Horizonte Minerals (LSE:HZM)

01 June, 2020

Market Cap: £45M / 2.85p  (£17M cash)

Current Share Price

Key Highlights

• Leading Nickel investment opportunity
• Two tier 1 nickel projects in close proximity forming a ‘nickel district’
• 3m tonnes combined contained nickel valued at $42bn in the ground (@$14k Ni)
• One of the largest undeveloped nickel inventory outside of the majors. With both projects developed Horizonte would be the 8th largest nickel producer globally
• Araguaia project DFS complete, fully permitted and in financing stage
• Vermelho project PFS complete targeting premium class1 nickel EV sector
• Orion $25m royalty agreement on Araguaia secured 2019
• First production from Araguaia targeted 2022

Nickel: It just makes good cents !

Anyone who has followed me on twitter will know that I have a big interest in the junior resources space, particularly smaller cap early stage mining companies. I’ve been invested in and followed  the Horizonte story for a number of years now and it’s been a somewhat rocky ride thus far! 

One thing I’ll say though, it’s been like that due to the bumpiness of the market for junior resource stocks in general  and is absolutely no reflection upon the company.  

In fact  the company has just gone on about their business quietly and what we see now emerging is potentially one of the next globally significant nickel producing companies. Yep!

As covered in some of my other research notes such as the one on Armadale Capital who are progressing their world class graphite project, I’m very selective in the junior resources companies that I’ll invest in and for good reason.

Personally, I have to tick boxes such as management: who is running the company and managing my investment?  What is the quality of the assets, are they really as good as the company says or is it just good marketing? What is the macro back-drop for the resource, not just now but importantly going forwards?  I want my investment to grow and I’m aggressive with the returns that I want and I’ll be patient if I think the rewards are significant.

I’m prepared to do the leg-work and if I’m writing a research note on the company you can be sure I’ve ticked all my boxes.

Anyway enough rabbiting, let’s talk a bit more about Horizonte then…

About Horizonte

Before I start, I suggest you visit the Horizonte Website at some point as you can glean more info about the company and its projects there. It’s one of the best junior resource websites I have seen with clear info on the projects and company.

So, the company led by CEO Jeremy Martin have been progressing their two tier 1 nickel projects both of which they acquired pretty much at the ‘bottom’ of the market. By the bottom I mean while nickel has been trading at multi-year lows. I’ll touch upon the nickel market briefly a bit later on.

I’ve had the pleasure of chatting to Jeremy and his team on a number of occasions either by phone or at events.  As I’ve highlighted in previous research notes, it’s a must for me before taking any reasonable position in an investment.

I’m not going to go massively in depth on each of the two projects but I will highlight some key info on both so you gain a high-level understanding. 

Both projects are based in Brazil, Araguaia, the flagship project targeted towards the ferronickel market is most advanced and Vermelho an additional project acquired from VALE which the company intends to target the EV (Electric Vehicle) market.  

Worth noting though that VALE had taken Vermelho to a construction ready stage aiming to run a lower grade higher scale operation so Horizonte have been able to leverage a huge amount of data here and make use of the estimated $200m VALE spent on exploration and development. Horizonte’s plan is to focus on a higher grade smaller scale project, which fits the company strategy better by reducing capex.

I think in time, investors will look back and realise what a master stroke Horizonte played in picking up these two Tier1 assets at the bottom of the market given the mouth-watering returns these projects could enjoy over the next few decades.    

So let’s talk a bit about each project…

Araguaia

Araguaia is 100% owned by Horizonte and is a high grade low cost nickel laterite project. It will be Brazil’s (and probably the world’s) next major producing ferronickel mine.

In 2018 the company delivered a robust DFS which has modelled a two stage operation (something we often see in junior mining projects these days).  Stage 1 is based upon a 52k/t pa ferronickel operation producing 14.5k/t of end nickel.  The Stage 2 expansion, funded from Stage 1 cash flows, doubles the annual tonnage giving around 30k/t pa nickel over a 26 year mine life. Importantly, this means initial capex is capped.

