Having been round the circuit a few times, a while back I prepared for a quieter and lower volume ‘summer’ market. Many new investors from mid last year who have enjoyed the fruits of a buoyant market may not have experienced a weaker market, particularly on AIM. It can be somewhat sobering!
You can read how I positioned myself ahead of this lull in my recent blog Positioning my Portfolio for 2021. I didn’t go to cash completely as some of my core investments have potential re-rating news on the horizon so it would be foolish to be ‘out of the game’ but I did slim down some with a view to buying back cheaper if opportunity presents.
As it turns out, that is playing out and I am progressively but warily increasing position sizes in researched plays that I am confident about. This has been the case for Armadale Capital (ACP), Afritin Mining (ATM), Goldstone Resources (GRL) and the subject of this blog Horizonte Minerals (HZM)
I could equally present a case for my other core holds as to why I believe they also offer excellent value, however I am focusing on Horizonte here in the light of recent news and what’s happening with Nickel.
Lets quickly recap on the share price . Since my original research note the share price has risen from 2.5p to a 2021 high of 10p. The stock at time of writing is trading at 6.4p. This is a circa 40% discount to recent highs and notably 15% discount to the recent fundraise at 7.5p
Why has the share price dropped ? Well its a combination of three factors really, One they raised some additional cash at 7.5p to commence work on long lead items (something I see as a positive despite some additional dilution). Two, the finance package completion looks to be spilling over into Q3. I don’t get hung up on delays as long as I don’t see any material issues (especially in the middle of a global pandemic!) and lastly the weaker market – look around and many AIM resource stocks have declined. As I said this is a normal feature of the markets this time of year and one an experienced investor learns to exploit.
So where are they at ?
The company updated the market recently on how the finance package is progressing – any investor that can be flexible with timeline and read an RNS will see that the financing is indeed advancing and is in credit approval stage with the five international banks:
“The Company has made excellent progress on all key project finance workstreams during the course of 2021 and is pleased to confirm that all five international banks (together the “International Lenders”), mandated for the US$325 million debt component of the project finance package (“Senior Debt Facility”), have each now commenced with their formal credit approval processes.“
Not only are they progressing the debt side the company is close to finalising the off-take and equity elements of the overall package. Q3 (which actually starts next week) is when we should see the complete package in place and then it really comes down to the numbers. All permitting is in place – no mean feat!
Lets quickly remind ourselves that Araguaia requires a total of $433m Capex ($325m debt element) and will based on stage 1 return $3bn in FCF over 28 year mine life. Expansion to stage 2 which can be achieved from FCF doubles production ! These figures are based on a $16.8k Ni Price – Wood Mackenzie are now forecasting a LT nickel price of up to $26,450.
Perhaps not unreasonable given the market back-drop of Ev’s and massive infrastructure spends. At this price the economics would be incredible (I’ll let you do the maths but we are talking tens of billions in revenue with Araguaia Stage 2 up and running!)
Lets remember DFS typically use 20-30 year mine life – in reality and as the company have mentioned the mine life is likely materially more than this. With debt payback in just over 3 years the operation becomes a cash machine and ultimately a lucrative dividend payer.
We are only talking about Araguaia here too, Vermelho is another 100% owned tier 1 nickel / cobalt deposit with a proven process to produce class 1 nickel suited to the EV battery sector. Ultimately Horizonte could become a 50k tonne pa nickel producer ranking in the top 10 producers in the world.
So where is Nickel now ?
Nickel today is trading at $18.5k/t, well in excess of the DFS $14k/t base case assumption. As mentioned previously, Wood Mackenzie have significantly upped their LT Nickel Price target to $26k/t
Analysts predict in 2022 the nickel market will balance somewhat so that could cap nickel price rises temporarily but it doesn’t change the LT outlook given projects coming to market and the huge demand expected from EV’s and stimulus.
Indonesia and Russia have only announced this week some internal initiatives that could tighten the market further restricting and taxing exports to curtail price inflation as an example.
Personally I think there is a long way to go for nickel, you can read my rationale in my Horizonte research note but essentially a weaker dollar, stimulus and a higher incentive pricing needed should all drive an upwards move in my opinion.
House Broker coverage…
Peel Hunt the house broker recently initiated coverage with an initial 14p price target and 33p un-risked price target. Given the stage that Horizonte are at, closure of the financing package should logically put the share price at the upper end of this price range offering investors significant upside from todays 6.4p share price level.
The elephant in the room is if nickel enjoys a price rise like it did back in 2006/7 when it hit in excess of $50k per tonne
He Who Dares…
So back to the subject of this blog, if you can look past some short-term market weakness and believe that Horizonte can close the finance package given just the Araguaia project alone would throw off tens of billions in revenue at the upper end of Nickel price forecasts then the current 6.5p level (c.100m Cap), below last placing and recent highs of 10p could be a steal – I certainly think so.
Horizonte look set to achieve the end game, something not many junior miners will achieve due the dynamics of the junior markets. It’s a testament to Management who have picked up assets early in the cycle and at the bottom of the market.
Opportunity knocks !
Disclaimer
Research materials prepared based upon my own analysis and research. Accuracy cannot be guaranteed and research notes should not be taken as investment advice. Please always do your own research.
