NAV v SP6 Jan 2020 10:49
Apologies for another slightly long(ish) post. My take on the shareprice v NAV equation. Disclaimer: I have never held a mining share through financing/mine build/production so this is based on logic only and I stand to be corrected!
I believe the main reason we are a £60m mcap company at the moment, and not much higher is uncertainty over the terms of financing. We have ~$2.5bn NAV (base case) Araguaia Stage 1 $700m+Vermelho $1.7bn. But we don't know what proportion of this NAV as existing shareholders we will end up owning once royalty and equity are agreed. The two pieces of uncertainty are:
1. Does finance happen
2. What are the finance terms/what is left for current shareholders
Once these are determined for Araguaia and by all accounts 6-12 months timeframe looks pretty nailed on, these factors are completely eliminated from the uncertainty. Ignoring Vermelho for the time being, I still think it has no value in the current SP and will probably follow it's own trajectory once it goes through the permitting-partner-DFS-financing steps.
Post financing I don't think we will be at full valuation on NPV basis on Araguaia. As an investor, there are three uncertainties/factors remaining which means I would not want to pay full premium for my shares on NPV. These are:
1. There is engineering uncertainty. It isn't straightforward completing a $0.5bn engineering project on time and on budget. Risks are cost overruns and budget overruns and possibly some factors outside Horizonte's control. Hopefully this risk is low-ish.
2. There is Nickel price risk. Whilst we all expect/hope Nickel will be flying in 3 years time, it isn't guaranteed. Therefore there is a discount to SP based on this risk.
3. Maybe the biggest factor - the company will not be generating a return (in dividend) for 3-5 years from now, maybe more. Therefore there is opportunity cost of holding the shares that long. Naturally opportunity cost therefore commands a discount also.
In my opinion, once mine build commences, with every month we get closer to mine build complete, all three of the factors above de-risk. We are closer to production and expected return. If the mine build is on track, and Horizonte are reporting this, then the risk of cost/schedule overrun is reducing. At halfway through the build we are 50% de-risked, for example. And finally, the closer we are to mine build complete, the more the nickel price matters. It's the nickel price on mine complete that matters most, not the nickel price now, or in 2021.
What I don't know is what % of NAV we might hope to achieve at each stage of de-risking hence I can't really predict what the SP will do. I have a view on what the SP might be on production, at a given Nickel price, and I have a view on what a reasonable 'finance complete' SP might look like, but I don't know the trajectory between these points.
For me then the final unkown is Vermelho. I think it adds £0 to current mcap but will surprise to up
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