Sirius Minerals plc Annual Financial Report (8277L)

TIDMSXX

RNS Number : 8277L

Sirius Minerals plc

23 April 2018

23 April 2018

Sirius Minerals Plc

Annual Financial Report

In accordance with Listing Rule 9.6.1R, Sirius Minerals Plc (the "Company") announces that the following documents have been posted to shareholders and submitted to the UK Listing Authority via the National Storage Mechanism:

   --      Sirius Minerals Plc Annual Report and Accounts 2017; 
   --      Notice of 2018 Annual General Meeting; and 
   --      Proxy Form for the 2018 Annual General Meeting. 

The above-mentioned documents (except for the Proxy Form) are available on our website at www.siriusminerals.com and will shortly be available for inspection at www.morningstar.co.uk/uk/nsm. The 2018 Annual General Meeting will be held at 1.00 p.m. on Thursday 31 May 2018 at The Events Centre, The Principal York, Station Road, York, YO24 1AA.

The information set out in the appendix below, which is extracted from the Annual Report and Accounts 2017, is included solely for the purpose of complying with DTR 6.3.5R. It should be read in conjunction with the Company's 2017 Preliminary results announcement issued on 6 March 2018. Both documents are available at www.siriusminerals.com and together constitute the material required by DTR 6.3.5R to be communicated to the media in unedited full text through a Regulatory Information Service. This material is not a substitute for reading the Annual Report and Accounts 2017 in full. Page numbers and cross references in the extracted information refer to page numbers and cross references in the Annual Report and Accounts 2017.

For further information, please contact:

 
 Sirius Minerals Plc   Tristan Pottas                       Tel: +44 845 
  Investor Relations    Email: [e-mail]         524 0247 
  Manager 
--------------------  -----------------------------------  --------------- 
 Media enquiries       Alex Simmons, Ed                     Tel: +44 7970 
  Edelman               Brown                                174 353 
                        Email: [e-mail]    Tel: +44 7540 
                                                             412 298 
--------------------  -----------------------------------  --------------- 
 

About Sirius Minerals Plc

Sirius Minerals Plc is focused on the development of the Woodsmith Mine, which will access the world's largest and highest grade polyhalite deposit located in North Yorkshire, United Kingdom. Polyhalite is a unique multi-nutrient fertilizer, which can be used to increase balanced fertilization around the world. Sirius Minerals' shares are traded on the Premium List of the London Stock Exchange. Its shares are also traded in the United States on the OTCQX through a sponsored ADR facility. Further information on the Company can be found at: www.siriusminerals.com.

Appendix

1. Identifying and managing risks (page 48)

Risk management and internal control

The Group's strategy exposes it to various risks. The Board is responsible for determining the nature and extent of the risks that the Group is willing to take in achieving its strategic objectives.

The Board has an ongoing process for identifying, evaluating and managing the principal risks faced by the Group.

The Board has performed a robust assessment of the principal risks facing the Group, taking into account those that would threaten its business model (see page 32), future performance, solvency or liquidity, as well as the Group's strategic objectives (see page 22). In addition, the Board considered how risks evolve and potential emerging risks. The most significant risks arising from this assessment, including details of their management and mitigation, are detailed in the Strategic Report on pages 49 to 52.

The Group has a system of internal controls which is designed to manage and mitigate these risks and which the Board is responsible for. This system is in accordance with the Guidance on Risk Management, Internal Control and Related Financial and Business Reporting as issued by The Financial Reporting Council and its key features include:

-- a defined organisational structure with appropriate delegation of authority and clearly defined lines of reporting and responsibility, whereby the incurring of expenditure and assumption of contractual commitment can only be approved by specified individuals and within pre-defined limits;

-- formal authorisation procedures for all banking transactions, expenditure and investment decisions;

-- a comprehensive system for budgeting and planning whereby annual budgets are prepared and approved by the Board and subsequently monitored with variances reported to the Board at Board meetings; and

-- regular and comprehensive information provided to the Board from the Group's senior management team, covering financial performance and key performance indicators, including non-financial measures.

The Group's system of internal controls (including each of those detailed above) have been in place for the year under review and up to the date of the approval of this Annual Report. This system is regularly reviewed by the Board and a review of the effectiveness of all material controls was carried out by the Audit Committee during the year. This effectiveness review considered the design of controls associated with key risks and the evidence as to their proper operation throughout the year. No significant failing or weaknesses were uncovered in the course of this review.

