October 29, 2018 / 5:54 PM / 20 days ago

Horizonte Minerals shares tank on lower nickel project profitability

LONDON (Reuters) - Shares in Horizonte Minerals (HZM.L) saw their biggest one-day drop in over two years on Monday after the company said the nickel mine it plans to build will be less profitable than previous estimated.

London-listed shares in the nickel development company closed down 9.7 percent at 3.3 pence, its biggest one-day fall since June 2016. The stock is also listed in Toronto.

The feasibility study on Monday showed that Horizonte’s Araguaia ferronickel project in Brazil will have an internal rate of return (IRR) of 20.1 percent, which was lower than estimates in a previous study of 26.4 percent.

IRR is a metric used in capital budgeting to estimate the profitability of potential investments.

“We had some private investors that were looking for higher returns than the study delivered,” chief executive Jeremy Martin told Reuters.

“But the reality is that the numbers it has delivered are robust and respectable for a project of this size.”

The project’s rate of return also assumes a price of $14,000 per tonne for benchmark London Metal Exchange nickel CMNI3, giving it a net present value of $401 million.

The price of the commodity used in stainless steel and batteries used in electric vehicles is $11,825 per tonne, having fallen over 7 percent this year.

Nickel has still been one of the most resilient base metals in 2018 as the entire complex buckled under pressure from U.S-China trade tariffs, however, analysts say.

SP Angel analyst John Meyer said the IRR was “not exciting” and the net present value was less than the capital expenditure, “which is not a good sign” given low nickel prices.

Araguaia would deliver 14,500 tonnes of nickel within approximately 52,000 tonnes of ferronickel annually at a cash cost of $3.72 per pound or $8,193 per tonne, the study said.

Horizonte plans to raise $443 million to begin construction on the mine in the middle of 2019, with production slated for late 2021, Martin said.

“The process (of raising funding) right now will certainly be harder than it would have been if the returns had been higher, and the commodities and wider equities sentiments been more positive,” said Shore Capital analyst Yuen Low.

He added that sentiment might have improved by the time Horizonte is due to close on its financing next year.

Investors in Horizonte include Teck Resources (TECKb.TO) , JP Morgan and Glencore (GLEN.L).

Reporting by Zandi Shabalala; Editing by Ed Osmond and Jan Harvey

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