Prior to completion of the Acquisition, Sirius intends to provide Anglo American and Bidco with information relating to its ongoing cash balance and cash flow requirements in respect of the Offer Period, provided that Anglo American and Bidco agree that such information shall not be used as the basis for invoking any Condition to the Acquisition. Anglo American, Bidco and Sirius intend to work with each other (to the extent legally permissible) to ensure that the business continues to address the financial challenges it faces in the long-term best interests of Sirius and its stakeholders.
Global fertiliser demand is driven by factors including food, feed and fuel demand, which are in turn driven by population growth, diet, arable land per capita and biofuel demand. The use of fertilisers is one of the most effective ways to improve agricultural yields and therefore help to address the anticipated future imbalance between food, feed and biofuel demand and supply. Fertilisers are therefore likely to have a critical role to play in a sustainable future.
Sirius' polyhalite product, POLY4, is a multi-nutrient fertiliser certified for organic use and has the potential to generate demand at a competitive cost that supports a strong margin. POLY4 is an attractive low-chloride alternative to, and for blending with, traditional fertiliser products on a cost-effective basis. It includes four of the six key macro-nutrients necessary for plant growth, being potassium, sulphur, magnesium and calcium, and has been certified for organic use.
Over a period of 7 years, a total of 492 trials across 54 different crops in 31 different countries have been undertaken by Sirius to support discussions with customers on the technical and commercial applications of POLY4. These have shown that polyhalite can improve crop yield, quality and taste. Polyhalite can also improve plant resistance to drought, frost, insects and diseases. Trials are ongoing and will continue to take place during the review phase.
POLY4 will be positioned as a premium product as a result of its multi-nutrient, lower-chloride composition. POLY4 and Sulphate of Potash have significantly lower chloride content (less than five per cent.) than the most commonly used potash fertilizer, Muriate of Potash (approximately 40 per cent.). This is important because many of the world's major crops, such as tea, coffee, beans, potatoes, and many fruits and vegetables, are particularly sensitive to chloride. Sirius has also identified that POLY4 generates significantly less CO(2) per tonne relative to both Sulphate of Potash and Muriate of Potash (less than, approximately, 93% and 85% respectively).
As a result of the significant benefits and potential for POLY4, Sirius has been able to enter into a number of customer offtake agreements with well-established counterparties such as Archer Daniels Midland Company, BayWa AG, Cibrafertil Companhia Brasileira de Fertilizantes, Indian Farmers Fertilisers Cooperative Ltd, Wilmar Group and Qatar Chemical and Petrochemical Marketing and Distribution Company Q.p.J.S.C. A large proportion of these agreements have specific price levels recognising the value from key nutrients and have been set up on a take-or-pay basis. In total, these offtake arrangements accommodate production in excess of 10 mtpa. Based on January 2019 prices, the indicative weighted average FOB price for POLY4 would be approximately US$140 per tonne under the offtake agreements as outlined in Sirius' May 2019 prospectus. This figure is not a forecast of future pricing and future pricing could be materially different.
Investing in the United Kingdom
The Project is located in North Yorkshire in the United Kingdom and offers the potential for significant investment and sustained job creation in the region, both directly and indirectly. Key stakeholders, including the North York Moors National Parks Authority, Scarborough Borough Council and a number of local landowners continue to express their support for its development.
As a sign of its intent to support the sustainable development of the Project's host communities, Anglo American intends to make a voluntary contribution of GBP4 million to the Sirius Minerals Foundation, with GBP1 million to be paid on completion of the Acquisition and a further GBP1 million to be paid on the anniversary of completion of the Acquisition for the next three years.
The Sirius Directors, who have been so advised by J.P. Morgan Cazenove and Lazard as to the financial terms of the Acquisition, consider the terms of the Acquisition to be fair and reasonable. In providing their advice to Sirius Directors, J.P. Morgan Cazenove and Lazard have taken into account the commercial assessments of the Sirius Directors. In addition, the Sirius Directors consider the terms of the Acquisition to be in the best interests of Sirius Shareholders as a whole.
Accordingly, the Sirius Directors intend to recommend unanimously that Sirius Shareholders vote in favour of the Scheme at the Court Meeting and the resolutions to be proposed at the General Meeting as the Sirius Directors who hold Sirius Shares have irrevocably undertaken to do or procure to be done in respect of their own beneficial holdings, amounting, in aggregate, to 172,462,637 Sirius Shares, representing, in aggregate, approximately 2.46 per cent. of the issued share capital of Sirius as at 16 January 2020 (being the latest practicable date prior to announcement).
Further details of these irrevocable undertakings (including the circumstances in which they shall fall away) are set out in Appendix III to this announcement.
5 Background to and reasons for the recommendation
On 17 September 2019 Sirius announced that, as a result of market conditions impacting its ability to deliver its Stage 2 Financing, it would be slowing the pace of development on its North Yorkshire polyhalite project and undertaking a strategic review over a period of six months. The purpose of the strategic review was to consider and incorporate optimisations to the project development plan and to explore alternative funding solutions, including conducting a process with the aim of identifying and securing a strategic investor in the project, in order to reassess the best way to unlock the value of the project for Sirius Shareholders, the community, the UK, and Sirius' customers all around the world. Sirius believed that the compelling economics of the Project provided a strong basis for a revised funding plan, but that it would require time to bring together components of such a plan and to assess investor appetite for a revised funding plan. The strategic review also recognised the difficult market conditions in the project finance market for single asset companies with a greenfield mining project and took into account the feedback received from prospective senior debt providers (including during Stage 2 Financing) around the risks associated with construction. Sirius had identified strategic partners as a way to bring extra capital into the Project to strengthen the credit case, as well as to potentially provide extra support during construction.
As at 31 August 2019, Sirius had approximately GBP180 million of unrestricted cash. That amount did not provide sufficient liquidity for Sirius to continue the development of the project in line with its original development schedule for any significant period of time. Therefore, the Sirius Board determined that the scope of development works would be scaled down to provide time to conduct the strategic review of the project development and to explore various funding options. The reduced pace of development focused on maintaining key areas of the Project to preserve the most value for the Project.
During the preliminary phase of the strategic review, Sirius assessed the development options available to significantly de-risk the proposition for any future senior debt providers. In the debt raising processes conducted by Sirius over the last three years, one common aspect identified by prospective credit providers had been the perceived risk associated with deep shaft construction. On 11 November 2019, Sirius announced an update to the strategic review which had identified a two-stage development plan to enable Sirius to achieve the key de-risking milestone of first polyhalite, when the service shaft reaches the polyhalite ore body, with an upfront capital requirement of US$600 million (in addition to existing cash resources) for this initial scope. The deferred scope of additional works required to reach an installed and ramped up production capacity of 10 mtpa contemplated up to US$2.5 billion of further capital expenditure thereafter. At the same time, Sirius announced that it was seeking to have the initial scope funded from the proceeds of either the strategic investor process or through a structured debt financing package, with either potentially incorporating the issue of new equity or an equity-like component to the financing package. Sirius confirmed that the strategic partner and debt financing processes were underway with the aim of securing US$600 million of initial scope funding, with various parties engaged and assessing information.
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