The DFS is modelled on a base case $14k/t Ni price and returns a Stage 2 NPV of $741m, IRR of 23.8% and after tax free cash flow over life of mine of $2.6bn. Capex is $443m.

Now, if you are bullish on nickel over the next decade and onwards (I’ll cover why I am a bit later on) then as I mentioned previously, Araguaia alone will deliver mouth-watering returns.

So what could these returns look like?

The table below shows a few scenarios I have taken from Horizonte’s on-line NPV calculator.  As you go up the nickel price curve you start to appreciate what ‘leveraged to nickel’ means and oh boy, Horizonte are! Remember we are just talking about project 1 here…

Ni Price($US)	NPV8 (Post Tax)($US)	IRR (Post Tax)($US)	FCF LOM (After Capex Payback) ($US)	Capex($US)
12,500 (Today)	459M	18.8%	1.76B	443
14,000 (Base)	741M	23.8%	2.55B	443
16,000	1.115B	29.6%	3.61B	443
18,000 (LT)	1.489B	34.8%	4.67B	443
25,000	2.796B	50%	8.37B	443

Stage 2 Economics assuming reinvestment from Stage 1

So from the table above you can see just how leveraged Araguaia is to the Ni Price.  If you consider that nickel only last year touched $19k/t the project NPV will already be in excess of $1.5B with FCF over LOM of a whopping $4.67B!

Now and this is even more interesting, if nickel were to hit just half of its 2006 high of $50k/t Araguaia would produce an NPV of $2.8B and FCF of $8.37B

We are talking about numbers here that dwarf pretty much any other junior mining resources small cap play you can find especially when you consider initial capex.

Keeping both feet on the ground the long-term nickel price is expected to be around $18-20k over the coming years but even at this level you can see the project offers exceptional returns.

Cracking numbers, where they at…

Over the last 2 years Horizonte have been busy bringing the project to construction ready stage having delivered the DFS and completing all permitting steps including award of the construction license.  

The project is packaged up and ready to go, major achievement over a 5/6 year timeframe. Remarkably, the company valuation today sits at 50% of previous highs but I’ll discuss that in the conclusion.

So the company has now embarked upon the financing stage of the project, a  critical point for the company and investors.  The company has instructed Endeavour Financial renowned mining finance specialists and the project funding is expected to take the form of debt/equity mix circa 60/40

Notably and this is a huge endorsement of the project, Orion Mine Finance agreed to pay Horizonte $25m for a 2.25% royalty on the first 429k tonnes of nickel produced from Araguaia.  This is significant as not only will Orion have done extensive due-diligence but as hinted by the CEO, they could well play a further role in  the financing which you would expect given they’ve just invested $25m in the project.

Lastly it is also worth noting the shareholder register, both Glencore and Teck Resources have significant stakes in Horizonte with Teck interestingly appointing a VP to the Horizonte board.

Vermelho

Up until this point, you’d think based upon the Araguaia project, its exceptional economics  and leveraged returns to nickel that the story ended there, especially if you were looking at the current company valuation and the stage the project is at.

But imagine if the company had picked up another 100% owned tier1 asset, just as big but could actually target the Class1 nickel market (namely nickel sulphate) 

Well enter Vermelho…

Horizonte purchased the Vermelho project in 2017 from VALE, its aim to become a multi-asset nickel company with the potential to diversify.  The purchase was for $8m and is satisfied by an up-front payment, milestone payments and a modest royalty 1% i.e. VALE retain an interest

A question some investors might ask is why did VALE sell Vermelho to Horizonte?  It’s a good question. The answer is a combination of factors. Despite VALE having progressed Vermelho to the DFS stage and taken the decision to commence construction, the project was placed on hold following VALE’s purchase of nickel miner Inco in late 2005, who incidentally had a near identical project already in construction.

The impending financial crisis and subsequent drop in base metals demand/prices left the project on the pipeline and the autoclaves that were already purchased for the construction at Vermelho were subsequently sold to CleanTeq (Robert Friedland backed venture).

Horizonte subsequently approached VALE and closed the deal pretty much as nickel was trading at multi-year lows. For Horizonte it was a scoop as Vermelho is in close proximity to Araguaia in an established mining district benefiting from the synergies between the two projects.

