Between December 24 and January 3, the entire team at ShareProphets is serving up our tips of the year (22 in total). We kick off with No 1, a buy from Gary Newman... I generally try to avoid tipping shares which I hold myself as I think it can lead to bias in favour of the positives when it comes to the analysis, but both of my tips are companies that I believe could do very well in 2021, and so my first pick is...
Horizonte Minerals (HZM). Many say that AIM mining companies aren’t investments and can only be traded, but this is a stock that I’ve held for a long time now and have always believed would be one that eventually made it into production, and it has now reached the stage where it is very close to taking that step and unlocking the value of its nickel resources, at Araguaia, in Brazil. Araguaia is a big project for a company of this size, especially as it has maintained a 100% interest in the licence, and roughly $443 million is estimated to be required to reach production in stage one. Financing it hasn’t been easy but it finally looks like that is all coming to a conclusion, as a $325 million senior secured facility has been committed to by a syndicate of banks, and Orion Mine Finance advanced $25 million in return for a 2.25% royalty.
It had been hoped that the source for the remaining $95 million or so would have been announced prior to the end of this year, but Covid caused delays to that. The exact nature of the remaining funding is yet to be revealed, and could include an equity component, but even if a substantial is raised by a placing I would expect it to be carried out at a good price, as once funding is closed a lot of the risk will have gone and mine construction would get underway – given that preparations for that have and are already being made. The recent substantial increase in nickel prices certainly won’t have done Horizonte any harm either in terms of obtaining the remaining funds, as it is now trading at well over $17,000/t, and during the feasibility study for the project, the economics of the project still looked appealing at an average price of 14,000/t, with post-tax cash flow of $1.6 billion over 28 years. At $14,000/t the feasibility study gave an NPV(8) of $401 million, but also estimated that at $16,800/t that would rise to $740 million, and shows how quickly the value of the project goes up as the commodity price rises. At the higher nickel price, net cash flow had risen to $2.6 billion, with production payback in just over three years, given that the nickel that it will produce has a production cost of just $8,200/t.
But like with any small miner, it all comes down to whether or not the company can actually unlock the value of the 461,000t of proven and probable reserves that it has. Obviously I believe that it can, otherwise I wouldn’t be invested, nor would I have added more shares since the announcement of the senior debt facility, but although it is close, it still needs to actually secure the rest of the funding. I think that funding news will come at some point in the next few months, and whatever form it takes, and given that it will enable construction to get underway quickly as all the permitting is already in place, I see the current market cap of just under £100 million (at a share price of around 6.75p) as being too cheap, even if there was a substantial equity component. The risks here are that it won’t secure the funding; commodity prices suddenly tank; or there is some political change which prevents the project going ahead, but I don’t see those as being massively high – although if funding or the licencing fell through the share price would collapse. The upside potential though is well worth that risk in my opinion anyway, especially as it is now far closer to success, as anyone who is still holding the shares when nickel starts to be produced is likely to do very well here I believe, and that makes this my lead share tip of the year for 2021.
Filed under: Horizonte Minerals, Shareprophets tips of year, Powerhouse Energy, [email protected] Capital, Mark Denning
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