On Monday, Horizonte Minerals (LSE:HZM) bought a ready-made Brazilian nickel-cobalt project expected to contain more than one million tonnes of nickel for a cash payment of just $2m. The Vermelho project offers Horizonte an additional 46,000 tonnes of nickel production a year, at a time when the price of the metal is rocketing due to growing demand from the electric car market. But, despite the potentially positive impact of the purchase, markets were left unfazed by the news, with the shares initially only trading at c.4p. On Thursday the market started to wake up, as the stock price jumped by an additional 14.8pc to 4.6p, but we still believe investors are failing to fully appreciate the deal’s value, offering shrewd punters the perfect opportunity to enter the stock.
The deal will see Horizonte purchase 100pc of the advanced Vermelho nickel-cobalt project in Brazil from mining giant for an initial $2m in cash. This will be split between a $150,000 initial payment upon signing and another $1.85m on the second anniversary of the deal.
The rest of the balance will be paid following the first commercial sale of metal from the site and will come from an £8.5m fundraise, which is also being used to pay for a preliminary economic assessment at the project. This assessment is likely to focus on possible synergies between the site and Horizonte’s planned Araguaia site, which is based just 85km away.
Vermelho is located south of Carajas, an established mining region with plenty of infrastructure in place such as rail, roads, and hydro-electric power. The project was developed by Vale with the view to becoming its principal nickel-cobalt operation, but was mothballed when the price of nickel collapsed in 2006.
Prior to mothballing, Vale took out extensive work on the project including drilling programmes totalling 152,000 metres, full-scale pilot test work and detailed engineering studies. Following a feasibility study, the project was approved by Vale in 2005 with annual production capacity of 46,000 tonnes of nickel and 2,500 tonnes of cobalt.
The project is also said to have over 1 million tonnes of contained nickel and 43,000 tonnes of contained cobalt. As part of the deal, Horizonte will also acquire Vale’s mining licence for the project for an area covering 2,000 hectares.
We covered Horizonte last month on ValueTheMarkets. The fundamentals of the company were already looking highly promising. However, the addition of Vermelho appears to have bolstered the case for owning shares significantly. From the perspective of investors the deal terms, which Horizonte has secured, reflect Vale’s eagerness appear to be completely risk free. With project funding still relatively tight across the mining sector, Vale’s decision to sell could prove to be an indicator of the kind of management thinking that marks a bottom in the market. If Horizonte chooses not to take the site to production then investors will not have to pay the remaining balance of the transaction, However, if the company does manage to commercialise Vermelho then the upside could be enormous
Getting your Nickelback
Perhaps the most exciting element of the deal is the nickel bull market, which has begun to emerge this year and is expected to continue into the next decade. Over the last six months, prices of the metal have risen from around $4/lb to nearly $5.5/lb.
This rise has resulted partly from a strong demand for stainless steel – which uses nickel as an alloy. But perhaps the most promising area for nickel is the expectation of a huge growth in demand from the electric vehicle market.
Interest in electric vehicles has seen a huge uptick this year due to increased backing by major manufacturers and governments around the world. Lithium Nickel Manganese Cobalt Oxide (NMC) batteries are widely expected to be the dominant battery chemistry, and – luckily for Horizonte – they have a nickel content of between 60 and 80% as well as using cobalt.
NMC batteries are preferred over those with higher cobalt content because they are cheaper and also provide a higher longer range. While prices are some way off their peak, with the electric car market expected to mature in 2020, some predict that nickel demand may jump by as much as 35pc – or 700kt – by 2025.
Indeed, in a recent presentation, mining giant Glencore concluded that ‘The energy and mobility transformation currently underway is forecast to unlock material new sources of demand for enabling underlying commodities including copper, nickel and cobalt.’
What does this mean?
The 2016 pre-feasibility study for Horizonte’s other main site, Araguaia, is impressive even when applying the conservative base case nickel price of $12,000/t (per tonne).
At this level, the project throws off $1.3 billion in free cash flow over life of mine (LOM) with a net present value (NPV) of $328 million. At $14,000/t Nickel the project generates $1.9 billion free cash and an NPV of $581 million. This is particularly exciting for the company given that UBS have forecast the Nickel price to be $14,330/t as soon as 2018.
With Vermelho containing more than one million tonnes of nickel, the firm’s prospects have become even shinier this week. At a nickel price of $14,330/t the site could bring in more than $1.4bn (£1.1bn) to the company before subtracting the costs of getting the metal out of the ground.
This figure, combined with the potential at Araguaia, dwarves Horizonte’s current £53.32m market cap, and suggests bright prospects for the future.
A mining oak tree in the making?
Horizonte is a small cap business with large cap prospects. Indeed, it enjoys the backing of aforementioned mining giant Glencore, which is unheard of for a firm whose market cap barely pushes the £50m barrier. Many could interpret this as a sign that Glencore would like to work with Horizonte further in the future.
Monday’s deal gives the business access to huge supplies of two metals, which are expected to be the biggest beneficiaries of the burgeoning electric car movement. Planned construction developments at Horizonte’s fellow Araguaia site next year only look set to extend this further.
As the 14.8pc share price jump on Thursday showed, opportunities to buy Horizonte at under 5p could soon cease to exist. Get in while you can.
The author of this piece does not own shares in any of the companies covered in this article.