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Taking control of Araguaia nickel project: Horizonte's shrewdest move yet?

Horizonte Minerals’ (LON:HZM) latest tie-up with a mining partner looks to be its shrewdest.

It is taking full control of the Araguaia nickel project in the Carajas region of Brazil currently owned by Teck Resources (TSX:TCK) and merging it with its neighbouring Lontra development.

It creates at a stroke a 100 million ton high grade resource which could, over time, creep up to 150 million tons and even 200 million tons, according to Horizonte chief executive Jeremy Martin.

In return the Canadian giant gets a 50 per cent stake in an enlarged Horizonte, worth around £7.5 million.
Horizonte is also raising £5.1 million by issuing shares at 10p each – well above the suspension price of 8.75p.
So why is it shrewd? Well, Horizonte is getting Araguaia for a song.

The deal values the combined assets at a bargain-basement 0.7 cents a pound of nickel in the ground compared with a peer group average of 3 cents.

"When you put the Araguaia project together with our Lontra project, that gives you a base case 100 million tons resource, which starts to put it up there with global big boys," Martin told Proactiveinvestors.

"I think we will get to 150 million tons, perhaps even 200 million. And a real driver behind the deal is the cost, which is at a significant discount to our peer group."

Horizonte can thank the global financial crisis for its good fortune, for it left Teck with some huge debts it was unable to refinance after buying the Fording Canadian Coal Trust in 2008.

The result was a major austerity drive as Teck’s exploration budget shrivelled. It partnered out many of its early stage projects, but baulked at completely offloading Araguaia.

Hoping to keep its aspirations of being a nickel player alive it jumped into bed instead with a relatively junior partner in the form of Horizonte.

There are echoes of the Onca Puma nickel project just up the road, which was bought by Canico Resources for US$20 million seven years ago.

Canico shelled out the same again to get Onca Puma to the feasibility stage before being taken out by Vale for CA$870 million.

"I’m not telling you today we can complete that transaction," Martin says.

"But we have the resource, we are in the right part of the world and have the partners to recreate it."
As a post script, it is interesting that Horizonte is hiring the Canico brokers that negotiated the Vale to deal organise next year’s listing on the Toronto Stock Exchange.

Martin believes the tie-up with Teck should give Horizonte investors something to cheer.

"We have a transformational joint venture that takes us ten steps up the ladder," he adds.

"We are going from a £5 million market cap company to a £25 million firm – with potential growth well beyond that.

"By the year end I want to be valued at least in the mid range of our junior peer group. We should be valued at 2-3 cents a pound (of nickel) and the resource will be twice if not three times those peer group companies."

TIMELINE

Mid August – Drilling on Araguaia/Lontra project begins

Three drill rigs are on standby ready to drill 6-7,000 metres before December

First stage resource out in December or January at the latest

Horizonte to list on the TSX in Q1 next year

Metallurgical test work will also start Q1

Second-stage resource out by June 2011

Pre-feasibility stage by Q3