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Stock Of The Day - SIRIUS RESOURCES (SELL)

Independence Group (IGO) has finally made an official announcement on its acquisition of Sirius Resources (SIR) for $1.8 billion of cash and stock, putting an end to all the rumors that has been spreading on the potential deal from quite some time. Sirius will first demerger its Polar Bear and Scandinavian exploration assets to form a new entity named S2 Resources, enabling SIR shareholders to benefit from the future potential from these assets.

Sirius shareholders will get share in S2 for every 2.5 shares held in SIR. S2 holds 67% direct interest in Norse Exploration and Sakampu exploration Oy. Sakampu is among the major mineral title holders located in the most prospective districts of Finland and Sweden. S2 is expected to have over $22 million cash, when it will be listed in ASX.


As per the deal highlights, Sirius shareholders will get 0.66 Independence group shares per one Sirius share as well as 52 cents a share in cash per SIR share. Independence group issued an implied offer price of $4.38 per SIR’s share (excluding S2 shares). Mark Creasy, Sirius major shareholder holding a stake of 34.59% has supported the deal and intends to vote in favor of the upcoming schemes. Mark Benett and Neil Warburton, Sirius directors will join the IGO Board. 


Group Capital Structure (Source: Company Reports)


Independence Group believes the deal to be completely aligned to its acquisition strategy and criteria. IGO will benefit from Nova-Bollinger, Sirius highly prospective and the best undeveloped nickel copper mines located in the tier 1 mining jurisdiction. In addition, consolidation can be seen in the Fraser range and Tropicana belts, though the deal. Sirius can leverage the huge cash position of IGO to develop the assets. Peter Brandford, the Managing and director and CEO of IGO, believes the transaction to be highly NAV accretive for Independence shareholders.


Combined Portfolio of the merged entity (Source: Company Reports)

Shareholders will now have exposure to 30% of Tropicana owned gold mine, 100% Long nickel mine, 100% Jaguar copper / zinc mine, and 100% Stockman copper / zinc development project. Tropicana is a leading Australian gold discoveries from 2000. The project has 3.6Moz ore reserves and 7.5 Moz resources. Independence Group has 30% stake in the project and expect a production in the range of 144,000 to 153,000 Oz Au for the fiscal year of 2015. Average cash cost is expected to be $590 to $630/Oz Au. IGO estimates AISC in the range of $770 to $830/Oz Au.

Jaguar is a high grade underground Zn/Cu VMS deposit and has been showing improvement in operations since two years. Tropicana is expected to deliver a production of 44-48kt Zinc and 7-8 kt copper. Long project has high grade underground Nickel (3.8%) and has a track record of replacing production with new reserves. The firm estimates that Long will deliver a production of 9,500 to 10,500t contained nickel with a cash cost of $4.1 to $4.5/lb Ni. 


Mining and Exploration projects (Source: Company Reports)
 
Sirius started the project construction of its prestigious Nova-Bollinger project in January 2015. Nova is ranked as 12^th lowest cost nickel asset in the globe. The starting ten year plan for the mine is to deliver a production of an average 26ktpa Ni, 11.5 ktpa Cu and 850tpa Co. The capital cost is estimated to be $443 million, which is totally funded with cash and project finance. The Nova Definitive Feasibility study estimates all including cash costs of $2.09/lb. On an overall note, peter believes to create cost efficiencies as well as realize synergies, as Sirius and Independence group assets are located nearby in tier one mining jurisdiction.


IGO and SIR Land Holding (Source: Company Reports)

With regards to the size, the market capitalization of the combined entity is over $2.7 billion. Moreover, Peter views the merger to lead to a major leading diversified Australian mining company showing “rapidly growing production profile, a strong balance sheet, and excellent current and future cash flows

 
Combined Entity Pro forma Market Cap (Source: Company Reports)
 

In the short term, from a valuation perspective SIR shareholders will appreciate the premium in the transaction. In the long term both IGO and SIR shareholders benefit from the shared synergies, scale and diversification of this high quality large diversified producer and developer with long term growth potential. We believe the combined entity will be extremely attractive to global investors. We would expect the transaction to proceed given SIR board approval, the favourable market reaction to the offer from SIR’s perspective and the pre-acceptance of major shareholder Mark Creacy. 

SIR Daily Chart (Source - Thomson Reuters)

Based on the foregoing, we give a “SELL” recommendation to SIR at current price of $3.84.