Sirius to raise 50M for U.K. potash project

London, U.K. — In northern England, the rolling hills and purple heather of the North Yorkshire Moors are more associated with tourism these days than with the area’s long-shut iron ore mines and blast furnaces. Where mining and industrial activity once formed part of the burgeoning economic engine of the world’s first industrialized nation, the moors of North York are now home to a large national park and vast acres of farmland, and host a small population feeling the squeeze of tough economic times.

Attracted by the promise of over 1,500 direct jobs and more than 4,000 indirect jobs, many local residents and politicians see a plan by Sirius Minerals (SXX-L) to advance its multibillion-dollar York potash project as a way to help transform northern England, or at least part of it, back to the area’s strong industrial roots.

London-based Sirius says its project could host “the world’s largest and richest deposit of polyhalite, as well as world-class potassium chloride,” based on historical drilling for oil dating back to the 1930s. Although it only acquired the previously explored property in January 2011, has completed just two drill holes since then and does not yet have a resource estimate for the project, Sirius has already begun to talk about its proposed mine plan, its upcoming definitive feasibility study and plans to become “the world’s New Potash Powerhouse,” drawing considerable attention from the British financial press.

The ‘Zechstein Sea’

Sirius’s mineral claims cover a large part of polyhalite and potassium chloride (KCl) sylvite deposits lying about 1.5 km below the moors. Comprising the western extension of evaporite sequences formed by the ‘Zechstein Sea,’ the deposits were formed during multiple cycles of evaporation during the Permian age roughly 200 million years ago. Although much of the former Zechstein seafloor is now covered by the present North Sea, the eastern margins of it extend into Germany, where considerable potash mining occurs today.

Sirius says the vast majority of potash seams on its claims comprise polyhalite mineralization, a complex hydrated sulphate mineral for which there is only one commercial-scale processing plant in the world, still in its first year of operations. Fortunately, the plant is right nearby in Yorkshire’s Tees Valley, and is owned by a subsidiary of one of the world’s largest potash producers, Isreal Chemicals Limited (ICL). Recently returned assays from Sirius’s first drill hole at its York project turned up three relatively closely spaced seams of high-grade polyhalite totaling 23.3 metres aggregate true thickness grading 95% polyhalite (or about 27.5% K₂SO₄), spread over core from 1,604 metres to 1,669 metres depth.

Dilution

Still, with 1.03 billion shares already outstanding and a share price that has failed to break past 35 pence in the past five years, Sirius may have trouble convincing the market it can advance such a technically difficult and expensive project to production.

On Jan. 26, the company announced plans to raise as much as £50 million (approximately US$78 million) through the issuance of common shares for “fast-track” project development. According to Chris Fraser, chief executive officer of Sirius: “With the backdrop of continuing uncertainty in global markets we have decided to raise all of the funding necessary to take the York potash project through to the completion of its definitive feasibility study. This will allow us to fast-track the project development without any funding constraints so that the project can be brought into production as soon as possible.” The news prompted a sharp sell-off in Sirius’s shares, which were down 10% to 21 pence at presstime on Jan. 26.

If completed at the company’s current share price, the financing would result in the issuance of another 238 million shares, bringing Sirius’s public float to 1.26 billion. It would also push CEO Fraser’s stake in the company down to 8.9% from 10.9%.

Though Sirius is the Australian investment banker’s first mining deal following 16 years in corporate finance roles with Citigroup and KPMG, Fraser is a quick learner. After picking up the rights to the York potash property in 2010, he sold his private U.K. company to Sirius for £25.3-million in shares and a key management position. Of the 150 million common shares issued under the deal, he has control over 112.5 million of them. The kicker: Fraser’s private company had only incurred an operating loss of approximately £362,000 before the acquisition, of which £176,385 comprised a loan “from an entity related to Chris Fraser.”

The North Yorkshire Moors Association

As Sirius labours to finish its third drill hole on the York project, the company has already started to come under fire from environmental groups and parks authorities. Tom Chadwick, chair of the North Yorkshire Moors Association, has helped set up a fund supported by 10 other national parks in the country to make sure the North York moors landscape remains undisturbed by any new mining operations.

Based on the evidence it has so far, Sirius says the pithead for any underground mine at York would likely need to be inside the park, something the park association is vehemently against. Sirius has instead proposed building low-rise pitheads, burying waste rock back in the tunnels and using an underground pipeline to transport potash slurry to a processing plant outside the park boundaries – all of which will add significantly to the project’s initial capital cost.

In an interview with the BBC, the director of planning for the North York Moors National Park Authority, Chris France, said policies relating to large-scale developments in national parks start with a presumption of refusal. “There has to be a proven national need for the development, they have to also demonstrate there is no alternative but to develop in the National Park, and, even if they do that, they still have to show how they can reduce the major impact it would have on the landscape.”

Sirius is expected to argue the mine is of national significance and draw comparisons with Israel Chemical’s 35-year-old Boulby potash mine a few miles north of the North York Moors Park border. ICL has produced over 1 million tonnes per year of refined KCl from sylvite seams at the mine and recently began mining a polyhalite seam with the help of a £15-million grant from the British government. Sirius says the mine produces roughly half of the U.K.’s annual potash needs, with its York project easily able to supply the rest. The British Geological Survey has reportedly called Boulby “the most important non-petroleum mining operation in the U.K,” employing 800 people directly and another 3,000 indirect jobs regionally.

According to a report from the Financial Times, Sirius’s York project would cost more than $3 billion to build and produce 2.5 million to 3 million tonnes of potash sulphate per year. That would put it on par with 2010 production levels from the Lanigan mine, PotashCorp‘s (POT-T, POT-N) biggest mine in Saskatchewan.