Horizonte Minerals (LON: HZM) shares are up 10% today on the announcement of a stake build by Glencore. For a prospective nickel miner this is a validation, but not a proof, of the Horizonte plans.
What this means is that Horizonte shares now have a major mining house onside. It doesn;t mean that their exploration and plans for extraction are whole and pure, it doesn;t mean that they’re inevitably going to be profitable. But it does stand as a validation of the plans so far and considerably smooths the path into the future. Having Glencore taking out what is, effectively, an option on Horizonte definitely helps.
At which point it’s worth running though the stages for a junior miner – the usual definition of which is someone not yet producing. The first stage of obviously the decision to go looking for something. Then there’s the finding of something that might be worth extracting. Then comes the expensive work of proving, to legal standards, that it is worth extracting.
That’s about where Horizonte is at present. They’ve those nickel projects in Brazil, the claim at least is that they’re Tier 1 (ie, of global size) and definitely worth working up to a production decision.
But, you know, these are claims by people who would like us to believe these claims. We should always look at any claim from a company at least slightly askance. What we’re interested in is some outside validation of a claim. This is what Glencore buying a 9,8% stake does for us. Glencore are not always right but they’re certainly experienced in the nickel business. So, we can take them spending real money as being a validation of what Horizonte is saying so far.
This does not derisk the project(s), it lowers the risk. If all risk were gone then we’d expect Glencore to have taken rather more of Horizonte. They are, rather, perhaps laying down a marker, taking an option on the future.
For there are still more development stages to go. There’s the final proof that it’s a viable project. There’s the need to raise the capital to mine and process. That capital requirement is usually aided by any new mine having “take off” partners. That is, people who agree to take the production on the assumption it is produced. This takes market risk off the table for bankers and other capital providers. This is really the greater value of Glencore being involved.
Another way to look at this is that some – for varied reasons – mining projects just peter out. Prices change, or politics does, or some slip twixt cup and lip means that while something gets halfway through the proving stages it never quite finishes them. Getting a major like Glencore on board minimises exactly this risk. Partly because they’ll have done their homework before investing, rather more because Glencore aren’t known for giving up. They’ve backed on North American copper/nickel mine through a decade of court challenges for example.
Glencore taking a stake in Horizonte isn’t the end of the story by any means, but it is a validation of the story so far.
CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage . 68 % of retail investor accounts lose money when trading CFDs with this provider . You should consider whether you understand how CFDs work, and whether you can afford to take the high risk of losing your money .
Tim Worstall is a freelance writer specialising in economics and the financial markets.