Horizonte Minerals (LON: HZM) (TSE: HZM) shares are down 45% in London this morning. HZM shares have fallen on the revelation that the Brazilian nickel mine is going to require lots more cash. That’s not quite how the company announces it but it is what they mean. It’s also not just that the project economics have changed, it’s the stage at which they’ve changed. They’re stuck over a barrel, with vast sunk costs and yet not able to get the project over the line without more money. That’s just one of those times when no one is nice and you do end up paying a lot for extra cash.
The announcement: “Horizonte Minerals Plc (AIM/TSX: HZM) ("Horizonte" or the "Company"), the nickel company developing two Tier 1 assets in Brazil, announces today that it has made good progress in completing the final detailed engineering and construction design for Line 1 of its 100%-owned Araguaia Nickel Project ("Araguaia" or "the Project"). This work, along with a comprehensive cost review, has resulted in changes to the design and execution scope, which are expected to increase the overall capital expenditure requirement by at least 35% (of current capex budget) and delay first production to Q3-2024.
Given the progress made to date with construction, the value of the Araguaia Line 1 Project and the upcoming delivery of the Feasibility Study on Araguaia Line 2, the Company continues to have strong support from its major partners. The Company is working on a plan with its various financial institutions together with the cornerstone shareholders for a financing solution to complete construction.”
Not good, to put it mildly.
Horizonte Minerals share price from Google Finance
There are two reasons for the vast share price change in reaction to an only 35% change in capital costs. The first is simply that of course the mine’s economics now change. If we need 35% more capital then that’s 35% directly out of the bottom line revenue in the plan. That’s going to be a big chunk of predicted profits. So, that’s no good.
But more than this it’s when the new numbers have been revealed. They’re already boots on the ground, building stuff. Which, to put it crudely, makes them easy meat for any passing financier. They’ve got to have the extra money given the amount already sunk into the project. So, the price that can be charged for the extra money will be high.
It’s possible that 45% is too much of a reaction in the share price. But we’d not suggest going long as yet - there might well be more news to come here. And a half completed mine can, in fact, be worth less than one not even started as yet.
