Horizonte Minerals - secures funding package. Remains a long-term Buy says Gary Newman...

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Horizonte Minerals (HZM) looks as though it has defied the odds and will actually manage to bring a large project requiring significant Capex into production, whilst at the same time retaining 100% of it. Funding arrangements for its Araguaia nickel project in Brazil have been in the pipeline for quite some time and, although various components of the overall package looked to have been secured, it all hinged on also being able to raise an equity component as well as securing an offtake agreement that the senior lenders were happy with. There had been much speculation amongst PIs as to what price any equity funding would be done at, and also the amount that would be raised. What appeared to make things more complicated, and also raised the possibility of funding coming at a premium, was that the company was looking to take on one cornerstone investor and, given the amount of money needed, it was hard to see how that could happen whilst that investor remained under the 30% threshold. The news is very different to what some had expected.

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This is with several parties subscribing for shares, along with a much larger than expected placing via a bookbuild, which resulted in a placing price of just 7p and saw the share price slide down to that level in early trading. I think that, as often happens, PIs were expecting far too much and ignoring the fact that these types of deals always favour the large investors coming onboard, no matter how much the board talk about being aligned with long term investors and the like. One question it does raise for me though, and not just specific to Horizonte, but for the AIM natural resources sector, is whether it is really worth taking on these sort of risks any more, with the potential for big drops that bad news can bring when often any positive news doesn’t result in much of, if any, sort of share price rise, and those who haven’t taken the risk can often buy in cheaper! It’s certainly something I will be reassessing for the future as, even when you pick a company that actually makes it operationally, there is no guarantee that early, long term investors will actually benefit financially from that. In terms of the deal though that the company has managed to secure, and given the size of Horizonte, I think it is incredible that it has managed to get a funding package totalling $633 million, even if done at a lower share price than many would have liked, and with the $£260 million odd raised from equity and convertible loan notes being far higher than expected (more than double what many were expecting). I’m struggling to recall any small AIM natural resources company securing anything of this sort of size to develop a large project like this, and even allowing for the fact that nickel is in vogue and in high demand, with future supply shortage concerns, it is still a real achievement to have got the deal done.

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The investors that have come onboard also look impressive, with La Mancha subscribing for between $65 million and $75 million worth of shares, plus $15 million worth of the convertible loan notes (issued at 94.25% of par and with a coupon of 11.75%). La Mancha is owned by Egyptian billionaire Naguib Sawiris, and has a track record of developing projects over the longer term, and although it has traditionally been involved with precious metals, it has decided to branch out into EV metals. It was no surprise to see that Orion also subscribed for $50 million worth of shares, and one of its subsidiaries also subscribed for $50 million of the loan notes, as this company has supported Horizonte for several years, including financially back in 2019 with the $25 million royalty agreement. Orion is also providing a cost overrun facility for $25 million, although given the increased amount of the funding package, I wouldn’t expect that to be needed. One name which I did think might pop up was Teck Resources, as it is one of the larger shareholders here, but does seem more focussed on projects at home in Canada, and there are only so many large investors that can be involved. Another big positive was that Glencore not only agreed to subscribe for $7 million worth of shares, but also agreed an offtake deal which will see 100% of production acquired by Glencore for a ten year period. This was one of the things which was pivotal for the closing of the senior facility, and with a name like Glencore onboard the lenders should have no concerns. I’ve already seen people pointing out that the exact terms of the offtake aren’t stated, but in order for La Mancha and Orion to have come onboard, and for the senior lenders to accept it, then I would put money on it being at the going market rate – the other parties involved here aren’t going to accept being screwed by Glencore and selling the nickel at a big discount!

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All of the focus in this news was on Araguaia, but those who read the RNS in full will also have spotted that a gross revenue royalty worth $25 million on the Vermelho project was signed with an Orion affiliate, initially for 2.1% but rising to 2.25% if construction work has not started on the project within the next five years. Vermelho is a nickel-cobalt project which will provide battery grade metals and has the potential to be even bigger than Araguaia, although still at a much earlier stage, and it isn’t hard to see why Orion want involvement at an early stage. Once Araguaia is in production it should help to accelerate progress at Vermelho, and can fund further work there via the free cash flows generated. So, overall, even taking into account that the deal and the current share price aren’t what most investors expected following news that the project funding had been secured in full, I can still see plenty of long term upside for those who are patient. I suspect that most who have sold were traders who were expecting a quick rise off the back of funding news, but barring any nasty surprises along the way, such as the nickel market collapsing or something specific to Brazilian mining, I find it hard to see how the company won’t be valued significantly higher by the time it starts producing nickel in a couple of years time. So all of this not only reaffirms my buy and hold stance, but actually strengthens that on the basis that the risk here has significantly reduced.

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Filed under: Horizonte Minerals, Mercantile Ports & Logistics, DX, Headlam, oil, TomWinnifrith.com

2021-11-25 15:18:11

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