As previously touched upon the beauty of Vermelho is it untaps the Class 1 nickel market namely nickel sulphate and there has been a lot of buzz around this due to EV batteries.  Post acquisition the company ran a test programme which confirmed Vermelho nickel could be ‘up-scaled’ to nickel sulphate with an incredibly low C1 cash cost of just $8k/t.  Bear in mind Class 1 nickel trades at a premium to the LME nickel spot price!

The company completed a revised PFS targeted at running a smaller scale, higher grade operation to produce nickel sulphate using the HPAL process.

The economics from the PFS are just as, if not more impressive than Araguaia and are as follows:

Ni Price($US)	NPV8 (Post Tax)($US)	IRR (Post Tax)($US)	FCF LOM (After Capex Payback) ($US)	Capex($US)
12,500 (Today)	877M	18.4%	4.4B	652
14,000 (Base)	1,262M	22.2%	5.7B	652
16,400	1.722M	26.3%	7.3B	652
18,000 (LT)	2,029M	28.8%	8.36B	652

Scanning around the market looking at other nickel sulphate projects you can quickly see that  Vermelho out performs all of them mainly due to its high grade and very large resource.  In fact if you look at the diagram below from the company presentation, you can see just how significant Vermelho is.

Cracking numbers again, so where they at…

The company published their PFS in 2019 and completed the test work programme confirming a project focused on the production of class 1 nickel.  The next steps are to progress the permitting side and as the company have indicated, likely bring in a project partner given its a larger project with a higher capex requirement. Who knows perhaps Orion will fancy a dabble in Vermelho too?

Whilst the focus of Horizonte to date has been to develop each project in its own right and to follow a different processing route for each, thereby serving different sections of the nickel market, the fact they are within 150km of each other means that the entire area could in theory be developed as one project, with synergies for trucking ore to a centralised processing plant. 

The close proximity gives numerous options which I think is very appealing to any existing major producing mining company that might have a slightly different strategy to that of HZM. 

All strategies are able to dine out on the great infrastructure already present in the region and make HZM a perfect target for a take over. 

So let’s talk a little about Nickel then…

Why Nickel, Why Now?

I’m not going to give a long drawn out account of the nickel market, one because I am not a nickel analyst and two because there are quite a lot of factors at play.

Nickel is what I’d call a very liquid base metal that is very sensitive to macro conditions such as general health of the global economy and supply/demand dynamics.  One needs to be aware of this especially if opting for a leveraged exposure!

So i’ll just highlight some observations I have made that have led to me to decide I want some exposure and exposure that could potentially offer huge upside from a higher risk earlier stage perspective i.e. Horizonte!

Nickel at multi-year lows

They say the cure for low prices is low prices! Well that’s been the case for nickel for a while now but there are signs nickel is turning back up, with new highs in 2018 and 2019 $16k/t and $19k/t respectively.

The 20 year chart below allows for some interesting observations.  

You can see that for the last five years or so nickel has been bobbing a long around the $11-15k area, however in this time period nickel has hit some new higher highs and from my observations this has largely been due to chatter on EV demand back in 2018 and then more significantly Indonesia introducing an export ban late 2019.

Add in to the mix Brexit, Trade Wars and COVID-19 and each rally has been swiftly corrected.

The long-term consensus though is that nickel will be establishing a higher long-term price nearer to $18-20k levels and the recent up-turn in the chart seems to support that but really we have to look at some of the fundamental factors driving this and I’ve highlighted some below.

Note also nickel had previously hit over $50k/t in 2006 prior to the financial crisis and it may not be unrealistic to think that could happen again if we experience a commodities super-cycle some are predicting.

LME Nickel stocks depleting

LME stocks have been dropping progressively over the last couple of years with the first week of October 2019 experiencing the sharpest inventory drop since April 2012!

Supply tightening

In 2017 Indonesia relaxed a ban on unprocessed nickel ore for five years to 2022.  In 2019 the government confirmed the ban was to be brought forward and came into effect at the start of 2020. This is likely related to the record LME drawdown in October 2019 but the ban remains in force further exacerbating supply issues.

