Horizonte talk Final Results and developing the next major nickel project in Brazil

Despite the challenging market conditions for the resource sector in 2014 and continuing into 2015, exemplary progress has been made by Horizonte throughout the year at its wholly owned Araguaia nickel project in Parà State, north central Brazil, as it moves to develop the next major nickel project in Brazil.

Your Company announced the completed Pre-Feasibility Study (‘PFS’) in March 2014, on time, within a tightly constrained budget and importantly demonstrated the robust economics of Araguaia as a leading nickel development project globally. In line with the wider macroeconomic environment, the PFS focused on maximising returns while minimising financial and technical risk and as such two operational scenarios were evaluated which demonstrated that Araguaia offers flexibility to be developed at multiple scales.

Our selected route to take to the Feasibility Stage is a smaller ‘Base Case’ scenario utilising a single line Rotary Kiln Electric Furnace (‘RKEF’) plant, running at 900,000 tpa ore throughput, with 15,000 t targeted annual production of nickel in Fe-Ni product that offers an after tax NPV₈ of USD 519 million and a IRR of 20%. The large scale ‘Option’, which would also utilise the proven process of RKEF, offers production upside with an NPV₈ of USD 1.2 billion and 21% IRR based on 2.7Mtpa twin line 40,000 tpa nickel in Fe-Ni product. However, the Base Case option importantly brings the project to a capital level which is within reach of a junior mining company such as ours, whilst demonstrating the considerable upside that future expansion could bring.

The strong project economics of Araguaia are also supported by the high nickel grades demonstrated at Araguaia, with an average feed grade for the first 10 years of 1.76% Ni, placing the deposit in the upper quartile for grade globally. Add to this the extremely low C1 cash costs of USD4.16/lb (USD 9,166/t) together with significant free cash flow generated over life of mine of approximately of USD1.8 billion post tax on the Base Case Scenario, and it is clear that Araguaia offers a compelling investment case.

With the PFS completed, and despite poor market sentiment overall during 2014, Horizonte successfully closed a £5.5 million placing before costs in July 2014, which further strengthened the balance sheet. Importantly Horizonte has a supportive shareholder base led by Teck Resources, and Henderson Global Investors. With this and a solid cash position, we are well positioned to deliver on Araguaia’s next development milestones as we take it through to the Feasibility Study (‘FS’) stage during 2015.

The FS is the next major milestone on the journey to further de-risk the project, leading into the financing to the construction and production stage.

With this in mind we successfully filed our Social and Environmental Impact Assessment (‘SEIA’) in June 2014. The completion and filing marked a significant de-risking step for Araguaia, as we worked with local stakeholders, communities and government agencies. The report is currently being reviewed by the Pará State Environmental Agency and, post the public hearing, we should receive the Preliminary Licence later in 2015.

The FS will also aim to deliver a Proven Reserve to cover the earlier part of the mine life, as well as defining the balance of the mine life in the Probable Reserve category for the Base Case option of the PFS. To this extent drilling has been underway since Q4 2014.

The current market sentiment towards resource companies is focussed on the perception of falling demand for many metals, with associated price falls. What needs to be made clear is that even with moderate growth, the supply pipeline is lean. It will be a lack of supply that will be responsible for increasing prices and a resurgence of the resource sector. Not that demand is that bad really – Wood Mackenzie predicts a 3.4% annual increase in nickel consumption through to 2018. They see a nickel shortage after the overhang is consumed by 2018 with some 778,000t of new nickel needed by 2030 and 300,000t by 2018.

The Indonesian ban on raw material exports is influential in this future picture. The potential building of nickel pig iron smelters within Indonesia could supply new nickel currently off market but the high costs of construction, plus problems with permitting etc. may restrict this new supply. While new nickel pig iron may come from the Philippines, due to lower overall nickel grades in the Philippines as compared to Indonesia, this will be insufficient to fill that large and increasing supply gap.

As a result there are bullish views on the future nickel price; the Bank of America Merrill Lynch forecast prices potentially reaching -USD 25,000/t in 2015 and Wood MacKenzie support this view with a long term price of USD 25,350 to USD 26,460/t.

The PFS was modelled on a USD 19,000/t nickel price and we believe the timing of the mine start up fits well with these pricing forecasts.

With the above in mind, Araguaia is developing into a leading nickel project globally in terms of size and grade which offers strong economics, a proven process route, and good infrastructure. Your Company is led by an experienced Board and expanding management team with significant experience in both South America and the nickel resource space, and has positioned Araguaia for development at a crucial time for the nickel market when demand will outstrip supply and nickel prices will ensure massive value creation from the project.

I am delighted that Horizonte has a solid track record of delivering milestones on time and on budget; for this much credit must go to Jeremy Martin, C.E.O., and having already completed the PFS this year which demonstrated robust economics, we are well funded following our recent placing to move into the Feasibility stage. I would like to take this opportunity to thank the dedicated Horizonte Board of Directors, Management team and shareholders for your continued support and I look forward to providing further updates as we continue to develop Brazil’s next major nickel project.

David J Hall