The commodities sector has shown signs of life in the first quarter of 2016, with upward movement in gold and oil, and mixed signals from copper and the other base metals. More importantly, the willingness of the investment audience to take notice appears to have revived, and that’s sparking the question: what’s next?
Seasoned investors will know that Horizonte has been around a while, but having said that it’s certainly not one of those companies that’s been treading water while the worst of the bear market excesses rage.
On the contrary, an active and experienced management team, headed up by chief executive Jeremy Martin, has been out there cutting deals, most recently with Glencore (LON:GLEN) no less, and expanding the company’s key nickel resource in Brazil in a transformational way.
The play on Horizonte was always about more than just the quality of its Araguaia nickel project. It was about its central location in what’s likely to emerge as a new nickel district in Brazil’s northern Pará state.
Thus Glencore’s asset to the north, in earlier times held by Xstrata, was always of keen interest to the company. And when Glencore’s ineffable rise stalled and the company began to take stock of some of its underutilised assets, Horizonte stepped up to the plate in regard to the Pará state nickel assets.
In a remarkable turn of events, Horizonte sat down with Glencore and managed to secure the acquisition of the Glencore asset for a down-payment of a mere US$2 mln in Horizonte shares.
The total acquisition cost will, in time amount to some US$8 mln, but that’s dwarfed by the US$75 to 80 mln that’s already been spent on it, and indeed a significant valuation was applied to the project at the time of the Xstrata-Glencore transaction.
It was a transformational deal, and one that Jeremy Martin remains very pleased with.
It’s just a shame that in the six months that’s passed since the deal was done the nickel price has dropped from over US$4.50 per pound to well under US$4.00.
But these are historically low levels, not seen in over ten years. Martin reckons an uptick is due, maybe not next week, but probably by the end of the year, and when it comes, it could dovetail very nicely with the next set of developments on the ground at Araguaia.
Two major news items are coming up. The first is that the company expects its preliminary environmental license – the key license – to come in by the middle of this year.
And the second is that updated work on the economics at Araguaia to take into account the full effects of the Glencore acquisition and the new economic environment in which Horizonte is working, should also be ready soon.
The anticipated pre-feasibility study will be something of a balancing act. There’s that lower nickel price to take account of for a start. But there’s also likely to be a substantial drop in input costs from earlier estimates, as leaner times have meant that contractors have become more competitive on pricing and the oil price has also dropped.
It remains to be seen exactly what sort of economies of scale can be reaped from the Glencore acquisition, but it’s worth noting that at the time of the deal the company informed the market that it was creating the world’s largest nickel saprolite project in terms of size and grade.
Martin emphasises the grade aspect in particular.
“We will be producing nickel at 1.9% over 10 years,” he says. “Australian projects average 1.1%. In Africa it’s between 0.8% and 1%.” Horizonte’s numbers even compete with Tier-1 assets in Brazil and New Caledonia.
“And bear in mind,” continues Martin, “that every 0.1% of nickel puts significant value ontothe NPV.”
We are talking big numbers here, and big upside. And it’s all for Horizonte - remarkably, Glencore kept no back-in right or royalty on Araguaia, and the resource is otherwise completely clean.
That presents a real opportunity. Horizonte is about as close as you can get to a pure proxy for the nickel price, and given that almost 80% of the world’s producers are likely to be underwater at the current price, an upward move is surely in the offing.
Given the positive newsflow that looks likely to come out of the company in the next few months, it looks like shareholders could be in for a very interesting time.