Horizonte Minerals - short-term delay largely irrelevant. Buy says Gary Newman...

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It always surprises me how impatient investors can be and how much a missed deadline can sometimes be punished, even when that event has the potential to unlock significant amounts of value if and when it finally happens. I’ve been invested in Horizonte Minerals (HZM) for several years now and during that time have seen lots of ups and downs, including disappointment when ‘deadlines’ have been missed. I think at times PIs get far too focussed on these dates being set in stone – if a company expects to complete something by the end of Q2, especially anything involving natural resources or complicated deals then people shouldn’t be too surprised when that timeline slips a bit. You could argue that if that is the case, the company shouldn’t mention any dates but they have to give some sort of guidance. News on the closing of financing for this company’s 100% owned Araguaia nickel project, in Brazil, had been expected before the end of H1 this year, but this week the company updated the market that although progress had been made, everything was yet to be finalised and it now wasn’t expected until Q3. Judging by how the share price had slipped recently I suspect that some saw this coming and had already sold, and on the morning of news the share price did show some further weakness, although is looking a bit better now that those sellers have gone and the shares have settled around the 6.6p area.

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What I can never understand is why people would sell having patiently waited for news – yes there is a chance that they can buy back in cheaper, and that almost seems to be the norm these days, but certainly no guarantee that will happen, and there is always a risk of being out when something happens. I don’t expect it to, but there could be a bid for the whole company out of the blue, for instance. Personally, with this one, I’ve taken the view that having held so long, and given the potential value that a move to full mine construction and eventual production will unlock, I’m not too bothered if it takes a bit longer than expected as long as it actually goes ahead. Of course at this stage there is still some risk, as the amount needed to get the project off of the ground is large, in the context of the £110 million market cap that Horizonte trades at, and in terms of raising the necessary $443 million needed for phase one of the project there are still some components to that which are unknowns – mainly the eventual size of any equity component, and at what price that will be raised at. Although that equity component is expected to all come from one cornerstone investor, the identity of which is yet to be announced. All of the components of this financing are inter-linked as well, so if one fails to go ahead then it may well jeopardise the rest, or certainly cause delays at best.

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I find it hard to believe though that it won’t go ahead, as the economics of phase one alone look so good, with a 28 year mine life, producing 14,500 tonnes per annum. At an average nickel price of just $14,000/t that would generate post tax free cash flow in the order of $1.6 billion, and given the current nickel price of around $17,200/t and expectations of that remaining strong for years to come, the true value should be significantly higher than that, and that would also make the internal rate of return a lot more attractive than the previous feasibility study suggests as well. Although there was nothing earth shattering in the latest update, it was good to see that everything was still on track and progress had been made, with the five international banks involved in providing the $325 million debt component of the package, having now completed all of their due diligence, and had commenced with the formal credit approval process. The company also mentions that good progress has been made on its discussions with Brazilian financial institutions, in addition to that. The company has also continued discussions with Export Credit Agencies, and it is now expected that a significant portion of the senior debt facility will now be backed, and this lowers the risk to the other lenders. The rest of the money needed – not forgetting that previously the company secured a $25 million royalty deal with Orion Mine Finance plus recently raised $25 million, gross, via a placing at 7.5p – will come from a combination of a long term offtake agreement, which is in the final negotiation stage, plus a major cornerstone investor. It is unclear exactly how much money will be raised from this investor, or who that party is – although this update suggests that there had been interest from multiple parties and that one has now been selected.

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But if we take it that the $443 million Capex requirement still stands, and that most of the money from Orion and the placing has been used as part of that – for things such as pre-construction – then I think it fair to assume that a maximum of $80 million would still be needed from the offtake and cornerstone investor combined. That is still a reasonable chunk of money, in the context of the size of Horizonte, and there is obviously uncertainty around what price the cornerstone investor would come on board at, and how much of that would come from that party, and how much via the offtake agreement. But I would be very disappointed to see an equity deal that was bad for current investors – I also suspect those institutions that took place in the 7.5p placing must have had some assurances, maybe that it would be done on similar terms – and especially so if a number of parties had shown interest in becoming that cornerstone investor. We are now waiting on the credit approvals from the international lenders being approved, and that should be the catalyst for everything else. From my experience with miners, nothing is ever guaranteed until it actually happens and I have seen companies where everything looked favourable, only for them to ultimately fail to get the funding needed – Sirius Minerals for instance. But in this case, and given the future demand expectations for nickel, I am confident that it will ultimately go ahead, and one day Horizonte will become a producer. So, on that basis I’m more than happy to continue holding, and may even be tempted to add more should the share price drift due to impatient sellers – for anyone on the sidelines who has been tempted but hasn’t yet taken the plunge, this is also offering an opportunity to get in at a price that until recently looked unlikely to be seen again. BUY.

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Filed under: Horizonte Minerals, Versarien, Hurricane Energy, Sosandar, Trackwise Designs, Bidstack

2021-06-22 13:33:38

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