Sirius Minerals PLC (OTCPK:SRUXF) Q2 2017 Results Earnings Conference Call August 16, 2017 4:30 AM ET
Tom Staley – CFO
Luke Nelson – JPMorgan
Richard Knights – Liberum
Yuen Low – Shore Capital
Good morning, everybody, and thank you for dialing in this morning. I’m please to present to you the half year results for the first half of 2017.
I’d like to start firstly safety and just to reiterate our commitment to safety as a company and the importance we placed on ensuring that we create a safe working environment for both our employees and the employees of that contractors that we develop this project.
As far as the project goes, I’m pleased to report that our progress through the period has kept us on time and on budget, and we’re very pleased with some of the achievements that we’ve made during the period. So what I’d like to do from a business review point of view is to take you through four areas: our progress, mostly in construction development; technical program and some of our corporate achievements; and then after that I’ll turn our attention to the financial review.
So starting with construction. The period started with some of the preliminary works that we were require to complete in order to facilitate commencement of work on site, and those works were predominately highway works to enable safe movement of vehicles off the highway network on to outside. And in conjunction with those activities, we also completed some services works to enable us to provide the utilities to site that we need for the construction program.
In parallel, with the construction activities, we completed a number of conditions clearing activities, and that was part of the requirements of our planning agreement which set out a number of conditions ranging from environment to — environmental and traffic conditions work that has to be completed in order for activity on site to commence. With those conditions cleared, we were granted four more commencements to develop on site, and at that point in time, we took the opportunity to name the mine. And as you may be aware, the mine is now known as the Woodsmith Mine, Woodsmith being a combination of surname of the founding geologists of the resourcing work with Chris in the early days of the project, they being Peter Woods and Rick Smith.
So one formal commencement of development has been granted. Construction commenced in earnest on sites and a number of key deliverable have been completed during the period, including the [indiscernible] road to provide access to the shaft-sinking platform for heavy vehicles, primitive fencing, site security and side office work, if it’s so, we take the construction. The expansion of the shaft-sinking pads has been completed and number of areas around those pads have been prepared in order for us to safely store the material loose excavated from the shaft and tunnel, once those activities commenced. A groundwater protection system has been put in place to manage any water runoff from the sites. And then to support future construction activities, we’ve now installed and commissioned a concrete batch plants and then now moving into some of the other infrastructure requirements of construction. So [indiscernible] batch plant foundation has now been laid in advance of the [indiscernible] plant being assembled, and we have commenced on preliminary de-walling activities through the construction of the guide wall and foundations for the de-walling equipment when it is delivered.
On the development side, since the beginning of the period, a substantial of that design work has been conducted under an early contractor involvement contract with IMC, and that has put us in a good place in the overall development program. In addition to that design engineering work, a number of long-laid items have been procured, the most significant of those being the orders for the permanent shop winding equipment that is require for the start of the mine in synch in 2018.
A commitment has been made to the de-walling subcontractor and that has enabled initial design and mobilization activity to commence in advance of that Diaphragm walling activity to roll.
On the tunneling side, a similar arrangement has now been put in place with our preferred partners for the tunnel, Hochtief Murphy, and so that re-involvement process has commenced and we now have Hochtief Murphy team based with appearance in [indiscernible] working on some design work for the tunnel.
For BHMS in the court, we have a number of consultant engaged with our standard development team as we continue and expand on that design work in advance of the commercial procurement prices that will commence in earnest next year.
From a development standpoint of view, I’m pleased to report that all key positions have been filled and we are now in the process of expanding out the members of those teams in order to scale up as the development activity scale up over time.
Post [indiscernible], we have now awarded Homeway to Shop Thinking scope of work to AMC, and I’ll come back to this after moving through the financial review.
So on the geo-tech side, the main component of our geo-tech program is drilling that’s happening over the production shop SN14B, and that drilling is still in the [indiscernible] sandstone. We have taken a number of course and run a series of tests through the sandstone and the starter above it, And we are pleased to report that all of the findings today have been in line with expectations and support initial assumptions and design work that had been prepared on the basis of the information we have collected from the previous drilling program.
In addition to that drilling campaign, we have completed some new service geo-tech activities on site and this is helping format design work. Other geo-tech work has also taken place at both Lockwood Beck, the intermediate shaft site and some locations along the MTS route. In addition to drilling, there’s been some seismic survey work ongoing. We have now covered over one-third of the tunnel route with seismic work, and data and analysis of that work has supported our historical funding and the assumptions that had gone into the initial work that was conducted last year as part of the tender the process where HMJV was selected that preferred tunneling partner.
On the corporate side, throughout the period, we have progressively expanded the sales and marketing team and now have a number of industry leaders in place in our key market around the world. We have also commenced a new round of commercial dialogue some very significant industry participants in those key and growth markets, and that dialogue progresses well and we’re working hard towards progressing that dialog into some material volume opportunities for our product. Alongside that sales and marketing effort, the crop trial program continues to expand both in number of trials into new crops, new regions and also into validation and expansion of the depths and breadth of historical programs in certain locations. As you are probably all aware, we moved to the main board in April and have subsequently been included into 42-50 index.
