19th Feb: Trader Tim’s Penny Stock Portfolio – #HZM

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Trader Tim’s Penny Stock Portfolio identifies penny stocks that have real long-term potential. Penny stocks will be published on the blog to show how the portfolio is performing. To receive Trader Tim’s updates direct to your inbox at 10am each morning, click here.

Penny Stock Portfolio

This is the first post in a new series.

Each post will focus on a penny stock that has real long-term potential. The aim here is not to find quick trades. There will be no quick in and outs. I will be identifying penny stocks that are worth holding on to long-term, 18 months and longer.

As I highlight these companies, I will add them to a portfolio published on the blog, so there is complete transparency on how the portfolio is performing. It will be an experiment, but will hopefully deliver value to readers and demonstrate the power of penny stocks.

Why?

The Penny Stock Post serves an important purpose: distributing analysis on key RNSes, which allows me to report on a breath of companies. However, with this format, I am not able to go into depth about the companies that I like. I can’t make tips or recommendations.

For those that have followed the blog for a while, I used to make tips on which companies looked potential investments. I have collated all of these tips accompanied with the blog post where I tipped them. In the table below, you can see the performance of these tips. I have used the share price when the stock was tipped. Overall, these tips would have made an impressive 44% gain since April 2016. Big winners include Boohoo, Asiamet, CloudTag and Berkeley Energia. Only 2 out of the 14 tips were losers – Easyjet and Royal Mail. Overall, I am happy with this performance.

As a result, I thought it would be good to revive this element of the blog. The Penny Stock Portfolio will allow me to tip penny stocks that have long-term potential and track their performance. It’s beneficial for me because – assuming it goes well – I end up looking like a stock market guru (or not!). And it’s beneficial for readers, who actually some proper opinion and research on good quality penny stocks, rather than a few anecdotal comments alongside the RNS analysis. Everyone wins.


Horizonte Minerals HZM 3.25 +0.05 +1.56%

Market Cap: £35.45m
Price Bought: 3.05p
Spread: 1.7%

Horizonte Minerals will be my first addition to the Penny Stock Portfolio. I hold stock in this company.

Horizonte is Nickel development exploration company, which is based in Northern region of Brazil. It wholly owns the Araguaia Nickel Laterite project. A Tier 1 asset, which is estimated to be ready for production in 2020.

The company recently struck a deal with Glencore to significantly expand its footprint. Horizonte had owned the Araguaia South product, which it acquired from Teck Resources. Last year, the company secured the acquisition of the Araguaia North, a Glencore asset, for a payment of $2 million shares, though this could rise to $8 million depending on conditions. This was a remarkable deal given that approximately $80 million had been poured into the building and infrastructure of the project by Glencore and the earlier operator Xstrata.

The September 2015 acquisition of the adjacent nickel project from Glencore at a low cost, with the upfront portion paid in shares was undoubtedly a game-changer for HZMShare Capital

Glencore parted with the asset amid company struggles in the commodities downturn. They opted to focus on their more utilised assets, rather than early stage development projects. This has allowed Horizonte to take advantage and now have full ownership of an enormous asset, which located in Brazil with good infrastructure.

Nickel Market

Like most metals and commodities, Nickel prices are coming off record lows. In the beginning of 2016, Nickel hit a 13 year low of $7,550 per tonne. This downturn has required producers to ensure operations are as cost-efficient as possible, which has led to some mines closing. In Horizonte’s Pre-Feasibility Study, Araguaia Project is profitable at todays Nickel prices.

Nickel prices are forecast to improve in the coming years. Morgan Stanley has forecast at $16,775 long term real Nickel price. UBS has forecast the price of Nickel at $13,228 in 2018 and $19,621 by 2020. An uptick in the price of Nickel will only make the Araguaia Project more profitable.

