Anglo American goes back to fertilizers with US$527M purchase of Sirius Minerals

Anglo American (LON: AAL) is expanding into fertilizers after agreeing to acquire Sirius Minerals (LON: SXX), the British junior struggling to build a huge fertilizer mine beneath a national park.

As part of the deal, Sirius shareholders will receive 5.5 pence per share in cash, a 34.1% premium to the closing price on Jan. 7, which was the day before Anglo American confirmed it was in talks to buy the mine developer.

The offer values Sirius at just over £400 million ($682 million), one-third more than the targeted company’s market value by the time it was presented. The firm, however, was worth more than £1.8 billion ($3.1 billion) 18 months ago, before its funding plans failed.

Sirius, 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 had fallen through. It warned at the time it only had enough cash to last another six months.

The company has already spent £850 million ($1.5 billion) developing Woodsmith, but has struggled to secure the other £2.4 billion ($3 billion) it needs to turn it into the world’s biggest producer of polyhalite, a multi-nutrient fertilizer.

As a last resource, Sirius launched a rescue plan in November involving 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, with the British junior urging shareholders to approve the transaction, which it sees as the “only feasible option” to save its North Yorkshire mine.

Sirius noted it deeply regretted being unable to fund the project alone, but warned shareholders that if they did not accept the deal there was “a high probability that the business could be placed into administration or liquidation within weeks thereafter.”

Anglo American’s intervention 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.

“We intend to bring Anglo American’s financial, technical and product marketing resources and capabilities to the development of the project, which of course would be expected to unlock a significant and sustained associated employment and economic stimulus for the local area,” said Anglo American’s chief executive, Mark Cutifani.

A service shaft under development at the Woodsmith project in England. Credit: Sirius Minerals.

Anglo American, which could retreat from thermal coal, sees Sirius as a way to return to the fertilizers market. It noted in January that it had found the project interesting “some time ago” due to its quality in 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 on Jan. 8.

If successful, the takeover would add a second major project to Anglo American’s US$5-billion ($6.5-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.

The company, however, has noted most investment at Sirius will start at the end of 2022, by which time the Peruvian copper mine should be complete and in production.

Analysts, such as Humphrey Knight, senior potash analyst at CRU, consider Anglo American’s move risky.

“Sirius’ planned production is around 30 times larger than the total polyhalite market size in 2018. The company plans 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.

Sven Reinke, senior vice-president and lead analyst for Anglo American at Moody’s Investor Service, has said that a successful acquisition of Sirius would increase Anglo’s financial risk profile for a number of years.

“This is driven by the very material capital investment needed over the next few years to complete the Sirius polyhalite mining project,” Reinke wrote.

Ed Sterck, metals and mining analyst at BMO Capital Markets, said in a January note to investors that while there are question marks over the nearer-term demand for POLY4, Anglo American was clearly attracted to the scale of the project.

“This would certainly be a counter-cyclical investment (for the fertilizer market), but given the extremely long mine life this may present an interesting opportunity in a ‘green’ commodity over the longer-term,” Sterck wrote.
BMO expects potash to remain in oversupply until 2027, meaning that the near-term take-up of what it calls a “commercially unproven alternative” may be limited.

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, which contains four of the six key elements needed for plant growth (potassium, sulphur, magnesium and calcium).

— This story first appeared on our sister publication, MINING.com