To further compound the supply side problems and this in my opinion is significant, UBS research estimates that only 26 of the 41 expected nickel mines either new or re-starts deliver an IRR of 15% even at a long-term nickel price of $20k/t – What does this mean? Nickel price is going to have to increase to incentivise these projects to come back to market  – good news for Horizonte who’s C1 costs sit in the lowest quartile.

Demand increasing

Now add to all of this that the stainless steel sector, a big consumer of nickel is expected to grow 5% YoY and nickel is one of the fastest growing battery metals.  The new generation of EV batteries require around 4x the nickel than its predecessors.  

Class1 nickel especially is going to come under severe demand pressure from EV batteries and you only have to look at the ever increasing number of gigafactories being built and automotive companies mulling off-take agreements to realise what the sheer scale of this could be.

Basically, my logic says if you look at the current nickel price and history, combine this with stock levels, then look at the supply tightening all against the back-drop of significant forward demand, I conclude there is likely only one long term way nickel can go and that’s up! 

As I said before you have to consider nickels sensitivities but to me the fundamentals look good. 

Conclusion

So before I highlight all the fluffy bits and why those invested  could be sitting on significant returns we need to be aware that smaller cap companies in general carry higher risk and that macro-events can dramatically change the land-scape for any investment so don’t be throwing the kitchen sink in, manage your risk !

Now back to business…

So hopefully in this brief research note I’ve helped you understand a bit more about Horizonte Minerals and their world class nickel assets.

As discussed, I personally see a bright future for nickel when you consider the supply/demand dynamics notwithstanding nickel is not trading far from multi-year lows.  The demand driven by the EV sector amongst other green energy applications really could prove to be a perfect storm for nickel.

Back to Horizonte…

When you look around the junior resources space there really aren’t many options for nickel certainly that meet my investment check-list anyway.

I’ve followed the story for a few years now and have been quite amazed at how the company valuation in my opinion has not reflected the delivery and progressive de-risking of the assets.  

The company has fully de-risked one tier 1 asset to financing stage and acquired another tier1 asset that they have increased JORC resource on, produced a robust PFS (backed by significant expenditure and data by VALE) and proven the project can target the premium class 1 nickel market!

I mean let’s think about it, the two projects combined will throw off $13bn in free after capex cash flow (@ $18k/t Ni), that is simply huge for a circa £50m market cap company.  Move up the nickel price scale and the numbers become even more mouth-watering.

There are plenty of reasons I can give why I think the valuation is currently sitting multiples below where it should be i.e. recent market events, sellers forced into redemptions, trade wars etc etc but it becomes pretty much irrelevant if you have a forward view and understand just exactly what Horizonte have!

What I will say though is dilution will be important, the level that Horizonte strike the equity component of the Araguaia finance package at will be key.  I’m personally not concerned and believe  the company will strike this at a significant premium to today’s market  cap in fact my expectation would be well in excess of £100m cap  – the company has signalled this.  

Based on my basic calculations a 40% equity element of the financing package funded at 8p would result in approx 3.65bn total shares in issue.  A 10p per share price post dilution would be a £365m market cap, 20p around £730m not an unrealistic valuation for a company that could throw off £150m pa just on asset 1.  In fact two independent broker notes already have pre-financing 14-21p price targets based on $13.5k and $15k nickel already.

The simple message here is, in my opinion, investors today at the current share price will likely see multiple returns on their investment and in a relatively short time-frame!

The ‘Eureka’ moment should have been in August 2019 when Orion Mine Finance paid $25m up-front for a 2.25% project royalty on just Araguaia.  This company would have exercised extensive due-diligence on the project, market and indeed Horizonte.  There is a distinct possibility they will back their investment up further by participating in the financing side too.

At £50m cap, sporting two tier 1 nickel assets (one construction ready), in what looks likely to be a rising nickel market with production in the sweet spot and diversification across the ferronickel and class1 nickel premium market, backed by a significant mining finance player, Horizonte for me is a stand out investment opportunity

Food for thought…