In December 2009 we invited our readers to picture the scene of Jeremy Martin, Chief Executive of Horizonte Minerals (LON:HZM) who, after successful development of the Horizonte business, had yet to see all his work and effort properly reflect in the share price. At the time, the share price, was languishing at just 7.25p.
Fast forward nine months, and Mr Martin's workload since has been quite frenetic and to some degree, the effort has paid off with the share price now around 14p, around 100% increase in the period.
But, if one looks at the activities of the company, and the value that has been created, there is a very big question mark over whether even the company's current valuation properly reflects that value.
As Isaac Newton stated, 'If I have seen far, it is by standing on the shoulders of giants'. For Isaac Newton, this quote paid tribute to the brilliance of his scientific predecessors, however this quote could just as easily by correlated with the situation created by some of the more successful explorers around today.
Take the case of Horizonte, who have used their technical skills, capability and flexibility on the ground, to identify some of the best gold and base metal projects in Latin America. This in itself is something the larger mining firms struggle to do and where they often look to acquisition or partnership in the junior environment to complement their in-house resources.
Majors rumble loudly and deals will usually happen (or not) in accord with their own extended timescales. Large size can often result in a certain amount of corporate sluggishness. However a junior with keen entrepreneurial management can often move fast and stealthily, using its relative size to its advantage.
Having identified and secured the right projects, Horizonte have leveraged this position by aligning itself with powerful partners, giants if you will, to help turn those prospective parcels of land into something altogether more valuable. That is standing on the shoulder of giants – in exploration terms - and that is why it's time to take a closer look at Horizonte!
So, here we go. Below we have a story of Big Nickel and Big Gold, as covered in our recent MiningMaven article.
Readers will recall on the 27th July 2010 Horizonte announced the acquisition of 100% of Teck Cominco Brasil SA in what amounted to a reverse takeover of Horizonte Minerals.
The magnitude of this 'partner' can be seen if you review the Teck website and realise this is a Canadian headquartered business with a current market capitalisation of some C$25 billion. So you can see what we mean by standing on the shoulders of giants!
Now you have probably heard the phrase, 'follow the money' in terms of an investment principle. Well in exploration the 'money' can be replaced with the term 'major'.
The majors may be bigger slower beasts, but their prudence and internal process means that deals like this do not happen very often - or overnight. In exchange for transferring in the assets of Teck Cominco Brasil SA, Teck Resources have taken a 50% holding in Horizonte Minerals shares (123,280,240 shares out of 246,560,480 shares in total).
The deal of course combines Horizonte's Lontra Lateritic Nickel project with the Araguaia Nickel project previously held by Teck. In total the combined projects now held within Horizonte, they now comprise 11 licences and licence applications across 73,000 hectares (that's about 270 square miles).
The combined licences represent something of a tour de force in Araguaia, an area already known to be a world class nickel province. Type 'Araguaia Nickel' into Google and two things will strike you. First, who else is there and, second, how much of the material relates to Horizonte's acquisition and strategic positioning in the area.
The licences include some 8 mineralised zones and it is now the stated objective of the company to delineate a resource of some 100million tonnes of nickel laterite.
This, as those with an eye for large scale nickel projects will attest, moves the company into a material position, with 100million tonne projects being something of a key target for nickel explorers.
Thats the quantity, but what of the quality? The company is focused on delineating not just a resource, but an economic deposit, so grades must be good. Moreover the location is significant with the established infrastructure increasing the economic viability.
One little bugbear was the fact that 50% of the Lontra project was owned by a third party, Quantom Holdings Limited. This too was addressed with Horizonte also purchasing, again for shares, the 50% Lontra interest from Quantom.
So, Horizonte now has a large patch of land within a world class nickel province, with a significant partner in Teck Resources and the prospect of delineating a 100 million tonne resource - something of an exploration full house!
We would note that Teck, Quantom and all directors have agreed to a 12 month lock in and will not sell the shares during that 12 month period (subject of course to the usual 'exceptional circumstances' clause).
So, with the Nickel licence aggregation complete and under one roof, what is the plan?
Well Horizonte have a way of doing things, and that way is carefully planned. The £5million raised in the placing is to be utilised in a defined manner (refer to the Chairman's letter dated 27 July 2010 within section 2b.The money will in part be used to fund drilling of the lateritic nickel project (including Lontra) leading to a JORC or NI 43-101.
This drilling campaign, scheduled to commence in Q4 2010 and to run for 8,000 metres, is expected to yield a JORC compliant resource by the first quarter of 2011 and at that point metallurgical testing will be undertaken. Short term news of this nature, providing a potential material value uplift in the business, is exactly what investors yearn for, and we will be following this campaign with interest!
Of course once the first JORC is determined we can probably start analysing the route to production, JV, disposal, etc, which accompany an explorer sitting on something of a gem.
But there may be another way to articulate the value. In the same news release that outlined the Teck deal, the company also confirmed a net smelter royalty (NSR) MOU (Memorandum of Understanding) signed between Horizonte and Anglo Pacific group.
Under the MOU Anglo paid Horizonte $500,000 for an option to secure an NSR over production from the Araguaia project. Anglo can exercise the option, paying $12.5million for the privilege when Horizonte have completed a pre-feasibility study. This secures Anglo a 1.5% NSR, up to 30,000 tpa (tonnes per annum) reducing down with increasing volumes to 1.1% above 50,000 tpa.
By way of interest 30,000 tonnes pa is around 66 million pounds, or revenues of $726 million at $11/lb nickel. The usual caveats apply of course and the key calculation is profitability. In this regard there are three main variables; production costs, commodity prices and customer demand, so we can't specify so far in advance what might happen. That said, as you can see the Horizonte Minerals exploration area and prospectivity make this a hugely exciting venture!