Brexit

The Group is aware that the referendum vote in June 2016 pursuant to which the United Kingdom has indicated its intent to withdraw from the European Union might present risks for companies, including uncertainty about the process, timings and consequences of the final withdrawal. The Group does not currently trade with Europe. It is also not in receipt of EU foreign direct investment (FDI). Most of the Group's future sales are likely to be in US Dollars. Therefore, the risk relating to Brexit is low for the Group and is not considered one of its principal risks. The Group continues to monitor political, regulatory and legislative aspects of the withdrawal from the European Union and is aware of the aspects of this potential risk.

Key to risk management

   Risk increasing            No change                   Risk decreasing 
 
 Principal risks                    Mitigation                        Trend             Strategy 
                                                                                         Link 
---------------------------------  --------------------------------  ----------------  --------- 
 Strategic risks 
-------------------------------------------------------------------  ----------------  --------- 
 Exploration and development        The geological, mining, 
  The Group is completely            processing and infrastructure 
  dependent on the ability           challenges of the 
  of the Project and                 Project are inherent 
  engineering team to                in a mining and infrastructure 
  successfully deliver               Project of this size, 
  operational mine and               and are not of an 
  infrastructure facilities.         extraordinary level 
                                     or nature. 
 
                                     Site investigation 
                                     work through a program 
                                     of seismic surveys 
                                     and investigative 
                                     boreholes continues 
                                     as part of the Project. 
                                     As engineering progresses 
                                     this risk naturally 
                                     reduces. 
 
                                     Development risks 
                                     are assessed, evaluated 
                                     and reduced as far 
                                     as reasonably possible 
                                     as part of the Project 
                                     management function 
                                     performed by our 
                                     experienced owner's 
                                     team. 
---------------------------------  --------------------------------  ----------------  --------- 
 Financial risks 
-------------------------------------------------------------------  ----------------  --------- 
 Liquidity risks                    We have a strong 
  The Group's current                Board and management 
  activities do not generate         team with extensive 
  revenues and there                 experience in financing 
  is a risk that, despite            large, multi-billion 
  raising the initial                Dollar projects. 
  funds to commence construction, 
  we will have insufficient          We have been successful 
  funds to finalise development      in raising funds 
  and construction of                in the recent past, 
  the Project to a point             including in 2016 
  of production where                to commence construction 
  the Group generates                of the Project and 
  positive operating                 signing a non-binding 
  cash flows, which will             mandate letter with 
  affect our ability                 financial institutions 
  to manage operating                in relation to a 
  costs and capital expenditure.     potential senior 
  There is no assurance              debt financing which 
  that adequate funds                would fund the majority 
  will be available when             of the remainder 
  they are required.                 of the operating 
                                     costs and capital 
                                     expenditure required 
                                     to finalise the development 
                                     and construction 
                                     of the Project and 