In 2016, the Nickel prices rose 38% – reaching yearly highs US$12,145 per tonne. The price fell back a bit in the beginning of 2017, but has since surged to its highest point of the year and is currently trading at $11,060 per tonne. This has been fuelled by major supply concerns with the Philippines, the world’s biggest nickel exporter, ordering the closure of 23 mines. Wood Mackenzie also indicate there is an increase in demand with the resurgence in the Chinese stainless steel market. Also, Nickel use in batteries could more than double over the next 10 years with the innovation of technology products and increase in electric vehicles.

There are signs that this year [2017] could be finally the turning point for nickel with many expecting the market to be in deficit and so starting the much needed re-balancing processEdward Heagel, BHP Billiton

Horizonte are expecting to hit production in 2020, so Araguaia development is dovetailing nicely with a positive macro picture. The rise in Nickel prices will serve to underline the robust economics of the Araguaia project, which has extremely low capital expenses, and prove good for profitability. In 2007, Nickel reached a record price of $54,050 per tonne – so there is plenty of long-term upside potential.

The nickel price in recent years has not been high enough to incentivise new supply and we view many projects in the pipeline as either challenging or having very high capital intensities, or both!Share Capital
Brazil

A topical point given the regulatory overhaul happening in the Philippines, a country once considered to be stable and friendly to mining operations.

Brazil is considered supportive of mining projects and has a well-established legislative framework in place. Production costs in the regions such as property and infrastructure are low. The Brazilian economy has had some struggled and also the country has had some political problems. However, IMF says “confidence in the Brazilian economy is slowly reawakening” and forecasts positive growth in 2017.

Pre Feasibility Study

In October 2016, Horizonte published the Pre-Feasibility Study on the Araguaia Nickel Project. These findings were very positive.

It has potential to be a Tier 1 asset in terms of size and grade. The project is one of the largest undeveloped saprolite resources globally.

The project has longevity. Araguaia is a long-life mine. The life of the mine is anticipated to be 28 years with the prospect of extending this further.

The Project is expected to generate US$1.3 billion in free cash flow over the LOM with the planned operation producing around 14,500 tonnes per year of nickel in ferronickel at a grade of 30% utilising the proven RKEF processJeremy Martin, CEO Horizonte Minterals

You can read the Pre Feasibility Study RNS here. The high-level economics are very strong, particularly given the the fall in nickel prices over the last 10 years.

Highlights are:

  • $1.3 billion in free cash flow over the 28 year life of the mine (LOM) with nickel prices at US$12,000 per tonne
  • $1.9bn of free cash flow over the LOM with nickel prices at US$14,000 per tonne
  • Horizonte’s Araguaia asset will sit in the lower range of the global industry cost curve
  • The project has a cash cost of $3.15 per pound or S$6,944 per tonne of Nickel
  • Araguaia will breakeven at $9,426 per tonne – currently the nickel price is $11,060 per tonne
  • Looking longer term: 10 year historical averages of the Nickel price is ~$20,000 per tonne – markedly higher than the $12,000 p/t and $14,000 p/t than Pre-Feasibility estimates

The economics of the project are extremely robust. Given the prolonged period of poor commodity and metal prices, contractors have had to become more cost competitive. This macro-ecomonic effect brings down production costs for exploration companies. Junior companies like Horizonte can create extremely lean, cost-efficient operations even against the backdrop of struggling metal prices.

Horizonte have managed to improve the capex of Araguaia compared to the original Feasibility report previously prepared. For example, capital expenditure has been reduced to $353m from $582m.

Nickel

Nickel occurs in essentially two ore types: magmatic sulphides and laterites. Sulphides are hundreds of metres below the ground and typically are very difficult and expensive to extract. Also, sulphide reserves are rapidly depleting.

However, Araguaia contains laterites (saprolites), not sulphides. Laterites – both limonite and saprolites – are much nearer the surface and more available. As a result, companies are increasingly looking to derive nickel production from nickel laterites.

Grade

One problem typically with laterite is grade. However, Araguaia has the potential to produce high-grade nickel. Horizonte’s grades even compete with Tier 1 assets around the world. In the first 10 years, nickel grade production is expected to be at 1.9%.

