As rare as is it to see an AIM mining minnow with a large and potentially very valuable resource in the ground actually make it to the production stage whilst retaining ownership of all of the project, Horizonte Minerals (HZM) now looks on the verge of achieving that. Most of these AIM companies that boast of a big resource will never actually mine any of it, as usually the economics of doing so are far less impressive than the quantities of the minerals themselves that are stated and even more so when the initial Capex cost of actually getting any mining operation off of the ground is prohibitive and has to involve debt funding. Horizonte looks on the verge of proving that it is possible though and especially if you acquire the original licences at a time when there is little interest in the commodity and it is only borderline economic at best. That is exactly what has happened with its Araguaia project in Brazil, which it acquired from Glencore some years back at a time when nickel prices were low and the economics of the project didn’t really make it an attractive investment given the amount needed to reach production and the rate of return that would have been generated for investors. Now though things look very different.
This is with nickel in high demand and that likely to continue going forwards, although there will continue to be some choppiness for prices – as we’ve seen in recent weeks with low inventories in China, quickly followed by reduced demand at stainless steel mills as a result of shocks to the property market due to the Evergrande debt crisis. But the general consensus seems to be that nickel will remain in high demand in the coming years. So it shouldn’t really have come as a big surprise that the company delivered on its goal to receive the credit approvals for its senior debt facility by the end of this quarter, and it announced that it has secured $346.2 million in total, which is actually around $20 million higher than had been mentioned previously. The terms of this debt also look very good to me when you consider the size of Horizonte and its lack of credit history, with an initial tranche of $146.2 million which is guaranteed by export credit agencies and was previously announced a couple of weeks back. That will be used to purchase equipment and engage contractors to build the mine, and it carries an interest rate of LIBOR plus 1.8%.
The second tranche of $200 million is being provided by a syndicate of international banks and has a rate of LIBOR plus 4.25-4.75%, which again I think is very good and suggests to me that the lenders are very confident in the project to be risking that amount at such a low rate. What will likely have surprised investors here though - including myself! - is the lack of share price reaction to this news, and at the current price it is actually trading at lower than where it was a week or so ago, and means there has been no real reward for those who risked holding for this news. Unfortunately that just seems to be the way the markets are these days, and that situation won’t be helped by the fact that Horizonte still needs to raise further money, likely somewhere around $80-100 million. It is already in discussions with parties for a potential offtake agreement to cover at least part of that, as well as with a cornerstone investor that would come onboard via a subscription, which would provide the rest of the money needed. Private investors seem to have been stung so often by placings on awful terms in so many companies recently, that they now seem to automatically assume that any equity raise is bad news and that the share price will drop to around whatever price level the placing is carried out at. What I think people are missing here though is that any equity raise will be the last piece of the puzzle in financing the company through to production, which will of course add significant value – the economics of the project at $16,800/t suggest it would generate total revenue of $7.2 billion and with an operating cash flow of in excess of $3.1 billion, and an independent study suggested an NPV(8) of $740 million. It also points to the project being very robust compared to some of its peers, with a C1 cash cost of $8,200/t and NPV(8) breakeven level of below $11,000/t.
On the basis of all that, and given that is what any equity raise will be moving towards unlocking, I’m not convinced that people will actually be able to buy in at the same share price as any cornerstone investor comes on board at. That could well be the spark which actually sends the shares much higher post-placing. Of course there is still risk to the project even once it is financed, both in the construction phase and also once it is actually producing, if the reality of that doesn’t live up to the modelling, but then that is something that is the same for all miners and something that you accept if you are going to invest in this sector. Personally, I am more than happy to continue to hold and believe that the company is in the best position that it has ever been in, in terms of getting Araguaia through to production and unlocking the value of it. I view the current share price as a good level for new investors to come onboard at - should they have been sat on the sidelines waiting for the financing risk to reduce - and I may well be tempted to average up again, as I have done in the past as the pieces of the puzzle have started to drop into place. Buy.
Filed under: Horizonte Minerals, Neil Woodford, Abingdon Health, LPA, Gooch & Housego, Bacanora Lithium
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