                                     reach a point of 
                                     production where 
                                     the Project generates 
                                     positive operating 
                                     cash flows. 
---------------------------------  --------------------------------  ----------------  --------- 
 Commodity price                    Our research team 
  There is a risk that               continues to analyse 
  fertilizer prices,                 various fertilizer 
  including potash and               markets, including 
  polyhalite, could fall             NPK, potash and polyhalite. 
  to levels at which                 Current studies support 
  it would not be economically       the continued growth 
  viable to develop the              in world demand and 
  Project. Such conditions           a positive price 
  would materially and               outlook over the 
  adversely affect production,       medium term. 
  earnings and the financial 
  position and could                 Feasibility study 
  result in the cessation            work indicates that 
  of mining activities               the anticipated cost 
  that become uneconomic             of production for 
  or could result in                 polyhalite is circa 
  the economics of the               US$30. At this cost, 
  Project not being sufficient       the Project would 
  to enable the Group                rank in the bottom 
  to raise the next stage            quartile of potash 
  of funding to take                 producers and is 
  the Project to production,         therefore well positioned 
  halt or delay the development      for significant price 
  of new areas to mine,              downturns 
  and reduce funds available 
  for proving reserves, 
  resulting in the depletion 
  of reserves. There 
  is no assurance that, 
  even as commercial 
  quantities of polyhalite 
  ore are produced, a 
  profitable market will 
  exist for it. 
---------------------------------  --------------------------------  ----------------  --------- 
 Currency                           The Group has mitigated 
  Sirius Minerals will               the currency risk 
  have currency exposures            in the medium to                   This risk 
  arising from both its              long term, by planning             is increasing 
  capital expenditure                a capital structure                as the 
  and operating costs                where it has raised                time frame 
  and the sale of polyhalite         funds in Pounds Sterling           for Brexit 
  ore.                               and US Dollars, to                 draws 
                                     broadly match the                  closer 
  Revenue from polyhalite            anticipated currency               and drives 
  sales and the majority             split of its expected              increased 
  of future financings               capital expenditure                volatility 
  for the Project are                and operating cost                 in the 
  expected to be denominated         needs.                             foreign 
  in US Dollars, providing                                              exchange 
  a natural exchange                 The Group monitors                 markets. 
  rate hedge. However,               its exposure to currency           As the 
  a significant portion              risk based on the                  proceeds 
  of the construction,               Project expenditure                from the 
  development and operating          forecast and the                   stage 
  expenses for the Project           stage of development.              1 financing 
  will be incurred in                The treasury policy                are spent, 
  non-US Dollar currencies,          sets out appropriate               the Group's 
  in particular Pounds               risk tolerances for                exposure 
  Sterling.                          currency exposure                  to sterling 
                                     and the treasury                   is also 
  Accordingly, appreciation          team implement appropriate         increasing 
  of such non-US Dollar              hedges to ensure                   because 
  currencies, without                the Group is compliant             the stage 
  offsetting improvement             with the treasury                  2 financing 
  in US Dollar denominated           policy.                            is likely 
  polyhalite prices,                                                    to be 
  could adversely affect                                                predominantly 
  the Project's profitability                                           in US 
  and financial position.                                               Dollars. 
---------------------------------  --------------------------------  ----------------  --------- 
 External risks 
-------------------------------------------------------------------  ----------------  --------- 
                                    The Group is in possession 
   Permits and licences              of the planning permissions 
   The Project requires              required to commence 
   a range of permits                the construction 
   and licences to operate.          of the minehead, 
   As the Project progresses,        MTS, MHF and has 
   the details of the                also received a development 
   works will require                consent order for 
   changes to the planning           the construction 
   permissions. There                of the harbour facility. 
   is no guarantee that              Any changes applied 
   these will be forthcoming.        for do not affect 
                                     these permissions, 
                                     but rather either 
                                     modify or replace 
                                     the existing permissions 
                                     once approved. 
 
                                     Up to this point 
                                     the minor non-material 
                                     changes sought have 
                                     been approved. A 
                                     minor material change 
                                     for the Woodsmith 
                                     Mine site has also 
                                     been approved by 
                                     the NYMNPA. 
 
                                     Sirius Minerals has 
                                     a broad range of 
                                     consultant advisers 
                                     that specialise in 
                                     obtaining the remaining 
                                     permits, licences 
                                     and secondary approvals 
                                     and licences needed 
                                     for the Project to 
                                     operate. 
---------------------------------  --------------------------------  ----------------  --------- 
 Competitors                        Our polyhalite product 
  There are high barriers            contains four of 
  for potential new entrants         the six macro-nutrients 
  into the market. The               (potassium, sulphur, 
  major competitors all              magnesium and calcium) 
  have substantial existing          required for plant 
  infrastructure, less               growth. Polyhalite 
  leverage and substantially         is an effective, 
  greater financial resources.       direct application, 
  There can be no assurance          multi-nutrient fertilizer 
  that Sirius Minerals               and can also be combined 
  or its Project will                with nitrogen and 
  be able to successfully            phosphorous to create 
  respond to such competitive        high-value NPK fertilizer 
  pressures or the competitive       products that contain 
  activities of the other            all six macro-nutrients. 
  major suppliers in                 As such, we are less 
  its markets.                       exposed to the existing 
                                     potash supply structure 
                                     with respect to product 
                                     supply and demand 
                                     dynamics. The Group 
                                     continues to develop 
                                     its marketing and 
                                     sales strategy to 
                                     utilise the unique 
                                     characteristics of 
                                     polyhalite. 
---------------------------------  --------------------------------  ----------------  --------- 
 Operational risks 
-------------------------------------------------------------------  ----------------  --------- 
 Construction delays                Detailed assessment 
  The Project may experience         and planning will 
  construction and schedule          be carried out continuously 
  delays due to unforeseen           by the management 
  technical issues.                  team and external 
                                     consultants as part 
                                     of the Project's 
                                     continued development 
                                     to mitigate and de-risk 
                                     the Project during 
                                     construction. 
 