And on the community side, we recently completed the launch of the Sirius Mineral Foundation. For those of you who aren’t aware, that is a foundation that we have undertaken to establish, which will be the beneficiary of a revenue royalty once we are in production. We undertook to provide the foundation with an initial grant once construction has commenced, and that money will be used to run a smaller community program over the construction period until such time as revenues flow to the foundation.
So turning our attention now to the financial review on Slide 2, I’d like to start first with the income statement. The company reported an operating loss of £15 million during the period, which is predominantly driven by an increase in company activity. And as you can see, it is up from the prior corresponding period. But this is a number that you would expect to see from our spending that is in line predominantly our approach to expensing some company costs and then ultimately capitalizing predominantly the cost associated with the project.
The company reported a total loss of £151 million, and this — difference between the total loss and the operating loss is almost entirely driven by fair value loss on derivative instruments. And whilst derivative instruments can be quite complicated, it’s very important to point out that the main driver of this loss is actually the increase in share price over the period. But fundamentally, is over the period as the share price has increased over 50%, the value of the derivative associated with the convertible bonds and the royalty financings has increased in value, which has towards that to revalue that liability on our balance sheet and ultimately then flow through a loss to the P&L.
Also worth pointing out that the reverse would also be true. If the share price had fallen during the period progressively, I would be here talking to you about a significant profit.
The two key points to note in relation to the derivative movements are that they are non-cash and they move our non-cash basis as balance sheet item highly valued but had no cash impact to our operations. And over time, the derivative liabilities will ultimately be reclassified to equity, and that happened as the convertible bonds are converting to equity or as the royalty financing is drawn down.
Turning to Slide 3 and capital deployment. During the period, the company deployed £121 million in the development of financing of the project. Capital expenditure accounted £48 million of that, and in addition to that capital expenditure, there are a number of other additional financial commitments that I mentioned during the business review, such as the permanent the permanent winding and the de-walling activities. These items are not reflected in the accounts but represent commitment to work that will occur through the second half of this year and in some instances into next year.
We have also provided £35 million in local authority security requirements, and this is largely driven by an obligation in our planning arrangements to provide money in Escrow for funds that we will pay to local communities over the subsequent 10-year period.
The final item I’ve notes, financing costs and the amount you can see there, £23 million, relates to interests and make all payments for the convertible bonds.
Turning now to Slide 3, and total funds, what we’ve provided there is a table to give you a sense of our total funding position and the breakdown between available cash and restricted cash. So the key points to note that we have £585 million in total funds, £491 million of that is available cash and £94 million is restricted, and the restricted cash includes both the local authority requirements I just touched and also the convertible bond Escrow.
Our holding split in the number of currencies. We currently hold 55% GDB sterling, 40% U.S. dollars and 5% euros, and we have been in the process of acquiring or purchasing further euros and Canadian dollars following the award of the shaft-sinking scope, which I will come on to.
So turning now to Slide 5. In July, the shaft-sinking scope was formerly awarded to AMC, and that scope of work encompasses approximately three quarters of the mine site development line item that was outlined in the Stage 1 financing plan. So the remainder scope of work that’s not included in shaft-sinking scope relates to items such as site preparation, the provision of utilities to the site and the contract and shaft bottom development. And so for those particular scopes that work like site preparation, we had a local earth-lift contractor conducting the scope of work to-date, and the provision of utilities, we are managing directly with options for the provision of electricity and water from local providers.
As we previously articulated to the market, the commercial nature of the contract with AMC is one of risk-sharing, and this has been structured using a “target price paying share, gain share mechanism,” where the target price and share to agree, any increases in performance both in time in budget are for the benefit of both the project and the contractor and any delays will cost over resulting an adverse economic outcome for both parties. And we feel this is the best commercial approach to managing some of the risks associated with the shaft-sinking scope of work. Certainly important to point out that the target price of the scope of work is consistent with the project budget and the target date for reaching both [indiscernible] completion are consistent with those dates outlined in the project schedule.
In terms of cost and currency, it’s our expectation that approximately 55% of the circle work will be in pounds sterling, 30% in euro and 15% in Canadian dollars, and as I mentioned, there we are now in the process of ensuring that we have appropriate amounts of both euro and Canadian dollar to mitigate our exposures under that arrangements.
So with that, I would like to now turn to Q&A and answer any questions that anyone may have. Thank you.
[Operator Instructions] And our first question comes from the line of Luke Nelson of JPMorgan. Please go ahead. Your line is now open.
Hi, Tom, a couple of questions. Firstly on the shaft contract award, can you just concern whether that has — whether that’s also been signed by AMC?
Yes, we formally awarded in the contract with the bonding letter and the contract attached to it. There are three or four processes that are ongoing at the moment, and the contract it self is expected to be signed very shortly. We are really just in the process now of just [indiscernible] an increased rating of the schedules to make sure everything is in order. But that formal award and the issue of the bonding letter and singing of that locks in all of the headline in key commercial terms of the arrangements.
