It’s no accident that the Araguaia nickel project is moving closer to a production decision at the very time that nickel prices are starting to rise. The project’s owner, Horizonte Minerals Plc (LON:HZM)(TSE:HZM) is run by experienced mining company directors who know a thing or two about markets and commodities prices.
“It’s the old adage,” says chief executive Jeremy Martin. “You put the story together and build it out at the bottom end of the price curve.”
Then by the time it comes to financing, the market’s already on the turn, and big-name investors are sharply on the lookout for opportunities.
Horizonte Minerals, broadly speaking, fits this pattern to a tee. There was a time when nickel traded up as high as US$50,000 per tonne, however Horizonte came to Brazil after that, discovering the Araguaia project eight years ago, when the nickel market was well and truly off its earlier highs and major players were leaving the space altogether.
After a few years of working up Araguaia as a standalone project, Horizonte was able to acquire a large, complementary asset to the north that had been owned by Glencore.
“We acquired it for US$8mln at the bottom of the nickel market the project had over US$70mln of investment,” says Martin, matter-of-factly.
Considering that Araguaia North is likely to comprise one half of the largest new saprolite project the world has seen for many years, that’s not bad going.
But Horizonte didn’t stop there.
Two world-class nickel projects
At the end of last year, the company acquired the Vermelho project from Vale S.A., adding to its assets in Para state. Brazil’s national mining champion. Vale S.A. had acquired a comparable asset at Goro when it took over Inco in 2006, and since Goro was already in development, that was where the focus went. But it had already spent approximately US$200mln developing Vermelho, and that value-add now accrues to Horizonte, all for a total cost of US$8mln, US$2mln paid up front, the balance on production.
It means that Horizonte now has two world-class nickel projects in development in Brazil, at a time when the nickel price is really starting to move.
“Both are highly scalable,” says Martin. “One will supply ferronickel for the stainless steel market, and one will supply class 1 nickel for the battery market.”
With these assets boasting a combined resource base of over 250mln tonnes, Martin’s stated aspiration for Horizonte that it become the “leading nickel company on Aim and the TSX,” doesn’t look far off becoming reality.
There are one or two other contenders, including Royal Nickel (TSE:RNX), but after five-to-eight years of little or no investment in the nickel space, it seems unlikely that any new challengers are going to emerge.
Which, of course, is propitious for Horizonte.
“Demand is robust,” says Martin. “Stainless is growing at five-to-eight per cent per year. And with batteries for electric vehicles there is significant future potential to add 20-30% to current nickel demand.”
Of course, if newcomers able to meet that new demand are thin on the ground, those that are in place are likely to reap a handsome reward: it’s that old adage.
The plan is to develop Araguaia first, to produce ferro-nickel pellets grading 30% nickel and sell direct to stainless producers or trading houses as part of an off-take arrangement. The precise economics of this potential operation will be made much clearer when Horizonte reveals the results of an ongoing bankable feasibility study in the third quarter.
At that point it will be time to start putting together a financing package that Martin says will likely comprise a standard combination of equity, debt and off-take agreement.
And once up and running, Araguaia could provide significant funding for the development of Vermelho, for which an economic study is due out later this year.
But Martin is conscious that as a junior Horizonte ought not to take on too much.
“A Horizonte-owned and operated nickel mine at Araguaia is a very real possibility,” he says. “It would be a very cash-generative vehicle with the potential to pay significant dividends. And it could fund the development of Vermelho.”
Horizonte will consider a partner for its second project. After all, Araguaia will be one of the largest saprolite projects currently under development. For a company that’s worth just over £60mln at the moment, that’s quite an undertaking. But Martin is clear enough that Horizonte has the will and the know-how to make it happen.