Written by @rapidDave_uk
It’s been an exciting week for metals so far as LME Week 2017 kicked off in London, where participants were in high spirits at the potential of electric vehicles, bull markets & super cycles! Nickel was particularly popular and touted by many as the potential star performer of 2018. This was reflected Tuesday in the spot price as Nickel closed 6.4% higher at $12,377. For shareholders of Horizonte Minerals (LSE:HZM) this all looks very promising indeed.
Before looking at the Horizonte story, let’s first consider the market backdrop. Nickel made further gains this week and at the time of writing is sitting at ~$12,700, a level not seen since 2015. Monday’s comments from Dr Guy Wolf, Global Head of Market Analytics at Marex Spectron, that “Nickel responds aggressively to super cycles in either direction” suggests that, with Nickel coming off the bottom of the market in recent months, traders may be looking back to the 2002-2007 bull market that saw Nickel reach highs of over $50,000. Dr Wolf also compared the current Nickel market rally that we have seen so far to the beginnings of the 2002 bull market.
Driving this renewed market interest has been the rise of the electric vehicle. Electric vehicles have been the talk of the town for months and the pace of adoption by major manufacturers and governments around the world has increased significantly this year. Lithium Nickel Manganese Cobalt Oxide (NMC) batteries are widely expected to be the dominant battery chemistry with Nickel content of between 60-80%. NMC batteries are prefered over those with higher cobalt content because they are cheaper and also provide a higher energy density / longer range. A win win scenario.
So is it possible that Nickel revisits some of the highs of the last few years?
Quite possibly. One thing many investors are familiar with is the principal of reverting to mean and looking at the 10 year Nickel chart we can see the mean price is still up around the $19,000/t level.
Nickel 10 Year Mean Price
While this $19,000 level may seem far out, it does seem to coincide with some price forecasts for 2020 when the electric vehicle market is expected to mature and therefore consume more Nickel. Some forecasters are predicting there might be as much as 700kt additional Nickel demand by 2025. To put that in context that is 35% of the current 2 million tonnes per annum Nickel market.
This naturally leads us to seek opportunities in the Nickel space and on the London market one company shines brighter than the rest, Horizonte Minerals.
Horizonte is an interesting story and one that is becoming more visible to investors as the Nickel price rises. The story begins with its Tier 1 Araguaia ferro-nickel project in the northern state of Para, Brazil, where it is fast approaching delivery of the bankable feasibility study (due quarter 1 2018) that is targeting some very robust numbers. The story continues with resource and capacity expansion before heading towards a potentially significant value add from a tailings operation to supply the battery markets direct with Nickel and Cobalt. Where does the story end? Some might say with merger & acquisition activity – this author at least, would agree.
In a recent interview Jeremy Martin, CEO of Horzionte, said:
“At that valuation of 4p we’re trading at around 1.5¢ -2¢ per pound of Nickel in the ground which is a very low range. The last big Nickel transaction which was very similar to our project, same type of deposit, same jurisdiction. That was taken through the feasibility study, where we will be Q1 next year and that was acquired for $850m which valued that at 25¢ [per lb of Nickel in the ground]”
The 2016 pre-feasibility study (PFS) for Araguaia delivers robust economics even when applying the conservative base case Nickel price of $12,000/t 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. If we move up the scale a little to $14,000/t Nickel then we’re looking at $1.9 billion free cash and an NPV of $581 million.
It’s worth noting that UBS have forecast the Nickel price to be $14,330/t as soon as 2018 and with a 9%+ uplift in prices this week so far that forecast looks very achievable. These numbers and others mentioned in this article can be found in the company presentation along with a forecast for Nickel at $18,000/t which yields a eye watering project NPV of $1.08 billion. Forecasts out towards 2020 are eying prices around $19,000.
The company has indicated its expectation to be able to double the mine life and also considers the possibility of increasing the annual mine output beyond the 14.5kt of ferro-nickel product as indicated in the PFS. I assume the later would be dependant on the prevailing market outlook but the doubling of the mine life may just be a matter of course as only a fraction of the total measured and indicated resource was included in the PFS.
September saw additional resources announced containing an estimate 233,200t Nickel and 25,580t Cobalt that could form the basis of a secondary project to produce hydroxides from Limonite ore tailings suitable for supplying the battery markets directly. An interesting point to note is that all mining costs associated with creating the tailings dumps are covered in the PFS but no economic value has been attributed to this additional metal. At today’s prices ($12,700/t Nickel and $64,499/t Cobalt) these quantities of metal may sell for an estimated $4.5 billion. Even applying an arbitrary, albeit unjustified, 90% discount rate results in an impressive residual value of $450 million. Use of existing infrastructure and no upfront mining costs may result in a low cost, high margin, expandable operation. Partnering with an industry expert may provide a fast track to development of these resources and will be subject to further economic studies.
There has been very little spending on new Nickel projects over the last few years and the question of how to meet the forecast demand now comes into focus. New mines are needed and only those that are imminently development ready will come online within the next few years when demand spikes. 2018 will see Nickel in its third year of structural deficit and I expect that Tier 1 producers will already be looking around for development ready Tier 1 assets to bolster their reserves.
It is therefore no surprise to see Glencore (LSE:GLEN) and Teck Resources as strategic investors holding significant positions on Horizontes share register alongside the likes of JP Morgan, Hargreave Hale, Lombard Odier and Richard Griffiths.
Interested readers may wish to dig further into the history of the acquisition of adjacent licences from Glencore Xstrata that resulted in the Araguaia project becoming one of the largest, highest grade laterite deposits globally.
An investor fact sheet provided by the company can be found on the website or via this direct link here. At 4.29p a share, last seen, Horizonte is worth £50million. With the quality of its asset, Nickel’s developing bull market and the potential for significant operational progress over the coming 12 months the future is looking bright for this company and its shareholders.
Disclaimer: The author @rapidDave_uk holds one or more investments / positions in one or more of the companies / commodities mentioned and therefore this note cannot be viewed as independent research. This note does not constitute investment advice or a recommendation to buy or sell or otherwise engage in any related activity / action with regard to any company or commodity mentioned or any other entity. All information is provided for entertainment purposes only and may be incorrect or outdated.