The would-be UK fertiliser miner, Sirius Minerals, released first-half results Thursday. One of those accounting phrases we were always taught to take seriously jumped out, an “emphasis of matter” from the auditors (with our, er, emphasis):
Without modifying our conclusion on the interim financial statements, we have considered the adequacy of the disclosure made in note 1 to the interim financial statements concerning the Group's ability to continue as a going concern. The Group is involved in efforts to complete the stage 2 financing to secure long-term project finance for the North Yorkshire Polyhalite Project, the timing and outcome of which is uncertain. These conditions indicate the existence of material uncertainties which may cast significant doubt about the Group's ability to continue as a going concern. The Group financial statements do not include the adjustments that would result if the Group were unable to continue as a going concern.
It is no surprise the ongoing viability of the project hangs on a $3bn+ financing package. If the company can't get lenders on board, there will be no mine.
Accountants deal in judgments of materiality, however, and that phrase “material uncertainty” hasn't appeared in the Sirius accounts since the 2016 interim results.
According to international standard on auditing 706, in the International Auditing and Assurance Standards Board handbook*, an emphasis of matter disclosure should be made when it is necessary to:
(a) Draw users’ attention to a matter or matters presented or disclosed in the financial statements that are of such importance that they are fundamental to users’ understanding of the financial statements; or
(b) Draw users’ attention to any matter or matters other than those presented or disclosed in the financial statements that are relevant to users’ understanding of the audit, the auditor’s responsibilities or the auditor’s report.
Here's part of the going concern report in note 1 of the Sirius statement, referred to above, with our emphasis:
On 6 September 2018 the Group announced an updated estimate of US$3.4bn to US$3.6bn for the capital funding that would be required to complete development of the Project to a 10 Mtpa production capacity. Subject to the successful completion of due diligence and a satisfactory financing plan being presented by the Group, the Group expects to secure credit approved commitment letters from lenders in the fourth quarter of 2018 and to achieve financial close of stage 2 financing in the first quarter of 2019. The Group is seeking up to a US$3bn senior debt financing and is working towards securing further additional necessary financing of US$0.4bnto US$0.6bn through the most efficient and cost-effective capital structure.
The Board of Directors continues to believe that the stage 2 financing will be successfully completed, however there is a risk that a successful outcome may not be reached. This therefore represents a material uncertainty that may cast significant doubt upon the Group's ability to continue as a going concern.
The Group's latest cash flow forecasts indicate that it currently has sufficient liquidity to continue development of the Project on its current schedule into Q2 2019 when the proceeds of stage 2 financing will be required. Should the Group wish to continue to operate into late 2019 or early 2020 without the stage 2 financing proceeds, they would need to curtail discretionary expenditures from Q1 2019 until further financing was secured and thus could continue to operate for a period of at least 12 months subsequent to the date of the approval of these financial statements.
Having assessed the principal risks and having regard for the above, based on the current likelihood of the success of the stage 2 financing and the technical completion of construction of the Project, the Directors consider it appropriate to continue to adopt the going concern basis of accounting in preparing these consolidated financial statements. Therefore, these interim financial statements do not include any adjustments that would result if the going concern basis of preparation was inappropriate.
There has always been the chance that the project is not viable, but after stage 1 financing was secured in November 2016, the material threat to Sirius as a going concern went away.
Now it is back. It comes after the group announced this month its estimates for the fertiliser mine's cost had risen, by about £0.5bn. The additional capital will have to be financed by fresh equity or subordinated debt, on top of the $3bn of senior debt it must raise, and a key unknown is the size of the contingency lenders insist must be funded, over and above that £0.5bn estimate, in case costs go up again.
Some might also wonder what level of “material uncertainty” is assumed by investors, given the group's £1.4bn market capitalisation.
*Update: a previous version of this post incorrectly described the handbook as the work of the International Federation of Accountants.
Related links: Sirius Minerals needs its small Chinese partners to meet their grand ambitions — FT Alphaville
Sirius Minerals buys its way into Brazil — FT Alphaville
Sirius gets $250m cash boost from Australia’s richest woman — FT
Costs up and cash needed at Sirius Minerals — FT Alphaville
Sirius Minerals: money for a hole in the ground — FT Alphaville
Sirius Minerals and the battle to build Britain’s deepest mine — FT