Just to throw another figure in the mix, if Anglo Pacific do exercise their option and pay $12.5million, that means, at an average of 1.3% NSR, the revenues achieved by the project would need to be $962million for Anglo to breakeven. We of course expect they would require a good return on top of their up-front payment, which suggests significantly higher revenues could be anticipated.
And in case you weren't too sure if all of this is good value, the company have looked at similar operations and ascertained that nickel in the ground is generally valued at 3.7cents per pound. This provides an estimated valuation for Araguaia of $105million or £66 million (assuming 1.3% lateritic nickel and a 100MT resource). Apply whatever discount factor you like, after all the resource is not yet defined. But the magnitude of this should be relatively clear.
It's worth noting that progress toward the maiden inferred resource by Q1 2011 is now underway with the announcement on 18th October 2010 confirming an 8,000 metre drilling programme has commenced at Araguaia. Not just drilling, but also an evaluation to define further high grade nickel targets.
Understandably, the combined Araguaia project has stolen the limelight recently, but we should not forget Horizonte's ambitions in the gold environment.
Those ambitions we assume are articulated clearly on the Gold section of the Horizonte website and focus on the Anglogold joint venture, Tangara Project and Falcao Project.
Anglogold Joint Venture:
Referring back to our theme of standing on the shoulders of giants, they don't get much bigger than Anglogold . In September 2009 Horizonte signed a deal that would see Anglogold inject up to $5.3million in new Brazilian gold exploration conducted through Horizonte .
This three year deal, of which $900,000 was the minimal commitment in year one has already produced some interesting results with the announcement in May 2010 highlighting nine priority gold and multi-element anomalies. These anomalies will act as the focus for further exploration and provide some incentive for Anglogold to move forward with the funding in years two and three of the deal.
The outcome of the JV will be any new projects identified being 49% owned by Horizonte and 51% by Anglogold. Furthermore Anglogold can increase its interest to 70% in any project by funding additional exploration leading to the completion of a pre-feasibility study.
This JV could create substantial value for Horizonte if suitable projects are identified, as the costs of achieving this would have been funded by Anglogold thus relieving the strain on budgets and cash flow that pure organic exploration would impose.
Moreover, in a world where big partner relationships are a major facet of successful junior exploration company development, the relationship with Anglogold is certainly an attractive feature for investors.
Horizonte had been exploring Tangara for some time and had built up some interesting results including one intersection of 35m at 2.5 grams per tonne (g/t) gold. Troy took over exploration and agreed to pay a $200,000 signing payment and $100,000 every six months for the next three years. If they wish to advance the project into production and take 100% ownership (a decision they must make by December 2010) they have to pay a further $2million to Horizonte and then a net smelter return on production. All in, if successful, the JV could provide $15-20million total income to Horizonte.
Having already exceeded their minimum $2million spend, Troy continue to explore actively at Tangara. Disappointing recent drilling results in two areas led investors to suspect Tangara had become the proverbial 'dead duck', but that may not be the case. Tangara has multiple target areas and Troy seem keen to push ahead; not least because their Andorhinas Gold plant nearby will be hungry for new feed sources over the years to come and Tangara is perfectly placed to provide. Moreover before Troy took over, Tangara had produced positive results for Horizonte highlighting the prospectivity of the area, something which many may be forgetting!
However this plays out, decision time is approaching and for Horizonte it looks like a win-win scenario. Clearly they will be happy if Troy do convert their option in December 2010. However, given their recent partnerships and secure funding position, should Troy decide not to proceed and the project returns into the hands of the company, Horizonte would be perfectly positioned to pursue Tangara themselves,.
Like Tangara, Falcao was one of the three flagship prospects that the company identified on listing in 2006, the third being El Aquila. Falcao is 175km away from Tangara and was the subject of a 1998 limited drilling campaign by BHP. They found interesting intersections including 9 metres from surface at 4.8 g/t gold.
Horizonte have recently undertaken extensive geochemical sampling and a mapping programme which means they are now drill ready and according to the annual report have a number of third party companies who have expressed an interest in the project.
We always thought Falcao was an exciting project and one that could secure a Joint Venture partner. This was confirmed in August 2010 when a $4.5million earn in agreement was signed with ...... Anglogold! This relationship seems to go from strength to strength.
Anglogold can earn 51% of the Falcao project by expending $4.5million over three years with a minimal spend commitment of $900,000 in the first year. As with the previous Anglogold deal, their stake can increase to 70% by funding a pre-Feasibility study.
Perhaps what excites us most of all, is that Horizonte Minerals, after a lengthy period of fast pace and broad based exploration and portfolio building, now has rationalised its business operations into two clear areas of focus – Nickel and Gold.
Within each area the company is focused on a number of distinct assets and clearly has a more focused pathway to value creation on something of a grand scale.
Funding issues were directly addressed over the summer through the raising of £5million at ten pence per share enabling the company to boldly move forward without the spectre of continuous dilution in order to meet ongoing funding cash needs.
At 12.5p per share the company has a market capitalisation of £30million, with £5m cash at bank. This level of capitalisation now positions the company on the radar of potential institutional investors and also articulates how far the company has come in building a sustainable and attractive business model.
No longer the penny share, Horizonte occupies an interesting position.
Clearly the company is at the foothills of immense potential value creation that we would hope will see the share price correlate with the value created. At the same time the vast majority of shares are tightly held including those under shareholder agreements. In other words with less liquidity the share price could potentially react sharply to news released which, if positive, could result in quite material re-ratings. We watch this space!!
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