We will be producing nickel at 1.9% over 10 years. Australian projects average 1.1%. In Africa it’s between 0.8% and 1%.Jeremy Martin

The RKEF process being utilised by Horizonte means the ferronickel (FeNi) grade quality has been increased to 30% from 20%.

Processing

A second problem with laterites is costly processing. Historically, high pressure acid leaching (HPAL) processes have been used to process both forms of laterites. This process uses acid and high temperature to extract the nickel ore. This process incurs excessive energy costs. It is also inefficient as it can only extract high-grade nickel and the acid and temperatures used often cause equipment to breakdown.

Horizonte will be using more modern technique to process the extracted ore, rotary kiln-electric furnace (RKEF). This process is being used by around 20 projects globally. It’s much lower risk and is a cheaper, more-efficient process. Also, RKEF has become the process of choice in China – who are one of the biggest importers of nickel-based materials.

Shard Capital calculate that Araguaia has a capital intensity of ~$24,500/t compared to the mean of $48,000/t. Interestingly, the average capital intensity for a HPAL project is $90,000-$100,000/t.

Funding

One thing to be wary of with junior exploration companies is funding. Even the cost-efficient projects require lots of cash to get them up and running. This typically means shareholder dilution and plenty of placings. This isn’t ideal, but is to be expected with these types of companies. Therefore, it is important to check that a penny stock has strong fundraising credentials before investing. If you do not do this, it is possible that you’ll be on the end of a deeply-discounted placing.

Horizonte has very strong funding credentials. The company recently made a large placing of £9 million. Despite the large size of the placing, the share price was preserved and this has fully funded Horizonte to conduct the definitive feasibility study for the Araguaia project. Therefore, there should be no more placings in the short-term.

More impressively, Horizonte have an enviable list of institutional backers in JP Morgan Asset Management and Hargreaves Hale, who have recently strengthened their positions in the company. Also, Teck Resource, Canada’s largest diversified resources company, and Henderson Global Investors – both own large chunks of the company.

43% of the shares are currently held by institutions and others while the remaining 57% are in public hands and available on the market. A good balance ensuring decent liquidity.

Newsflow

The next major milestone in the development of Araguaia is the Feasibility Study which will be anticipated starting in 2017. Horizonte are fully-funded through to the end of Feasibility at Araguaia.

The company plans to complete the feasibility study by the end of 2017 with some key approvals and announcement throughout 2017. However, the general picture looks very positive for Horizonte – both short-term and long-term.

Timing

Timing was the main reason I chose Horizonte for the Penny Stock Portfolio today.

On Friday, the company closed at 3.025p – this is the highest close it has achieved in over a year. This, particularly at the end of a trading week, is generally seen as a very bullish sign. As a result, I prioritised this pick because I didn’t want to miss out. As mentioned, the aim here is to see gains over a long-term period, but entry price is always important.

Management

Management are hugely important to the success of any penny stock. Due to the small nature of the companies, the management have a significant impact on the operations and performance.

The management deserve a lot of credit of the Horizonte story to date. Jeremy Martin – the CEO – has done a fine job crafting deals to secure an Horizonte 100% ownership of an extremely attractive asset.

He may not have the background of a Tony Manini or Tony Gilby, who have scaled up small resource companies and sold these companies in deals worth many multiples their original market cap, but he has done a tremendous job.

The deal to secure the Glencore North Araguaia asset was a transformational deal, which was struck on extremely favourable terms. $2 million shares for an asset that had already received $80 million in investment. Glencore have have no back-in right or royalty on the asset either. The timing was a major plus for Horizonte – the deal was concluded at the bottom of the Nickel price slump.

Elsewhere, the management have acquired an impressive register of institutional investors with Hargreaves Hale, JP Morgan, Henderson all holding a significant stake in the company. This is major plus point from my perspective. The company are now entering the business stage, where costs to progress development are going to go up. This is expected. Strong financials connections are important to ensure the share price is preserved.


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If there are companies that you want me to cover in the coming days or have significant news due imminently then let me know. My aim is to deliver value to readers, so I want to ensure I’m doing this as much as I can.

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