The future of many junior miners has become rather less clear over the last few weeks in the face of falling commodity prices and uncertainty around when investor demand, cash, and liquidity will return to the market. However, Brazil-focused nickel player Horizonte Minerals (LSE:HZM) could present an exception to this trend.
Horizonte’s flagship asset is Araguaia, a tier-one ferronickel mining project located south of the Carajas mining district in north-east Brazil’s Para state. A stage two expansion case devised in a 2018 feasibility study gave the property a 26-year mine life, generating cash flows after tax of $2.6 billion with a $741 million net present value and a 23.8% internal rate of return. The company is also developing the Vermelho nickel-cobalt project in Brazil, which it plans to use to supply nickel and cobalt to the electric vehicle battery market.
The first critical ace in the hole for Horizonte is its funding situation. Although construction on Araguaia is ready to begin – it had not commenced before the Covid-19 outbreak was deemed a pandemic. This means the company will not have to spend cash on continuing or halting production during the outbreak either for financial or health and safety reasons. Handily, this leaves the company fully-funded for the rest of the year. This is an enviable position that few junior miners can currently boast.
It is also worth noting that Horizonte recently announced that it remains committed to progressing discussions around financing Araguaia’s ultimate construction into a mine in spite of the Covid-19 outbreak. It got the ball rolling here last August, when it revealed a $25 million royalty funding agreement for the property with Orion Mine Finance – one of the world’s most prominent mining investors.
Macro forces
Elsewhere, Horizonte is positioned strongly from a macro perspective. Putting aside recent market events for one moment, the firm plans to supply nickel to both the electric vehicle (“EVs”) and stainless-steel industries from its two projects. These are two huge sector opportunities. JP Morgan sees EVs accounting for 30% of global vehicle sales in 2025 compared to 1% in 2016. Meanwhile, the global stainless steel market is forecast to grow at a 6.3% CAGR through to 2027 and looks set to benefit from stimulus packages directed at construction materials.
Returning to the present day, it is no secret that the world has faced an unprecedented selloff in recent weeks. However, central banks are now stepping in to add massive liquidity and shore up shaky markets. The US Federal Reserve has announced what it called an “unlimited” buy up of mortgage-backed securities and corporate debt, the Bank of England has slashed interest rates to 0.1%, and the European Central Bank has announced plans to buy up to 750 million euros in government and private sector debt, as well as commercial paper, by the end of 2020.
With this anchor in place, things look much more encouraging for the nickel market over the long-term – the timeframe of most interest to Horizonte. For example, Wood MacKenzie recently noted that while Covid-19 is having a severe near-term impact on nickel prices, there will be little to no impact in the longer term. As such, the analyst firm has maintained its long-term view on nickel.
This is highly encouraging for Horizonte, which based its economics for Araguaia around a nickel price of $14,000 per tonne. This looked conservative in October, when the metal was trading at $18,000 a tonne. Using this figure in the stage 2 expansion case would have increased the project’s NPV(8) to $1.48 billion from $741 million, and its internal rate of return to 34.8% from 23.8%. Once commodities and nickel start to rebound, then this upside will once again become a serious possibility.
A strong position
The market situation now heavily favours juniors with little to no debt, which is where Horizonte stands out among its peers. Alongside this, a lack of ongoing cash burn at the construction-ready phase puts the firm in prime position to make the best gains when lockdown procedures come to a close and markets skyrocket as manufacturing and production spins back up again.
Author: Mark Sheridan
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