5 Reasons to put Horizonte Minerals #HZM on your Watchlist

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5 Reasons to put Horizonte Minerals #HZM on your Watchlist

The content of this blog / podcast (or content associated with it) is not intended as investment advice. I hold a position in Horizonte Minerals. Please do you own research.


Share Price: 2.5p
Market Cap: £29m
Shares in Issue: 1171m



Horizonte Minerals #HZM is an AIM and TSX-listed nickel development company focused in Brazil, which wholly owns the advanced Araguaia nickel laterite project located to the south of the Carajas mineral district of northern Brazil.

The Company is developing Araguaia as the next major nickel mine in Brazil, with targeted production by 2019/20.

To hear my most recent interview with CEO Jeremy Martin click here

My strategy, when researching small cap companies, is it to find those that have the genuine potential, over the medium to long term, to become a ten bagger. I put Horizonte Minerals in this category, for the reasons below:

5 Reasons to put Horizonte Minerals #HZM on your Watchlist

Horizonte Minerals has one of the largest and highest grade undeveloped nickel saprolite resources in the world. It has the potential to be a tier 1 asset.

Tier 1 is defined as a large, expandable, long life (>20 years) mine with favourable mineralogy and geographic location and in the lower half of the cost curve.

The project can be split into two areas:

Araguaia North – Glencore Araguaia Project (GAP)

Araguaia South – Horizontal Minerals Araguaia Project (HZMA)

The Economics of the project

According to their Pre-Feasibility Study, published on 3rd October 2016, this project is expected to generate:

$1.3 billion in free cash flow over the 28 year life of the mine (LOM) with nickel prices at US$12,000 per tonne. That’s $46.4m every year for 28 years.

$1.9bn of free cash flow over the LOM with nickel prices at US$14,000 per tonne. That’s $67m every year for 28 years.

Remember this is free cash flow, so that’s around $80m of profit a year and Horizonte Minerals’ Market Capitalisation is currently below £30m.

Other Points

There’s potential to double the life of the mine.

Their Pre-Feasibility Study also showed their project to on the lower range of the global cost curve with C1 cash costs of $3.15 per pound or S$6,944 per tonne of Nickel and they breakeven at $9,426 per tonne.

(see point 5 below for more on Nickel prices).

 

There are very few (if any) AIM companies, of a similar size, or profile, to Horizonte Minerals that possess such big institutional shareholders on it’s register:

 

($308 bn mcap) hold 98,394,838 shares or 8.4%

 

(£41 bn mcap) hold 74,507,195 shares or 6.4%

 

Teck Resources ($20bn mcap)  Canada’s largest mining company – hold 210,207,179 shares or 17.9%

 


Henderson (£2.7bn mcap) hold 165,376,242 shares or 14.1%

Plus:

Richard Griffiths (Chairman or ORA) holds 169,414,049 shares or 14.5%
Hargreave Hale hold 75,000,000 shares or 6.4%
City Financial 65,333,333 shares or 5.6%

With these type of connections, you could argue that accessing funding, for the project, shouldn’t be an issue.

44.1% of the shares are held by significant shareholders ie holding more than 3% of the companies outstanding shares.

 

In November 2016, Horizonte raised £9m by way of a placing at 2p per share. Net proceeds are to be used to fund the definitive feasibility study for Araguaia and for general working capital purposes.

In their interims for the 6 months to 30 June 2016 they also had £1.6m in cash.

So they have enough cash to take them through to complete their Definitive Feasability Study this year, which will significantly de-risk the project.

 

There’s plenty of news flow, starting this quarter:

Q1 – Feasability Study Tender Process

On 19th December 2016 Horizonte announced the issuance of a request for proposals to engage consulting firms to prepare a definitive Feasibility Study.

The tender process will close in January 2017 and successful groups will be announced and commence work in February 2017.

Q2 – Q3 – Work on Feasability Study & Licence Permitting

The selected firm, from the tender process, will be working on the feasability study and Horizonte will also apply for their installation licence in order to start construction of the mine.

Q4  – Full Feasability to be Completed and Award of Construction Licence.

The commecial production of nickel isn’t expected to commence until 2020. This may seem a long way off but the project will be fully de-risked by then.  If the 2017 milestones are achieved, then their share price should be a lot further north than it is currently. In other words, now is the time to start your research on Horizonte Minerals.

