Big Nickel...Serious Gold

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It may be many a junior exploration company’s ambition to one day grow into a world-class player. But whilst few stand any real prospect of this happening, Horizonte Minerals, a Brazil-focused nickel and gold mining explorer, could well have what it takes!

Horizonte has strong strategic partners, supportive shareholders, and a major (and expanding) top class nickel project that is expected to be low-cost to mine and process. As a diversified business it also has advancing gold mining interests; all located within a low-risk operating environment with excellent infrastructure and robust growth.

Very early in its development Horizonte’s management team’s strong track record won it the backing of not just one but two major mining companies. These have become partners in its Brazilian projects, and the company also has further support from some heavy-weight investors. The mining partnerships are with Canada’s giant Teck Resources and South Africa’s AngloGold Ashanti and substantial investors include Teck and the very canny London-based minerals royalties group Anglo Pacific.

There are very good reasons for Teck’s close interest in Horizonte: Rationalising its operations after the Global Financial Crisis, Teck designated its Brazilian TeckCominco subsidiary with its world-class Araguaia nickel laterite project as non-core and sold it to Horizonte in 2010. The transaction was effected via a reverse take-over in which Teck took a stake and now holds 44% of Horizonte’s equity. No one likes having to sell at the bottom, and for Teck at the time the decision to divest itself of such a prospective asset must have been a rather painful one. But through Horizonte’s stewardship Araguaia continues to advance with strength and Teck still retains a key strategic interest. Jeremy Martin, Horizonte’s CEO, called the deal “transformational”, and with some justification since it has enabled Horizonte to join Araguaia to its own nearby Lontra nickel prospect forming a giant 100%-owned flagship project of substantial scale.

Until then Horizonte was equally focused on gold mining, having set up Joint Ventures (JV’s) with AngloGold Ashanti and Australian listed Troy Resources. Although another JV with AngloGold has since been added, there is a logical thought process that could, at some future point, see its gold operations hived off into a separate vehicle, with Horizonte retaining a strategic interest, thus allowing the main company to remain purely focused on nickel operations.

For Horizonte, nickel dominates its portfolio and prospects look excellent with price forecasts to continuing to rise. The big buyers are of course the Chinese stainless steel manufacturers so the price is closely correlated with its economic cycles. But demand is expected to hold up and prices to stay well above the USA$7,000 per tonne cost Jeremy Martin envisages for Araguaia.

Following “exceptional” progress at Araguaia last year, Mr Martin has a “clear development path” and is working to a timetable of a Bankable Feasibility Study (BFS) in 2013 and production by 2016. Horizonte had as many as seven rigs active in 2011, drilling 13,204 metres and advancing the project to a stage that puts it in the upper quartile globally on grades and size. The newly-defined estimate is for an indicated and inferred resource at just over 100 million tonnes grading 1.29% nickel, with high-grade zones totalling 24 million at 1.6%. That size is important as it meets the criteria for profitable economies of scale.

Within the next few months a Preliminary Economic Assessment is expected to be ready and will, according to stock broking firm finnCap, provide an unrisked valuation, “at a substantial multiple of the company’s current market capitalisation.” Even on a highly conservative basis, with a 70% risk discount, finnCap comes up with a sum-of-the parts valuation of 24.4p a share on the basis of Araguaia alone.

Add in the two gold mining projects on which Horizonte is working with JV partner AngloGold, and finnCap moves the valuation up another 4.4p. The bottom line is, including 2011 year-end cash, a target of over 30p a share. Before the risk discount, the figure is as high as 87p!So it is with some justification that Mr Martin maintains that the market does not yet recognise Horizonte’s substantial asset base. Comparing the company to other nickel laterite groups, he points out that, whereas Horizonte’s market value is US$0.02 per lb contained nickel in situ, Mindoro Resources in the Philippines, with a resource of only 30.7 million tonnes and grading 1.09%, is put at AU$ 0.04 per lb. Arguably   Horizonte’s closest peer is TSX-listed Anfield Nickel comments finnCap, whose project in Guatemala has a market value of US$0.07 per lb. “We believe that Horizonte will be valued at the same US$0.07 cents per lb metric or higher during the Preliminary Economic Assessment phase,” the broker adds.

Another comparison underlining Horizonte’s undervaluation is the vast gap between that US$0.02 in situ figure and prices paid in nickel deals. Jeremy Martin names some that even in the dire days of nickel a couple of years ago at US$5,000, saw values of US$1.67 (Sherrit’s acquisition of 40% of Ambatovy) and US$0.23 (Vale’s purchase of Canico’s Onca Puma project).

This year Jeremy Martin is promising “good news flow” on the gold portfolio as well as nickel. So, there are likely to be more quantum leaps in the value accumulating here for investors.