Stock to Watch: Horizonte Minerals

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Nickel is an enticing investment theme given its use for stainless steel - therefore supporting the adoption of a vast range of consumer goods, from cars to kitchenware, as living standards rise in developing countries. A shortage is predicted in years ahead, which (assuming no global downturn) should enhance prices.

Yet investors have experienced a rollercoaster ride on this volatile commodity, sometimes needing to substantially write down their holdings in junior miners. AIM-listed European Nickel (now ENK (ENK)) won recommendations from various brokers for the economics of its heap-leaching project in Turkey, and a multinational co-financed it, taking share options at about 40p. The directors owned substantial shares and bought more.

But the Turks kept a kibosh on development and ENK has had to pursue its other projects; despite some diversification the shares languish at 11.5p.

There has also been Gladstone Pacific Nickel, which possessed a "world-class" nickel laterite resource in Australia and was for some time the largest holding in RAB Capital's special situations hedge fund. When RAB helped bring GPN to the AIM market, the project was said to have been given very thorough due diligence.

For a few years the shares caught the market's imagination and trebled, but after a change in directors a takeover was pushed through (against RAB's will) in late 2010 at 14p a share.

With examples like this it is easy to feel cynical about junior miners, although a few are going to become multi-bagger shares, given the leverage for equity in a small company.

AIM-listed Horizonte Minerals (HZM) is a current play attracting interest with an improving story. Its shares rose from 15p to briefly above 30p early last year, but then slid progressively as low as 8p while investors shunned the sector.

The company has been listed nearly six years, having initially raised £2.3 million at 30p a share, for gold and base metal projects in Brazil and Peru. Gold activities continue as small caps like this try to avoid being seen as a "one-project company".

The shares have jumped from 10p to 17p amid broker recommendations following 10 January news of a resource upgrade for Araguaia, its wholly-owned "world-class" nickel laterite resource in northern Brazil. This is the kind of news that tends to feature from junior miners moving towards a definitive project plan, to seek wider financing. An indicated resource of 39 million tonnes has shown high-grade zones, which helps the economics of early mine production.

Horizonte Minerals is capitalised at about £45 million, a market value liable to continue volatile, albeit with improving chances of an up-trend. It is a good example how mining shares can swing according to whether sentiment favours recognising "assets in the ground" versus a firmer sense of their being turned into cash. Results for the nine months to end-September 2011 showed a near £1.2 million loss, with £3.7 million capitalised exploration expenditure leaving £7.1 million cash (raised).

The estimated resource compares favourably with similar smaller nickel mining shares listed in London and Toronto, possibly putting Araguaia in the upper quartile of developing global nickel assets.

This improving story versus share price volatility is a potentially useful mix for short and long-term traders. HZM shares are also up in the New Year because risk appetite is generally increased; but if shock waves reverberate on a Greek default or other problems, it is quite easy for sentiment to change.

The company acquired 100% control of Araguaia in July 2010 issuing shares at 10p, making the project owner Teck Resources a 44% shareholder in Horizonte. HZM shares progressively rose, then spiked above 30p a year ago - Horizonte raising £8.25 million before expenses at 25p a share, to accelerate drilling.

Encouraging exploration data was then released both for the Falcao gold project also in northern Brazil, and Araguaia. Despite further positive news flow however, HZM shares succumbed to the sector downturn as investors de-risked from junior miners.

Further drilling is planned and no doubt the company will want to maximise prospects for its preliminary economic assessment due around March/April - this likely being a basis for project financing. Some traders incline to play a share like this in the run-up to seeking project finance, the company able to present without any setbacks which normally affect miners once underway.

Panmure Gordon, which has a commercial relationship with Horizonte and was once a promoter of European Nickel, has issued a 'buy' note in response to the 10 January 2012 update, arguing the 2011 de-rating provided "a very attractive entry point for investors relative to our updated 25p price target". Targets like this tend to be a moving feast while data continues to be released: various brokers upgraded European Nickel from 40p to 60p then 100p plus, before its debacle.

Horizonte does however stand a fair chance of evolving into a sound operation. FinnCap, another broker, currently targets over 30p a share.

Last September the chief executive added 125,000 shares at 12p, to own 618,571 shares - about £100,000 worth at the current market price. While that looks modest exposure, at 34 years of age he probably has financial commitments soaking up cash. Horizonte's board does have some very experienced operators and you would not expect to see much by way of management personnel at this stage.

It is a key risk to bear in mind however, that the company will need to prove operationally capable. Petropavlovsk (POG), the FTSE 250 gold miner with highly attractive resources, is only just starting to overcome a couple of years' doubt among investors, due to missing production targets.

So Horizonte is worth watching, with potential to defy the debacles like at ENK and GPN. After the New Year excitement its volatile shares may offer further buying opportunities.

For more information see www.horizonteminerals.com, and for previous Stocks to Watch, visit Edmond's archive.