 

Currently at $10,287 per tonne, nickel is bumping along the bottom at multi-year lows. In Q1 of 2016 nickel hit a 13 year low of US$7,550. Prices have since increased but in 2007 nickel reached an intra day record of $54,050.

Nickel industry C1 cost demonstrates that 50% of operations produce at US$9,873/tonne (Horizonte’s C1 cost is $6,944/t) which means around 40 to 50% of global operations are subeconomic today. This isn’t sustainable.

Global demand for nickel has grown at an average of 6.3% since 2010 and it’s estimated to have grown between 2.4 – 4.4% in 2016. The market returned to balance in Q4 2015 and showed around 80,000 tonne deficit at end of 2016.

According to Mining Weekly refined nickel prices will remain under pressure in the coming weeks but expects the current sell off to ease by the second quarter, making way for modest gradual increases for the rest of the year.

Nickel prices softening, in the short to medium term, isn’t a bad thing for Horizonte, it will probably mean fewer operations coming online and more shutting down or reducing their investment in current mines. Remember Horizonte aren’t expected to start producing until 2020.

Price Predictions:

Morgan Stanley: had nickel as its “most preferred metal” in 2016 and forecast it’s long term price at US$16,775.

UBS: “Nickel one of our most-preferred commodity exposures” and they forecast it to be at US$13,228 in 2018 and at US$19,621 by 2020.

Wood Mckenzie: “The optimistically resurgent Chinese stainless market has led to an increase in our world nickel demand forecasts, with 8% growth now expected in 2016, to 1.99Mt, and the total rising to 2.25Mt in 2025”

 

Horizonte Minerals have a tier 1 nickel asset, on the lower range of the global cost curve. They have backing from some of the biggest and most experienced shareholders available and possess the cash to take this project through to it’s next major milestone, the definitive feasbility study.

The nickel market is now in supply deficit and so it’s price is expected to rise over the next 3 years, just at the time when their mine comes online. Currently Horizonte’s market capitalisation is below £30m and yet this project is set to deliver, on average, $80m of profit every year for 28 years, even if nickel prices stay around $14,000 per tonne, which seems a relatively conservative prediction.

 

Other Points of Interest

Share Price

(click to enlarge)

Technically, the share price looks to be in a good place. It’s in an uptrend, being above the 200ma with all the other moving averages starting to head in the right direction.

There maybe some short term weakness and so an opportunity to pick the shares up at a lower level due to the moving average convergence divergence rolling over and the RSI heading south. In order to capture this potential opportunity, I also have a limit order in 2.25p.

I would be surprised if the share price went below 2p again. As this was the price of the placing, it provides good fundamental support and as you can see on the chart above, good technical support.

On the upside, there’s some resistance at 3p. In the last 10 months, it’s made 3 attempts to get above this level but failed. Should it close the day above this level, then we should expect to see it break out of this 2p – 3p range and move higher.

Management

Jeremy Martin – CEO

I’ve interviewed Jeremy four times and I have to say I’m impressed both by his knowledge and professionalism. He is honest and fully aware the project he is in charge of running has massive potential but tempers his enthusiasm appropriately to the point where I believe he is almost overly conservative.

Jeremy holds a degree in Mining Geology from the Camborne School of Mines, and a Master’s Degree in mineral exploration from the University of Leicester. He has served on a number of public company boards and is a member of the Society of Economic Geologists and the Institute of Mining Analysts.

 

Brazil

Over the past 24 months Brazil has had it’s fair shair of problems, from a deep recession (the biggest in 100 years) to a presidential impeachment, to a corruption scandal ensnaring the political and corporate elite but it now seems they are turning the page on a particularly bad chapter of their history.

It’s the 9th largest economy in the world, had the 3rd best performing stock market in 2016 (up 81%) and it’s currency was the 2nd best performer (up 21%).

There been $64 billion in new infrastructure investments announced by federal government since June 2015 with China expected to invest more than US$50 billion.

The IMF says “confidence in the Brazilian economy is slowly reawakening” and forecasts positive growth in 2017 and elts be honest some of the best recoveries happen after major recessions.

To view Horizonte Mineral’s recent Investor Presentation click here
The content of this blog  / podcast (or content associated with it) is not intended as investment advice and people featured may hold positions in the companies they talk about. Please do you own research.

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