When it comes to small mining companies, lots of them appear to have a great story and if you listen to those doing calculations based on resources in the ground, then most are worth billions! But the harsh reality is that most of them will never actually produce anything due to the economics of the licences that they have, and in many cases there is a good reason why they’ve ended up with acreage that none of the bigger players appear to want. Every now and again though you do get an exception and a small mining company manages to get a large project all the way to production, and I think that Horizonte Minerals (HZM) could well end up in that category.
You could easily argue that there must have been a good reason why Glencore sold its Araguaia licence, in Brazil, to Horizonte, and the same for Vale with the Vermelho licence. But things were a bit different back then and nickel wasn’t in such high demand or with the level of focus on it with regards to being a battery metal. Nickel prices were also trading at pretty much their lowest prices in recent years as well – not far off of $8,000/t when the deal for Araguaia was done, and at that sort of price, the economics wouldn’t have been attractive. A lot has changed since then though in regards to the nickel market and expected future demand for the metal and currently it is trading at around $14,600/t and with predictions for higher future prices. There is little doubt that Araguaia, plus the Vermelho nickel cobalt project which would produce high grade nickel sulphate for the battery industry, have value at current prices, and higher, but even for small companies in this position, obtaining the necessary project funding through to production is often a big hurdle as large amounts of Capex are required. Most of the focus is on progressing Araguaia initially, and in order to complete stage one through to production the company would need around $443 million. That would be for a 14,500t/a mine with a life of 28 years, and would be expected to generate free post-tax cash flows of around $1.6 billion at a nickel price of $14,000/t. There would also be significant upside via stage two expansion plans to double production, and the plan would be to eventually complete that using cash flows generated from the initial phase. At this point I know some of you will be thinking that it all sounds too good to be true for a company with a market cap of around £70 million, and that you’ve heard it all before with various companies making similar claims but never actually advancing the project. In most cases you’d be right to be highly sceptical, as in most cases the chances of raising the funds needed are almost non-existent, and that is where I think Horizonte is different from the rest.
The financing side of things started to look far more promising last summer when Orion Mine Finance agreed to advance the company $25 million for pre-construction work, in return for a 2.25% royalty on Araguaia, and since then the company has been working to try and secure other lines of funding for the bulk of the Capex. The other week it announced that it had succeeded in securing commitments for a further $325 million of funding, in the form of senior secured finance from a syndicate of international banks. Final approval for the facility is yet to be completed, but is expected by the end of this year, and given that it has reached this stage, I would expect it to go ahead. That still leaves up to $120 million to find – depending on how much of the pre-construction work is included in the Capex figure, and if all of it is then you can knock off the $25 million already provided by Orion. So somewhere between $95 million and $120 million still needs to be found, and how that is raised is significant for current shareholders. If it comes in the form of an equity raise, then that is a huge amount for a company with this sort of market cap and will be highly dilutive to holders in terms of new shares hitting the market, but maybe less so in terms of the share price it is raised at – although that would of course have a significant effect on likely longer term returns with that many more shares in issue. I would be surprised though if it all has to be raised via equity and see a good chance that further offtake or royalty agreements will be secured with an upfront payment element, and if equity does need to be issued then I also see a good chance that Teck Resources and Glencore, which currently hold 14.5% and 6.1% of the shares respectively, would take part in any fundraise and quite possibly to a significant extent. So, whilst this debt funding doesn’t completely de-risk the project, it certainly goes a long way towards doing so and makes it far easier to envision a scenario where it has all the cash for Capex and can commence with mine construction.
Given the size of the project and the amount of funding secured so far, I’m surprised that the share price is still trading where it is, but I think that is just the way the market is these days where many consider a long term hold as being a week and would rather gamble on junk than invest in a real company that has a chance of a bright future. Personally, I’ve been holding shares here for a couple of years now, from sub-2p, and intend to continue holding to see if this will turn out to be one of those companies that does make it in a big way. There is still some element of risk in terms of raising the additional funding needed, but I find it hard to see how that won’t happen, given that it has already secured total commitments of $350 million (subject to the senior facility completing as expected of course), and now see it as far less speculative than it once was. Strengthening nickel prices won’t do it any harm either, as the economics of Araguaia rapidly get more attractive at higher levels, and even $16,000/t has a very meaningful impact on free cash flows. So, despite the recent rise in share price I view it as a buy and hold, and actually added some more myself at 4.2p.
Filed under: Horizonte Minerals, Reach4Entertainment, Rio Tinto, Safestay, Tim Martin, Catenae
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