                                     The Group also continues 
                                     to pursue all acceleration 
                                     options available 
                                     to reduce the time 
                                     required to reach 

                                     first production. 
                                     Contractors are incentivised 
                                     to bring their scopes 
                                     forward. 
---------------------------------  --------------------------------  ----------------  --------- 
 Contractors and suppliers          This risk would manifest 
  The performance of                 itself in cost, delay 
  our contractors and                and/or quality issues. 
  suppliers is critical 
  to the success of the              An active and experienced 
  Project. Performance               management team is 
  issues or a lack of                in place with a focus 
  alignment could introduce          on being clear about 
  cost and schedule risks            expectations, verifying 
  to the Project.                    performance, and 
                                     doing everything 
                                     possible within the 
                                     contracts to ensure 
                                     the success of our 
                                     contractors and suppliers. 
                                     Performance is actively 
                                     monitored and managed, 
                                     with mitigating change 
                                     instigated should 
                                     performance not meet 
                                     expectations. 
 
                                     In working with our 
                                     contractors we are 
                                     focussed on ensuring 
                                     that they are working 
                                     within their area 
                                     of specialisation, 
                                     that their senior 
                                     management are engaged 
                                     in our Project, that 
                                     regular communication 
                                     and progress updates 
                                     are maintained and 
                                     that major construction 
                                     contractors are incentivised 
                                     around the success 
                                     of the Project. 
---------------------------------  --------------------------------  ----------------  --------- 
 Construction cost overruns         The owner's team 
  The Project may experience         has a strong focus 
  construction cost overruns         on cost. 
  due to unforeseen technical 
  issues or scope change.            Confidence in the 
                                     final cost will increase 
                                     as detailed engineering 
                                     progresses and contracts 
                                     are put in place 
                                     for the works. 
 
                                     Prices received from 
                                     contractors and suppliers 
                                     so far have been 
                                     in line with the 
                                     DFS and budget. In 
                                     addition, the Project 
                                     was costed with significant 
                                     contingency and escalation 
                                     provisions in case 
                                     of cost pressures. 
                                     The fall in the value 
                                     of the pound also 
                                     provides comfort 
                                     in this area. 
---------------------------------  --------------------------------  ----------------  --------- 
 Safety and environmental           We continuously assess 
  performance                        the risk and ensure 
  A significant safety               that we have the 
  or environmental incident          right people in the 
  would affect the delivery          right place. Nonetheless, 
  of the Project and                 the Group is not 
  the Group's reputation.            complacent about 
                                     the risks in this 
                                     area. 
 
                                     The owner's team 
                                     is set up to manage 
                                     safety and the environment 
                                     effectively. A key 
                                     part of our work 
                                     in this area is in 
                                     ensuring that we 
                                     engage contractors 
                                     who have the right 
                                     attitude and systems, 
                                     and that we welcome 
                                     expertise and improvement 
                                     from employees, contractors, 
                                     and external parties. 
 
                                     Ongoing focus areas 
                                     include leadership 
                                     activities, work 
                                     with our contractors 
                                     (including onboarding 
                                     processes and auditing), 
                                     developing the culture 
                                     of the Project team, 
                                     and the identification 
                                     and control of major 
                                     hazards. 
---------------------------------  --------------------------------  ----------------  --------- 
 

Viability statement

In accordance with provision C.2.2 of the Code, the Directors have assessed the prospects of the Company over a five-year period, taking account of the Company's current position and principal risks.

Timeframe

The Board believe that five years is the most appropriate timeframe over which the Board should assess the long-term viability of the Company. The Company's current activities do not generate any revenues or positive operating cash flow, and construction of the Project and the development necessary to commence production and generate revenues will require significant capital expenditures. The Project is not expected to generate positive net cash flow until approximately 2022, some four years from now.

