understanding of the geotechnical characteristics of the strata within which the MTS will be excavated has increased following further ground investigation and seismic work. This exercise has led to a refinement of the parameters set out in the geotechnical baseline report upon which the tunnelling contract has been determined. The MTS cost increase is driven by a combination of the following factors:

  • optimisation of the tunnel design including an increase in the planned internal diameter of the tunnel from 4.3m to 4.9m and an increase in lining thickness from 250mm to 350mm;
  • a decrease in advance rates as compared from 25m per day to 17m per day; and
  • a commercial risk allocation which transfers construction and delivery risk to STRABAG.

The cost of the MTS Contract will be incurred in GBP and EUR.

Materials handling facility

The Company has also entered into an Engineer, Procurement and Construction ("EPC") contract for the MHF at Wilton with Jacobs UK Limited ("Jacobs"), a subsidiary of Jacobs Engineering Group, a Fortune 500 provider of technical, professional and construction services. The EPC contract with Jacobs is on a target price basis, with financial incentives for completing the scope of work under budget, and financial penalties should completion be late or the cost be above the target price. The target price of the EPC contract is consistent with the Company's optimised DFS estimates and the target dates are within the dates outlined in the existing Project schedule. The plant has been scoped to include 7 million tonnes per annum ("Mtpa") of granulated and 3 Mtpa of coarse product in its first phase of development but with a footprint for up to 20 Mtpa of granulated product.

The MHF contract is a USD target price contract. Cost under the EPC contract will be charged to Sirius in the currency in which they are incurred by Jacobs.

Outstanding procurement

The procurement process is nearing completion for the major packages and the Company is currently in the final stage of negotiations for the outstanding scopes of work. The outstanding scopes of work are the MTS fit out, which includes the supply and installation of the MTS conveyor and the associated power supply, and the port facilities which includes construction of the outload circuit, wharf and product storage facility. The Company has identified STRABAG as its preferred contractor for the MTS fit out and is in advanced negotiations for provision of port facilities.

The Company has developed a construction programme which defers the upfront capital costs associated with the port facilities and has amended the scope of work to include temporary truck and train transportation of product from the storage facility at Wilton to the port facility. This enables the construction of the overland conveyor to be deferred until such time as it can be funded through operating cash flows, currently assumed to be 2025.

The Company currently expects that the costs of the outstanding procurement contracts will be in line with its optimised DFS estimates.

Capital cost and contingency estimate

The revised capital cost estimate has been compiled on the basis of signed contracts, tenders or quotations. The Company engaged a third-party consultant to assist in the preparation of a revised capital cost estimate.

The following table outlines the revised capital cost estimate of the Project and explanations of key variances:

Capital Costs (US$m)

November 2016

September 2018

Change

Comment

Mine development

1,238

1,079

(159)

· MTS caverns to be completed by MTS tunnelling contractor

MTS

858

1,461

603

· Tunnelling scope to include caverns

· Revised capital costs to reflect fixed rates and risk transfer to the tunnelling contractor

MHF and Port

641

538

(103)

· Overland conveyor deferred until 2025 and funded from operating cash flow

Other infrastructure and facilities

121

258

137

· Scope definition aligned to procurement

· Sep 2018 estimate includes general site infrastructure previously included in other areas (including construction power)

Owners costs

280

371

91

· Reassessment to reflect final implementation plan

Sub-total

3,138

3,707

569

Escalation contingency and allowances¹

536

463

(73)

· Reflects re-calculation based on progress and design work undertaken to date

Total

3,673

4,169

496

Notes: 1) Includes contingency, escalation and allowances for capital spares and freight.

The re-estimate of capital contingency is based on a detailed assessment of project risks taking into account all available technical information, contractual provisions and risk mitigation measures. The impact and probability of overrun for specific risks was identified and ranges applied for each area of the estimate. Monte Carlo simulations (a probabilistic modelling methodology) were performed by a third-party estimator resulting in a probability weighted distribution of cost outcomes for the overall Project. Sirius has included contingency at a P65 confidence level in its revised capital cost estimate, meaning that in 65% of iterations the Project will not exceed the capital cost estimate. The Company believes that P65 represents a conservative assessment of Project risks based on likely outcomes.

There is significantly more certainty over Project risks compared to stage 1 financing estimates following extensive ground investigations, design and engineering, engagement with expert contractors and contractual risk allocation.

