A Sirius business

The Woodsmith project. Polyhalite or POLY4, a natural mineral fertiliser, is underneath the North York Moors National Park, near Whitby.

An estimated 85,000 retail investors and a high proportion of those living in Yorkshire lost considerable amounts of money in 2020 investing in Sirius Minerals.

 

Sirius invested around £1bn to access the world’s largest known deposit of polyhalite underneath the North York Moors National Park near Whitby. As Sirius ran out of money, the Woodsmith mine was acquired in March 2020, some ten years after it was first conceived, by mining giant Anglo American for £404m.

 

Anglo American recently hosted an investor trip to its Crop Nutrients business, centred around the Woodsmith project that will produce a natural mineral fertiliser product, POLY4. Anglo American believes POLY4 is uniquely positioned to help solve the three interconnected challenges the agricultural industry is facing: the increasing demand for food from less available land, the need to reduce the environmental impact of farming, and the deteriorating health of soils. Furthermore, Anglo American said that as polyhalite is a multi-nutrient natural mineral, that it has an 85% lower carbon footprint compared with conventional fertilisers.

 

Mining projects are capital-intensive. Since the acquisition of Woodsmith, Anglo America has invested $1.3bn in developing the mine and is planning to invest a further $6bn over the coming years. By 2030, it should have the capacity to produce 5 million tonnes of polyhalite a year, with the ability to increase this to 13 million tonnes.

 

The mine has an estimated productive life of more than 50 years, and whilst it has incurred higher costs and delays, Anglo American’s CEO has been quoted on the Woodsmith project – ‘This is a great example of a high-quality, tier-one asset in a low-risk jurisdiction. It will be a very low-cost mine with low stay in business capital expenditure requirements. From a mining portfolio perspective, it will be a cornerstone, long-life, lowest quartile of the cost curve asset delivering strong cashflow for many decades.’

 

As with all exciting new mineral discoveries, it is a reminder that newly discovered mineral deposits, be it polyhalite or lithium, usually require very deep pockets to develop and can take a considerable time to reach positive cash flow.

 

What have we been watching?    

 

Bond yields and the tragic events unfolding in the Middle East continue to overshadow global markets. The 10-year US Treasury yield had a look above 5% but then moved back below again. Israel says it is still preparing for a ground invasion of Gaza, and the risk of wider escalation across the Middle East remains. Brent oil held at around $90. The US resolved its House of Representatives Speaker problem but still faces the risk of a government shut-down on 17th November. Elsewhere, China announced a major stimulus package to aid its flagging economy, but this was countered somewhat by news that property developer Country Gardens had defaulted on its US dollar debt. There was some relief from the latest US economic growth data, which has raised hopes for a ‘soft landing’.

As if the world did not face enough geo-political challenges already from Ukraine, Gaza and Tiawan, President Joe Biden has warned China that it will defend the Philippines if China attacks. This follows Manila accusing Beijing of menacing Filipino vessels.

 

Given events in the Middle East, is there a risk of another energy crisis? Europe may look well prepared for the upcoming winter, with gas storage already at 99%, but as the recent gas price volatility serves to highlight, safety margins are relatively thin. Demand is lower due to greater efficiency and tough economic conditions. However, supply is likely to remain tight. Mild weather is helping, while in addition, China’s economic rebound from lockdown has been far weaker than expected. Higher energy prices are not helpful for inflation but may accelerate the energy transition. While oil and gas remain unfavourable in an era of ESG investing, not so in the US, with Chevron announcing the acquisition of medium-sized competitor Hess for $53bn.  

 

China has threatened to ban high-grade graphite exports. This could give China the ability to strangle the rest of the world’s electric vehicle industry and hold back its development until alternative sources of graphite anode material become available. This would allow China’s EV manufacturers to get ahead and this appears to have begun. Given the problems in its domestic property sector, is China betting its economic salvation on electric vehicle manufacturing and exports?  

 

In the UK, ‘flash’ PMI business activity indicators showed a continuing contraction in both manufacturing and services activity in October amid a reduction in new orders and employment.

 

In Europe, ‘flash’ PMI business activity indicators showed the contraction accelerated across both the manufacturing and service sectors in October. The European Central Bank (ECB) left interest rates unchanged as expected, leaving the deposit rate at 4%. The ECB also signalled that interest rates are unlikely to rise further.

 

In the US, Mike Johnson was elected Speaker of the House of Representatives, ending weeks of chaos and Republican infighting on Capitol Hill. The House now faces a deadline of 17th November to come to an agreement to continue funding the US government or face a shutdown. Mike Johnson is an ally of Donald Trump and his appointment may make it much harder for President Joe Biden to secure extra military aid for Ukraine and Israel. Meanwhile, ‘flash’ PMI indicators for October came in better than expected, with business activity growth picking up to a three-month high. The US economy grew by 4.9% in the third quarter of 2023, the fastest pace of growth since early 2021, and up sharply from the 2.1% of the second quarter. This was driven by US consumer spending, which increased by 4% over the last quarter.

 

Japan’s private sector stagnated in October as the PMI dropped to 49.9, with manufacturing remaining in contraction at 48.5, while activity in the service sector fell to 51.1. Japanese firms are the least upbeat since January and are feeling less optimistic about future output.

 

China announced a CNY1 trillion ($137bn) sovereign bond issuance in a move to shore up the economy after a sluggish post-lockdown recovery. This is also expected to support higher infrastructure spending following severe floods in parts of China. Beijing has also revised its fiscal budget deficit to GDP from 3% to 3.8% to support the economy. The last time China did this was in 2008, around the global financial crisis in the aftermath of the Sichuan earthquake.

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Brent oil held steady at $90 despite reports that the US military had attacked pro-Iranian targets in eastern Syria.

Finally, Tesla has a new Chinese rival in its rear-view mirror. China’s BYD is now ahead of Tesla in quarterly production of electric cars but second to Tesla in global sales. BYD has two competitive benefits: manufacturing its own batteries and the Beijing authorities, which have provided significant tax breaks as an incentive to support domestic demand for electric vehicles. In addition to that, China is now imposing a ban on high-grade graphite exports, which will hamper some EV competitors.

 

 

Read Last Week’s Alpha Bites – If you see me, then weep

 

Disclaimer: Anglo American is held in discretionary portfolios for many of our clients. This commentary sets out a summary of the background to the acquisition of Sirius, the scale of the investment being made and potential long-term value. You should not take this as a recommendation to buy the shares without taking professional advice.

 

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