Regular readers of ShareProphets will know that I’ve been a fan of Horizonte Minerals (HZM) since 2016 - as well as tipping it on a recent ShareProphets Podcast - and it is also a company where I hold some shares myself, so it is good to see that it is continuing to progress in the right direction with some good news. This small AIM listed mining company has had its ups and downs in recent times – including a great buying opportunity earlier this year when the share price dropped as low as the 1.7p area – but it has proved to be a good example of why investing longer term can actually pay off if you find the right natural resources company...
It owns 100% of the Araguaia and Vermelho nickel projects in Brazil, and on paper I can understand why some investors could be sceptical as these projects have huge amounts of resources in the ground, yet are owned by an AIM minnow, and in many cases it is a reason why I avoid investing in such as things sound too good to be true. In the case of Araguaia, Horizonte bought part of the land from Glencore back in 2015 for $8 million to add to its existing acreage – Glencore also retains a 6.1% shareholding in Horizonte. Then in 2017 it acquired the Vermelho nickel and cobalt project from Vale, also for $8 million. It may seem strange that these large mining companies sold these assets so cheaply, but at the time nickel prices were weak – below the base level of $14,000/t that the feasibility studies had been based upon – and it is only in the last few months that the metal has really started to motor upwards and is now trading at more than $16,000/t. This has a major impact on the economics of these mining projects, especially if, as looks likely, prices remain strong in the future. For instance, at the Araguaia project this $2,000/t increase in the nickel price equates to more than a $250 million increase in the NPV of stage two of the project alone; increases the IRR from 23.8% to 30%; and adds $0.9 billion to expected free cash flow generation over the life of the mine. Stage one would only take just over three years to payback the initial investment.
I’m not going to spend too much time going through all the figures relating to the resource, as at this stage it all comes down obtaining financing for one of these projects in order to get them to the production stage, but it is worth pointing out that further work at Vermelho recently has continued to produce encouraging results, and the nickel and cobalt sulphate produced during the test work is of a suitable grade to be based in electric vehicle batteries. It shouldn’t be too long before we see all of these test results from Vermelho worked into a pre-feasibility study, and although the focus is now on Araguaia, the potential of Vermelho certainly shouldn’t be forgotten and is likely to generate further positive newsflow for the company. The recent major news for the company, and specifically for Araguaia – although there is no reason why Vermelho shouldn’t eventually follow a similar path – is a royalty agreement with Orion Mine Finance. Orion will provide an upfront payment of $25 million in return for a 2.25% royalty on the first 426,000 tonnes of nickel to be produced and sold from the project – basically this equates to a royalty on production from phase one of the project, which currently has a NPV of in excess of $580 million at current nickel prices. This would be the equivalent of the company having managed to raise the finance at a 10p share price, compared to an SP of around 3.5p prior to this news coming. This money will help the company to progress the project towards construction and also means that it is now involved with one of the largest mine finance providers in the world.
It is still early days as Horizonte still needs to find around $440 million to get stage one through to production, where it would be churning out circa 14,500 tonnes per annum, but the association with Orion should certainly help and the company is still hoping to be producing by around 2022. There are of course still risks here as a lot of money still needs to be raised and nickel prices need to remain high to make the projects as attractive as they currently would be to investors, but given the expected demand for nickel in years to come everything certainly looks promising at the moment. It is also interesting to note that Horizonte has far more shares in the hands of institutional investors than many other AIM miners at a similar stage. The news of funding from Orion caused the share price to rocket when the market opened, but it has since settled down a bit and for me it certainly still remains a hold, as the potential is huge if it does actually make it into production, and I will consider adding more if there are any significant pullbacks caused by the usual AIM ‘sell on news’ mentality, regardless of what the news actually is.
Filed under: Horizonte Minerals, Burford, Epicenter, Glenmark, Napo, Woodford, Bahamas Petroleum
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