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Sirius Minerals decision to change contractor is a positive step that may bring forward production, say brokers

Polish firm DMC Mining Services is taking over on all four shafts at the North Yorkshire polyhalite project
Mine Tunnel
DMC is a world-leading shaft sinking company with experience in this sort of geology, said WH Ireland

Sirius Minerals PLC’s (LON:SXX) decision to switch drill contractor for its North Yorkshire polyhalite mine is a good move, according to City watchers of the FTSE250 company.

Polish firm DMC Mining Services, part of giant contractor KGHM, is taking over from AMC after the Canadian firm failed to finalise commercial terms despite a ‘notice of award’ being signed last year. DMC is a world-leading shaft sinking company with experience in this sort of geology, said WH Ireland.

READ: Sirius Minerals switches drill contract for Yorkshire polyhalite project to Polish giant

“The design of the shaft has not changed; what DMC brings is a methodology of shaft sinking using the Herrenknecht Shaft Boring Roadheader (SBR) system, which is currently being used at the BHP Jansen Potash project in Canada.

“This [SBR] has the potential to bring forward first polyhalite production by six months to mid-2021.”

Incentives (and penalties) are in place to ensure the quickest possible sinking of the shaft and DMC has an enviable safety record recognised by worldwide authorities, added the broker.

Shore Capital said while the change in contractor was a surprise, the move might see first polyhalite production up to six months earlier than planned.

“Most importantly, from our point of view, Sirius’s contracts with AMC included rights of termination for convenience, so Sirius will not incur any penalties.

READ: Sirius Minerals tweets video showing progress at York potash project

“The notice served by Sirius on AMC includes provisions for transition and novation arrangements around the engineering and design work, on-site activities (including the drilling of SM14B, which we understand is now very close to intersecting polyhalite; and operation of the concrete plant) and winder procurement.”

Shore added DMC expects to deploy ‘next-generation’ SBR systems incorporating significant upgrades from the BHP work for the construction of the vertical shafts at Sirius’s Woodsmith and Lockwood Beck sites.

DMC is also incentivised for early completion versus existing target price and schedule guidance via pain/gain-share mechanisms.

Shore said the opportunities are likely to prove genuine and kept its buy recommendation with a 65-82.5p/share, with the range dependent on the structure of the second round of financing.

Liberum said it too was surprised by the change of contractor, but DMC is known for their SBR technology, which the company expects will allow faster excavation of the shaft. Its price target is 60p.

Shares in Sirius rose 3% to 22.8p.

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