The probabilistic modelling used to calculate contingency provided the following contingency estimates at a P50, P65 and P80 confidence level:

US$m

P50

P65

P80

Total escalation, contingency and allowances

370

463

580

As part of the stage 2 financing process, the lenders' technical consultant will review the executed procurement contracts. The lenders will form a view of the required contingency based on a balanced assessment of the Project risks identified by the technical consultant.

Capital funding requirement

The Company estimates that its revised stage 2 capital funding requirement will be between US$3.4 - 3.6bn (previously US$3bn), an increase of US$400 - 600m and primarily driven by an increase in the revised estimate of capital costs.

The actual stage 2 financing requirement is subject to completion of due diligence and agreement with lenders on:

  • the required level of contingency;
  • the Project scope and funding of the proposed deferred capital items; and
  • the level of net operating cash flows in the financing plan.

The table below sets out a reconciliation of the stage 2 capital funding requirement as estimated by the Company in November 2016, to the revised capital funding requirement estimate:

Capital estimate

Capital estimate (US$bn)

Revised capital cost estimate

3.7

Stage 2 financing costs

0.9

Sub-total

4.6

Stage 1 capital

(1.2)

Equipment leases

(0.1)

Net operating cash flow

(0.3)

Stage 2 Capital¹ (Nov '16)

3.0

Capital costs

0.5

Financing costs

(0.1)

Stage 2 capital requirement² (Sept '18)

3.4

Risk allocation

0.2

Stage 2 capital requirement² (Sept '18)

3.6

Note: 1) Stage 2 Capital of US$3.0bn represents total requirement for stage 2 senior debt anticipated by the financing plan presented to prospective lenders in H1 2018 and assumes the Nov-16 capital costs. 2) Sep-18 Stage 2 Capital reflects the total funding requirement following potential adjustments anticipated by the company associated with changes to the stage 2 financing plan

Operating cost estimate

Operating cost estimates have marginally decreased since the Company's 2016 optimised DFS estimates. The key drivers of changes in the operating cost estimate include:

  • the impact of the updated mine plan;
  • an increase in power rates;
  • a reduction in the starch binder costs following execution of a supply agreement with Archer Daniel Midland (as announced by the Company on 31 July 2018);
  • a reduction in port outsourcing charges related to the materials handling agreement signed with RBT.

The table below sets out the Company's revised operating cost estimates on a US$/t free on board ("FOB") basis:

November 2016

September 2018

By Area

10 Mtpa
(US$/t)

20 Mtpa
(US$/t)

10 Mtpa
(US$/t)

20 Mtpa
(US$/t)

Mining²

11.1

8.7

12.3

10.3

Materials handling facility processing

10.0

9.7

8.2

8.7

Minerals transfer

4.7

4.4

5.4

5.1

Port storage and loading³

5.8

4.2

3.0

3.0

Other

1.0

0.5

0.4

0.2

Total

32.6

27.6

29.4

27.4

Notes: 1) Operating costs represent latest company estimates and exclude royalties and sustaining capital and are presented using an exchange rate of 1.33 USDGBP. 2) Mining costs include costs relating to mining equipment leasing. 3) Port storage and loading costs include RBT handling rates.

Stage 2 financing

All key stakeholders remain engaged in the stage 2 financing process and due diligence is ongoing. The Company has received detailed responses from potential lenders which support a commercial debt tranche of approximately US$1.5bn, subject to completion of satisfactory due diligence.

Following the lenders' review of the final procurement contracts, the Company and its lenders will assess the required contingency levels and determine the overall capital funding requirement of the Project. The Company then expects to present a revised financing plan to lenders in Q4 2018 which will incorporate the revised capital funding requirement.

Subject to the successful completion of due diligence and a satisfactory financing plan being presented by the Company, the Company expects to secure credit approved commitment letters from lenders in the fourth quarter of 2018 and to achieve financial close of stage 2 financing in Q1 2019.

Additional funding

The Company continues to be focused on shareholder value and pursuing the most efficient and cost-effective capital structure to develop the Project. The greatest driver of value for the Company is successful Project delivery. The Company believes that a US$3bn senior debt financing is the appropriate level of debt and will not seek to increase this amount. Incremental capital raisings must compliment and ideally enhance the stage 2 financing. It is intended that all sources of incoming capital (senior debt and other) will be raised conditional on the basis that the Project has a complete financing package.

The Company will review the most appropriate form of financing for the increased capital funding requirement including:

  • strategic partner financing to provide capital at either the asset or Project level;
  • completion support from potential stakeholders or financial investors to provide contingent funding for the purposes of mitigating cost overrun risk;
  • alternative sources of structured capital including subordinated debt and leasing providers;
  • accessing the capital markets through convertible notes or new equity where the value proposition is appropriate for all capital providers (existing and new).

