Sirius Minerals Plc has announced the signing of two major tunnel construction contracts and a revised capital estimate increase from US$3.67bn to US$4.17bn for the Company’s North Yorkshire Polyhalite Project (the “Project”). The Company has entered into design and build contracts for the construction of Drive 2 and 3 of the Company’s mineral transport system (“MTS”) and an EPC contract for the construction of the materials handling facility (“MHF”) at Wilton. In addition, following the signing of these contracts which substantially completes procurement across the Project, the Company has finalised a revised estimate of the Project’s capital cost, funding requirements revised operating costs.
Chris Fraser, Managing Director and CEO of Sirius, commented:
“The signing of the contracts for the remaining tunnel drives and the materials handling facility at Wilton are significant steps forward for the business with almost all procurement now complete. The expected increased funding requirement coming from this process reflects an optimisation of the MTS tunnel design and a significantly improved risk allocation for Sirius to support the senior debt financing. The Project’s economics remain extremely compelling and we are confident they support the expected additional funding requirement.”
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For MTS Drives 2 and 3 between the Woodsmith Mine and Lockwood Beck (the “MTS Contract”), Sirius has entered into a design and build contract with STRABAG AG, a subsidiary of STRABAG SE (“STRABAG”).
The MTS Contract is effectively a lump sum arrangement, with fixed rates for tunnelling advance. The price is based on a defined and agreed geotechnical baseline report, with firm pricing for a range of expected support classes within the build.
The cost of the MTS Contract is higher than originally anticipated by the Company in its previously announced optimised definitive feasibility study (“DFS”) estimates announced in 2016. Since the DFS estimate, the Company’s understanding of the geotechnical characteristics of the strata within which the MTS will be excavated has increased following further ground investigation and seismic work. This exercise has led to a refinement of the parameters set out in the geotechnical baseline report upon which the tunnelling contract has been determined. The MTS cost increase is driven by a combination of the following factors:
- optimisation of the tunnel design including an increase in the planned internal diameter of the tunnel from 4.3m to 4.9m and an increase in lining thickness from 250mm to 350mm;
- a decrease in advance rates as compared from 25m per day to 17m per day; and
- a commercial risk allocation which transfers construction and delivery risk to STRABAG.
The cost of the MTS Contract will be incurred in GBP and EUR.
The Company has also entered into an Engineer, Procurement and Construction (“EPC”) contract for the MHF at Wilton with Jacobs UK Limited (“Jacobs”), a subsidiary of Jacobs Engineering Group. The EPC contract with Jacobs is on a target price basis, with financial incentives for completing the scope of work under budget, and financial penalties should completion be late or the cost be above the target price. The target price of the EPC contract is consistent with the Company’s optimised DFS estimates and the target dates are within the dates outlined in the existing Project schedule.
The MHF contract is a USD target price contract. Cost under the EPC contract will be charged to Sirius in the currency in which they are incurred by Jacobs.
The procurement process is nearing completion for the major packages and the Company is currently in the final stage of negotiations for the outstanding scopes of work. The outstanding scopes of work are the MTS fit out, which includes the supply and installation of the MTS conveyor and the associated power supply, and the port facilities which includes construction of the outload circuit, wharf and product storage facility. The Company has identified STRABAG as its preferred contractor for the MTS fit out and is in advanced negotiations for provision of port facilities.
The Company has developed a construction programme which defers the upfront capital costs associated with the port facilities and has amended the scope of work to include temporary truck and train transportation of product from the storage facility at Wilton to the port facility. This enables the construction of the overland conveyor to be deferred until such time as it can be funded through operating cash flows, currently assumed to be 2025.
The following table outlines the revised capital cost estimate of the Project and explanations of key variances:
|Capital Costs (US$m)||November 2016||September 2018
|Mine development||1,238||1,079||(159)||· MTS caverns to be completed by MTS tunnelling contractor|
|MTS||858||1,461||603||· Tunnelling scope to include caverns
· Revised capital costs to reflect fixed rates and risk transfer to the tunnelling contractor
|MHF and Port||641||538||(103)||· Overland conveyor deferred until 2025 and funded from operating cash flow|
|Other infrastructure and facilities||121||258||137||· Scope definition aligned to procurement
· Sep 2018 estimate includes general site infrastructure previously included in other areas (including construction power)
|Owners costs||280||371||91||· Reassessment to reflect final implementation plan|
|Escalation contingency and allowances¹||536||463||(73)||· Reflects re-calculation based on progress and design work undertaken to date|
Notes: 1) Includes contingency, escalation and allowances for capital spares and freight.