Horizonte Minerals (HZM.L, HTM.TO) has just raised US$25M to further advance its nickel projects in Brazil by selling a 2.25% NSR to Orion Mine Finance. What’s interesting is that this royalty only applies to the first 426,429 tonnes of nickel in a ferronickel concentrate, but Orion will still make plenty of money on the deal.

Applying the current gross value of US$8/pound nickel onto the production of 940 million pounds results in a gross metal value of US$7.52B and on an undiscounted and pre-tax basis, the 2.25% NSR has a gross value of US$169M to Orion Mine Finance, or almost 7 times the price it paid for the royalty.  It does look like Orion Mining got the better end of that deal, but it will also bear the development risk as any delay in starting up the Araguaia nickel project in Brazil will reduce the returns for Orion.

For Horizonte Minerals, this is a way to raise capital without issuing shares (but please let’s not even call it a non-dilutive financing as Horizonte pretends it to be as giving away 2.25% of the top line is per definition dilutive. Perhaps not on the share count level, but definitely on the project and NAV level). Perhaps this was the only funding solution available to Horizonte, but it does make Araguaia less appealing as Horizonte basically forfeits US$169M in future revenue at the current nickel spot price.

Disclosure: The author has a small long position in Horizonte Minerals.

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