Shares slump at Sirius Minerals after firm announces huge rise in North Yorkshire mine costs
The listed mining company building a mine in North Yorkshire has announced that its construction costs will rise between $400m to $600m, mainly due to the higher costs of the transport system tunnel system.
Sirius Minerals has made a revised capital estimate for the company’s North Yorkshire Polyhalite Project, which it expects to create more than 4,000 jobs and £100bn for the UK economy over the next 50 years.
Updating the markets, Sirius Minerals stated: “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.”
It added that it had entered into design and build contracts for the construction of Drive 2 and 3 of the Company’s mineral transport system (“MTS”) – which is expected to be 23-miles long and will be used to transport fertilizer underground between North Yorkshire and Teesside – and a contract for the construction of the materials handling facility at Wilton.
Reacting to the announcements, shares dropped 16%.
Chris Fraser, Managing Director and CEO of Sirius, said:“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.”
Commenting on the announcement, Russ Mould, investment director at AJ Bell, said the increased costs were a substantial setback, adding: “One of the worst things to happen to a mining company and its shareholders is the need to revisit calculations for building a new project.
“Constructing a mine can be costly and it certainly isn’t unusual for miners to lift their capital expenditure requirements by a million dollars or so during advanced development stages.
“However, when additional funding requirements are a nine figure sum, you’re looking at serious embarrassment and this is exactly the situation facing Sirius Minerals.
“The company, which is hoping to build a large polyhalite mine in Yorkshire, says it needs an additional $400m to $600m which is mainly connected to the higher costs from its transport system tunnel.
Mould added: “The path to building a mine is rarely smooth and Sirius has already overcome significant challenges such as getting permission to construct a huge project in a national park.
“Its management team will undoubtedly have a stressful time near-term while they address the funding issues, but we don’t appear to be at the stage where the market doubts that its mine will be built. The key question is by how much existing investors will be diluted in order to get the money. And that is exactly why the share price has been hammered on the funding news.”
