The market seemed to have been disappointed with the recently released results of a feasibility study from Horizonte Minerals (HZM), but for me nothing has really changed in terms of the long term potential of the project. This is a company that I have been bullish on – as a long term investment – from prices up to the 4p level, and now that it has dropped back to the 2.5p area I see even more value. But if you are patient then there is the possibility of picking up shares at an even lower price, as these small miners do have a tendency to drop lower in periods of limited news flow, and especially so if the markets in general were to take a tumble.
The main focus for the company is its 100% owned Araguaia nickel project in Brazil and the success of the project will now largely come down to whether or not it is able to finance the $443 million needed to get it into production. Given that its market cap is only around £35 million, it will be interesting to see how this is achieved and how much of the project, if anything, it needs to give to any larger partner which may come onboard. It has also announced that it has appointed mine finance specialist Endeavour Financial to focus on a debt and offtake package – and if successful it could keep 100% control of the project – which is likely to be multi-sourced.
The feasibility study reiterated a mine with a lifespan of 28 years – with sufficient resources to potentially extend that further and initial production of 14,500 tonnes of nickel per annum, with possible expansion to 29,000tpa via a second rotary kiln. Post tax cash flows from the operation are expected to be in the order of $1.6 billion – an increase on the previous $1.3 billion projections – despite C1 cash costs coming in a little higher at around $8,200/t. That would still make it one of the lower cost producers though, with an average nickel price of $14,000/t being used for the project, and many predicting higher future nickel prices due to its use in batteries, particularly for electric vehicles. The internal rate of return for the project comes in at just over 20%, which may not be as high as some of the other mining projects out there, but in this case you have to take into account the fact that will occur over a very long period of time (28 years or longer). Perhaps of more relevance is the net present value of over $400 million, which rapidly rises if nickel prices were to go higher – at a nickel price of $16,800/t the NPV(8) increases to $740 million, with an IRR of 28.1%. So far the company has obtained a preliminary environmental licence and water permit for the project, and should get a construction licence granted early next year. In addition the company also has its Vermelho nickel-cobalt project, also in Brazil, and although at an earlier stage, results have been encouraging so far, plus test work on samples is currently ongoing, so there could be positive news on this front relatively soon.
There is of course plenty of risk here still as this is a tiny AIM company with two very large projects and no way of funding either of them itself, but if either is as valuable as the data suggests, then it should be able to find a way of getting a mine into production. This is definitely a long term investment, as although there will be plenty of ups and downs in the share price along the way, I see the real value in holding until it at least reaches production – with the risk being that doesn’t happen. The price of nickel will also play a big part here, and if it does rise as predicted then the projects will become even more attractive and valuable, so for me the shares remain a buy and hold at around the 2.5p level.
Filed under: Horizonte Minerals, Northland, Berkeley Energia, Catenae, Parity Group, TomWinnifrith.com
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