The Company continues to believe that the robust economics and cash flow potential of the Project will support the expected increased funding requirement. It remains focused on de-risking its Project by continuing to construct the Woodsmith Mine and associated infrastructure and progressing various commercial arrangements with potential partners and customers.

Project phasing

The Company has revised its production capacity expansion plan to incorporate expected senior debt facility terms that would restrict the ability of the company to use cash flows from operations to fund expansion of the Project to 13 Mtpa production. Under the revised assumptions the Company expects to reach 13 Mtpa production capacity in 2026 and 20 Mtpa in 2029.

Revised Project economic analysis

The key assumptions underpinning the revised financial analysis are as follows:

  • 50 year mine life from first production with no terminal value assumed;
  • First polyhalite in 2021;
  • 10 Mtpa production in 2024;
  • Expansion to 13 Mtpa in 2026 - capital expenditure funded from operating cashflows;
  • Expansion to 20 Mtpa in 2029 - capital expenditure funded from operating cashflows;
  • Nominal unlevered Project cashflows;
  • NPVs are after-tax applying a 10% nominal discount rate;
  • Revenues are estimated using four FOB pricing cases as follows;
  1. US$100/t (real today) flat pricing inflated at 2% per annum;
  2. Contract case: contracted and uncontracted volumes are assumed to be sold at prices equivalent to existing offtake contract pricing methodologies. Nutrient prices are Sirius estimates;
  3. Base case: contracted volumes are assumed to be sold at prices equivalent to existing offtake contract pricing methodologies. Uncontracted volumes are assumed to be sold at a discount to the full nutrient value of polyhalite with prices increasing to nutrient value in year 5 of production; and
  4. US$200/t (real today) flat pricing inflated at 2% per annum
  • Existing supply agreements are expected to deliver US$140-150/t FOB over the first five years of production;
  • UK Corporation tax rate legislated to reduce to 17% from 1 April 2020.

Project NPV sensitivity table - 13 Mtpa

NPV US$m

Capex sensitivity

Price

(10%)

-

10%

20%

$100/t¹

2,599

2,256

1,912

1,569

Contract case²

6,672

6,328

5,985

5,641

Base case³

10,109

9,766

9,422

9,079

$200/t

11,135

10,791

10,448

10,104

Project NPV sensitivity table - 20 Mtpa

NPV US$m

Capex sensitivity

Price

(10%)

-

10%

20%

US$100/t¹

4,501

4,093

3,685

3,277

Contract case²

10,365

9,957

9,549

9,141

Base case³

15,307

14,899

14,491

14,083

US$200/t

16,386

15,978

15,570

15,162

Indicative EBITDA sensitivity

10 Mtpa

13 Mtpa

20 Mtpa

Selling price US$/t

EBITDA %

EBITDA US$m

EBITDA %

EBITDA US$m

EBITDA %

EBITDA US$m

US$100/t

61%

606

67%

866

67%

1,343

Contract Case

68%

873

74%

1,360

76%

2,306

Base Case

72%

1,091

78%

1,771

78%

3,120

US$200/t

77%

1,517

79%

2,062

80%

3,211

Sales and marketing

Commercial discussions are continuing in the key target markets of the Company and its current priority is to conclude agreements in Europe and Brazil. Negotiations in both of these regions are well advanced. Together, the opportunities in Europe and Brazil represent more than 3 Mtpa of peak aggregate supply volume for Sirius and, if successfully concluded, would mean that Sirius' initial supply of POLY4 would be diversified across four of the five largest fertilizer markets globally.

A number of opportunities in other regions of the world are also being progressed.

About Jacobs Engineering Group

Jacobs Engineering Group is a publicly traded Fortune 500 Company and is one of the world's largest and most diverse providers of technical, professional and construction services. Further information can be found at http://www.jacobs.com/

About STRABAG SE

STRABAG SE is a publicly listed European-based technology group for construction services and a leading international transportation infrastructure, building construction and civil engineering contractor. STRABAG SE is a global leader in tunnelling technologies and a specialist in providing technically optimized end-to-end tunnelling solutions worldwide. Their extensive experience and track record on some of the world's largest and most technically challenging projects includes the excavation of tunnels and caverns, TBM operations of all kinds including soft ground and hard rock, and long, deep tunnels. Further information can be found at https://tunnel.strabag.com/

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