Horizonte Minerals (HZM) is a company that I’ve written about a number of times in recent years, and is also one where I’ve been patiently holding shares myself for a long time. When it comes to AIM mining stocks it is quite a rarity that they either actually make it into production or get taken out by a larger predator prior to that stage, and for many of them the resource in the ground sounds far better than the reality of actually extracting it commercially. There are exceptions though - another of my favourites, Bacanora Lithium (BCN) recently received a takeover bid from a large Chinese outfit - and it is looking increasingly likely that Horizonte will fall into that relatively elite category of small mining firms that actually made it, as opposed to burning through large amounts of investors money with nothing to show for it, as is all too common. Better still, it looks like the company will also find itself in a position whereby it has secured all of the funding necessary to take its Araguaia nickel asset in Brazil through to the first phase of production, whilst managing to retain 100% ownership.
Finance for mine construction has been in the pipeline for quite some time, and given its substantial size in relation to that of the company itself, which has a market cap of almost £150 million at the current share price level of 8.7p, it isn’t really surprising that it has dragged on for longer than many private investors originally hoped – these things often do! The company has in the past been a bit too optimistic with its timelines and often that has led to the share price being punished when that schedule hasn’t been met. Private investors were also a little upset when the company raised $25 million at 7.5p earlier this year, with the shares having traded a fair bit higher shortly before that. I suspect that all will be forgiven though as long as Araguaia funding is finally closed, and providing that the terms are decent, and the company has just taken another major step this week towards that happening.
It has been seeking $325 million of senior secured debt and has been in discussions with various banks and other organisations, and closing of the full facility came a step closed when the company announced that it had received guaranteed commitments for $146.2 million from two export credit agencies – from Denmark and Finland. The balance of the debt facility will come in a separate tranche from a syndicate of international institutions, and the company seemed confident that this would still come in Q3 as expected, meaning anytime in the next couple of weeks or so. The ECA guarantees relate to a number of key equipment and service provider contracts, which are all part of being able to move to the full construction phase as and when the last pieces of the financing deal fall into place, and having already been working on pre-construction at the site for some time now. In addition to the senior debt facility, the company will also be seeking to bring onboard a cornerstone investor, and the share price at which that occurs is still an unknown, as is the exact amount that will be raised – even at the current share price and assuming that the party has no existing holding in the company, in order to remain below the 30% threshold of post-dilution shares in issue (and not spark a compulsory takeover bid) the maximum that could be raised is around £63 million or so. That is of course assuming that any equity component of funding actually comes at a discount, and given that it would be the final piece that moves this company to production, and that there is no way that any party could accumulate a big chunk of the Horizonte shares on the open market without sending the price soaring much higher, you never know, we could even see a premium placing being done (that would also help with the amount raised, if that was a potential issue).
It may well be the case though that even a placing at a slight discount could raise enough money to cover the remainder of the total needed for phase one, as Horizonte is also in the final stages of negotiations with potential long term offtake partners, and that could easily bridge the gap between what money is needed, and how much can realistically be raised from one investor without breaching the 30% threshold. Although based on previous estimates and the amounts raised since then, in theory it should be perfectly possible for one new cornerstone investor to come on board and provide all of the money needed (assuming any equity raise was done at around the current share price). Obviously until everything is signed and the funding is definitely coming, then risk remains here, but I do think the market is under-pricing Horizonte by far too much based upon that risk. Especially when you consider the current nickel price, as well as predictions for a strong market in the future as well, and what that will mean for the value of the project. On the basis of where the share price is now and how far along the road the company seems to be, then I can still see plenty of value even for investors just getting onboard now at the current share price of around 8.7p, and I would expect that confirmation that the deal is going to go ahead as planned and that construction of the mine can start, should give the share price a sizeable boost, even allowing for any equity component that may come at a discount. Buy.
Filed under: Horizonte Minerals, Umuthi, Jubilee Metals, Character Group, DeepVerge, FeverTree
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