And then previously you’ve sort of indicated around de-walling completion by January-February next year, given the process that you have been through with awarding and still awaiting signing of the contract. Should we maybe thinking a bit of pushback on the timing of that or not really?
So we had indicated that our milestone for 2017 with the substantially complete the Diaphragm walling components of the production and services shafts, and we are still confident that we can deliver on that. But what we will do as part of our next quarterly update is provide a little bit more color around the activities that will happen as part of the Diaphragm walling program in the four-shaft design to give people some more color around what will be delivered over the balance of this year. But we are confident with where we are at in terms of program. The mobilization of the de-walling has taken a little bit longer than what we would have liked. But that really — what we were looking to do there was actually get ahead of the schedule as appose to deliver on the schedule by getting some of that mobilization activity complete soon rather than later.
Yes, fine. And then final question just changing tack a bit on to marketing. I mean we are setting here in August and we’re not that far from heading into 2018, so I suppose it’s becoming more acute in terms of the timing on Stage 2 funding and suppose through that is walling commitment. So just could you outline the strategy going forward in terms of walling commitments, when we might expect some announcements on commitments and whether you – are you comfortable with the way you fit from a marketing and all heading into H2 had to for 2018?
Yeah. So we obviously need to get some more off-take agreements in place, and we are working towards having some new off-take agreements into incremental volume in place by the end of the year. But we’ve got a handful of opportunities that we’re working very hard on at the moment, and we’re positive that we can get some of those opportunities turned into agreement at some stage over the balance of this year. And then ultimately what we’re working towards is having the required amounts of off-take agreements in place before we execute the Stage 2 financing in the second half of 2018. So there is still quite a bit of time out there, but very clearly I wanted to emphasize that we have the target of gaining more off-take agreements in place this year, and we’re positive about being able to achieve that.
Okay, thank you.
Thank you. Our next question comes from the line of Richard Knights of Liberum. Please go ahead. Your line is open.
Hi, Tom. Just a question regarding the shaft contract, anymore flavor you can give around the types of incentives that are included and penalties in that contract and any sort of indication you can give on what realistic flex either side of the £730 million? Obviously, it’s a pretty open-ended question, but is there any more color you can give on that?
So I can’t give you a whole lot because it’s obviously commercially confident, but other than to say that the mechanism is pretty simple in nature. There is a significant financial incentive or penalty, depending on which way it goes, in relation to the cost of the project coming in below the target for us or the schedule coming in ahead of schedule, and then equally it goes the same way to the extent that the target price is exceeded or the schedule is exceeded. Then there is a meaningful financial penalty on the contract. So I appreciate that that’s not — that’s probably not the level detail that you would ideally like, but unfortunately due to just the commercial sensitivity of the arrangement, that’s all I can provide you.
Thank you. [Operator Instructions] And our next question comes from the line of Yuen Low of Shore Capital. Please go ahead. Your line is now open.
Could you tell us whether you’ve been having any stock with Global Capital?
So we’re looking at — as you know, we’re looking at a number of option for port infrastructure in relation to both developing our own greenfield both facility on the land that we aren’t on the Tees River but also looking at ways we could get access to the Redcar Bulk Terminal. There are a number of stakeholders in that terminal, Global Capital being one of them. And as part of exploring opportunities to access that bulk terminal, we have had discussions and are in ongoing dialogue with all stakeholders associated with that facility.
Could you also tell us more about the permitting process for the design for shaft? How that’s going and when that needs to be completed by?
Yes. So that focus is progressing well. We have been in dialogue with the stakeholders of that approval process prior to making the application and then now we are involve with the consultants associated with that application. It’s our anticipation that that process will conclude in October of this year and that will work in well with the overall schedule of the development program.
Are you able to shed any light on the finding of drilling to-date in relation to the [indiscernible]. You undertake – are there any indications that you can use the lying regime of indicators or will there be any changer?
So we have taken cores out of the sandstone that have demonstrated that there are some features in the sandstone as we expected. We’re actually pleased to come across some fishes, because it actually gives up a benchmark against what we are expecting to find in terms of the types of graphs that we might use and the volumes of graphs that will be required, because as you know that graphing is certainly part of our construction raging, we’re pleased to report that though both fishes are quite tight and consistent with what our expectations have been. In addition to that we also will run a number of packet tests which will provide us with more information and understanding as to how those fishes will be hived through that graphing process. So everything we’re going to-date is consistent with all of the consumptions that have gone into our initial lining design and now we are using the information just as a refine the work that have been done.
Thank you very much. There are no further questions. I’ll hand the call back to Thomas for closing comments.
Okay. I’d like to thank everyone for dialing in and look forward to speaking to you again later in this year. If you have any questions, please feel free to reach out to Christine and we will hope to provide you with anything we can. Thank you.
This now concludes our call. Thank you for attending. Participants, you may disconnect your lines.
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