Assessing viability

The main assumptions are that the stage 2 financing of up to US$3 billion is completed in the second half of 2018 and that the U$300 million royalty financing due from Hancock British Holdings Limited is paid on or around the same time. If these transactions are not concluded in this time frame the Company may not be able to ensure that the Project will become operational, nor that commercial production will commence on schedule (or at all).

Principal risks

In addition, in making their assessment, the Board has taken into account the principal risks as described in detail on pages 49 to 52 and also the scenario modelling and sensitivity analysis undertaken by the Company and various consultants which has been conducted as part of the development of the Project. The modelling demonstrates profitability over a range of negative assumptions, both individually and in aggregate. The scenarios considered took into account the impacts of:

   -      a Project capital cost overrun; 
   -      a delay in Project completion; 
   -      lower realised polyhalite sales prices; 
   -      lower long-run polyhalite sales volumes; 
   -      higher long-run operating costs; and 
   -      a reasonable downside scenario taking into account a combination of the above. 

Based on the financial impact of the analysis outlined above and the associated risk, management actions and controls that are either in place or could be implemented, the Board has been able to conclude that the Group will be able to deliver the construction of the Project, provided the stage 2 financing is completed as described.

Confirmation of viability

Taking account of these matters, the Directors have a reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they fall due over the period to December 2022, assuming that the stage 2 financing referred to above is completed as described.

The Group's going concern statement is detailed in note 1 on page 114.

2. Directors' Responsibilities (page 102)

The Directors are responsible for preparing the Annual Report and the financial statements in accordance with applicable law and regulation.

Company law requires the Directors to prepare financial statements for each financial year. Under that law the Directors have prepared the Group financial statements in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union and Company financial statements in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards, comprising FRS 101 'Reduced Disclosure Framework', and applicable law). Under company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and Company and of the profit or loss of the Group and Company for that period. In preparing the financial statements, the Directors are required to:

   --        select suitable accounting policies and then apply them consistently; 

-- state whether applicable IFRSs as adopted by the European Union have been followed for the Group financial statements and United Kingdom Accounting Standards, comprising FRS 101, have been followed for the Company financial statements, subject to any material departures disclosed and explained in the financial statements;

   --        make judgements and accounting estimates that are reasonable and prudent; and 

-- prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Group and Company will continue in business.

The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Group and Company's transactions and disclose with reasonable accuracy at any time the financial position of the Group and Company and enable them to ensure that the financial statements and the Directors' Remuneration Report comply with the Companies Act 2006 and, as regards the Group financial statements, Article 4 of the IAS Regulation.

The Directors are also responsible for safeguarding the assets of the Group and Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

The Directors are responsible for the maintenance and integrity of the Company's website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

We confirm that, to the best of our knowledge:

-- the financial statements, which have been prepared in accordance with IFRSs as adopted by the European Union, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and the undertakings included in the consolidation taken as a whole;

-- the Strategic Report includes a fair review of the development and performance of the business and the position of the Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face; and

-- the Annual Report and financial statements, taken as a whole, are fair, balanced and understandable and provide the information necessary for shareholders to assess the Company's performance, business model and strategy.

By order of the Board

Chris Fraser

Managing Director and CEO

Thomas Staley

Finance Director and CFO

3. Related Party Transactions (page 128)

There have been no material related party transactions in the year ended 31 December 2017 (2016: nil), except for key management compensation. The key management compensation below includes eight (2016: seven) Sirius Minerals Plc Directors and three (2016: four) further executive management employees who are not Sirius Minerals Plc Directors. Key management personnel received the following compensation during the period:

 
                                             2017      2016 
                                          GBP000s   GBP000s 
---------------------------------------  --------  -------- 
 Salaries and short-term benefits           4,415     1,482 
 Post-employment benefit contributions         11         9 
 Share-based payments                       1,431       581 
 Compensation for loss of office                -       157 
---------------------------------------  --------  -------- 
 Total key management compensation          5,857     2,229 
---------------------------------------  --------  -------- 
 

Total Directors' emoluments and emoluments of the highest paid Director, together with full details of Directors' remuneration, pensions and benefits in kind are given in the Remuneration Committee Report.

This information is provided by RNS

The company news service from the London Stock Exchange

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April 23, 2018 10:37 ET (14:37 GMT)