With major news looming, is nickel player Horizonte Minerals worth a look on recent weakness?
Despite strong newsflow, this year has seen shares in Brazil-focused nickel developer Horizonte Minerals steadily drift below highs of more than 5p hit last December following a major acquisition. With the outlook for nickel strengthening and the delivery of a key feasibility study expected next month, we ask whether Horizonte’s potential could present a buying opportunity at its current 3.6p share price.
What is it?
Horizonte’s flagship asset is the Araguaia nickel laterite project located near the Carajas mineral district, where production is slated for early 2021. The firm plans to develop Araguaia as Brazil’s next major nickel mine and claims its nickel is compatible with both the traditional stainless-steel market and the growing electric vehicle (EV) battery metal space.
Horizonte is completing a feasibility study on the project designed around an open mining pit operation targeting 900,000 tonnes of ore per annum. It expects this to produce 14,500ts of nickel a year contained in 52,000ts of ferronickel that, according to a 2016 pre-feasibility study, could generate free cash flow of more than $1bn over a 28-year mine life.
The business is also the owner of the Vermelho project in Brazil, which it describes as one of the largest, highest-grade undeveloped laterite nickel-cobalt resources globally. The site, which it bought from mining major Vale in December last year for $2m, contains a measured and indicated resource of 167.8MMts estimated to house 1.68MMts of nickel and 94,000ts of cobalt.
What has been happening?
Following its purchase of Vermelho, Horizonte’s focus has mostly shifted back to Araguaia this year. The company has passed several necessary stages in the delivery of its feasibility study for the site, which it plans to deliver next month.
In February, the firm announced that it had completed a trial excavation at Araguaia, with a test pit confirming the site’s mining technique, slope stability, and grade profiles. Based on these results, it is now updating the project’s mineral reserve estimate with the aim of converting a portion of its current reserve from the probable category to proven.
Following this, Horizonte received a final water permit for industrial water consumption at Araguaia in April, further de-risking the site by ensuring it will have enough water to operate continuously. Finally, in June, it completed an aero survey on the project covering the route of the power line into the project.
Why focus on the nickel market?
It would be remiss to discuss the Horizonte investment case without mentioning the outlook for the nickel market. Indeed, it is likely that this has driven many retail investors towards the firm over recent years.
As it stands, the business’s two chief focuses here are stainless steel and batteries. Stainless steel, which chiefly uses ferronickel, currently makes up two-thirds of total nickel demand. However, this is expected to continue rising after a lift in 2017 thanks to under-investment over recent years.
Meanwhile, the amount of nickel used in the battery market is also poised to soar thanks to nickel sulfate now being a major component in most EV batteries. With BP predicting that the number of EVs on the world’s roads is set to rise from 3m today to over 320m by 2040, the percentage of nickel used in the battery market could end up far outstripping its current 3pc.
Thanks to these forecasts, demand growth for nickel is increasingly outstripping supply growth, with analysts expecting a global market deficit of 88,000ts by the end of this year, up from 72,000ts in 2017. In line with this, prices of the metal are also soaring. They rose by 18pc in the first half of 2018 to around $14,823/t, and analysts at Wood Mackenzie expect long-term prices to reach as much as $22,000/t.
Where will share go now?
Horizonte started 2018 at a strong 4.9p off the back of the Vermelho acquisition. However, the company has repeatedly drifted this year and currently sits at 3.7p with a market cap of £52.7m.
As well as having substantial exposure to potential long-term growth in the nickel market, Horizonte had £8.9m of cash in June and has also secured strong institutional backing. With this in mind, its decline can perhaps be put down to an absence of blockbuster newsflow after the Vermelho deal led shares to reach multi-year highs.
But make no mistake, Horizonte appears to be gearing up for a potentially exciting period for news. As mentioned, the business is currently completing its feasibility study at Araguaia, which it plans to deliver next month. If successful this could secure the site’s vast resource, potentially adding huge amounts of value for the company.
A second potential catalyst is the next phase of work at Vermelho, which will see Horizonte continue Vale’s work to determine whether the site can produce nickel and cobalt sulphate for the EV battery market. If it can, then this will be another string to the firm’s bow, giving it even more exposure to potential growth in the nickel market.
As with all young resource players, Horizonte’s success is contingent on numerous deliverables. If Araguaia’s feasibility study misses the mark, Vermelho’s product cannot feed the EV market, or even if nickel prices tank, then it will not be good for the company’s outlook. In these cases, with a market cap of £52.7m against a cash balance of around £8.9m, it could have further to fall.
However, for many investors, these points are unlikely to overshadow the positives that Horizonte has going for it. It is a cashed-up business with two large prospective projects operating in an exciting potential growth market with plenty of news flow on the horizon. If all this piques your interest, then the weakness in the firm’s shares this year could present a decent buying opportunity ahead of next month’s slated feasibility study release.