Sirius Minerals, the now-troubled $5bn (£4bn) fertiliser mine under the North York Moors, would seem to tick every box in the supposed post-Brexit industrial strategy playbook. It is big, bold, northern and a potential export earner. So why would the government decline the company’s kind invitation to guarantee $1bn-worth of its bonds?
The answer, sadly for those local MPs screaming for intervention to save 1,200 jobs, is that Sirius is not a straightforward prospect. It is riddled with risk. First, the company doesn’t currently generate cash, and the production schedule doesn’t imagine polyhalite appearing until 2021.
Second, the construction challenges are hard to price. Sirius is aiming to sink two shafts to a depth of 1,500 metres – equivalent to the height of 20 York Minsters – and build a 23-mile underground tunnel and conveyor belt to Teesside. That engineering adventure looks more fearsome than, say, building a toll bridge over the Mersey, to cite one project supported by the government’s Infrastructure Project Authority.
What is polyhalite, and how is it used?
Polyhalite is a mineral deposited around 260m years ago during the evaporation of the Zechstein Sea. Sirius Minerals plans to grind polyhalite into a powder to produce pellets with the commercial name Poly4 – or K2SO4MgSO42CaSO42H2O for short.
What’s so good about it?
Poly4 contains four of six key minerals that plants need to grow – potassium, sulphur, magnesium and calcium – making it ideal for use in agricultural fertiliser. Sirius says it is cheap to produce, certified for organic use and offers high crop yields.
How much is there?
Sirius thinks it has a 290m tonnes of recoverable polyhalite, which it could start mining in 2021 and continue exploiting for 100 years, up to a maximum of 20m tonnes per year.
Third, bond investors couldn’t be persuaded to bite on the last $500m in Sirius’s private-sector funding proposal, despite being offered IOUs with a seemingly juicy coupon, or interest rate, of 13.5%. Their refusal offers a clue to the inherent risks – they run deeper than Brexit.
Fourth, not everybody is convinced that demand for polyhalite, currently a niche corner of the fertiliser market, is sufficient to support Sirius’ plan to produce 10m tonnes of the stuff every year.
Such details cannot be wished away. Yes, the government was merely being asked to guarantee loans after another 18 months of activity in North Yorkshire, but the company’s financial profile still does not fit the bill. The promise of $1bn-a-year of annual profits is merely a hopeful projection at this point, making it hard to back with public money.
All is not lost for the project, however. Chris Fraser, Sirius’s admirably determined chief executive, is free to hunt for a backer more reliable than the junk-bond market. Mining giants or sovereign wealth funds are obvious candidates, but he will probably have to offer a large chunk of the company to find one. One wishes him well, since the MPs are right about the potential to invigorate the economy around Whitby and Teesside.
Life, however, looks grim for Sirius’s current shareholders, including the small army of local investors. A share price of 4.7p, down from 30p a year ago, says fortunes from fertiliser aren’t happening soon.
WeWork isn’t working
Over in the US, WeWork also has its own problem with uncooperative investors. The flotation, or initial public offering (IPO), has been delayed. A company aiming “to elevate the world’s consciousness” can’t even get Wall Street, a sucker in recent years for airy mission statements, to take it seriously.
An outbreak of scepticism was perhaps inevitable after IPO flops such as Uber, but WeWork’s weaknesses were obvious from the off. Most critically, the loss-making company needs to raise $3bn-plus to keep expanding and unlock further investment. That financial vulnerability amounted to an open invitation to investors to hammer the price, which is exactly what they have done.
Softbank, WeWork’s primary backer, had been hoping for a price tag of $47bn, the last valuation at which it invested in the private market. On what basis? Certainly not medium-term profits, since losses are projected for several years.
Or was it supposed to be the innovative business model? That idea has not withstood scrutiny since, beyond the funky murals and slogans, WeWork looks conventional. It is a property company that takes long leases on big buildings and offers tenants short, flexible rents. We have seen those businesses already. There is one on the London market – IWG makes real profits, but is worth a more sober £3.6bn.
Meanwhile, co-founder Adam Neumann seemed determined to copy the worst aspects of US tech IPOs, such as supercharged voting rights to cement his personal control. He has offered to soften those rights in the past week, but the damage is done. Given that Neumann is already estimated to have cashed out $700m from WeWork via share sales, personal loans and property leases, the only acceptable arrangement should have one that allowed a fully independent board to fire him at will. That is not going to happen.
The net result is a would-be IPO candidate that looks desperate. The only certain solution is a lower valuation. Wall Street was clearly going to say no at $20bn, and perhaps also at $15bn. Keep cutting.
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