Investment returns tend to be positively correlated with risk. This is why small-cap, UK-listed, mining, oil & gas and biotechnology stocks can multiply investors’ money in a day while your typical FTSE 100 giant might struggle to do so in a decade.
Pick well and you can make a shedload of money. Pick poorly, however, and you could lose all your capital. Here’s one stock that I think might just do the former.
Soaring small-cap
I’ve owned shares in would-be nickel producer Horizonte Minerals (LSE: HZM) for a few years now. For much of this time, my investment has been under water. Mercifully, that’s now changed.
Horizonte’s share price is up a little over 50% in the last month alone. Had you picked up the shares back in the dark days of March, you’d already be sitting on a gain of around 240%.
Aside from the bounce seen in markets generally, the reason for the price charge is down to Horizonte getting ready to build its Araguaia ferro-nickel mine in Brazil. This is one of two Tier 1 projects that, importantly, are 100% owned by the company.
Show me the money!
Earlier this month, Horizonte announced that it had mandated five international financial institutions to raise up to $325m in debt to part-fund the Araguaia build. Coronavirus-dependent, this should be done by the end of 2020. The remainder of the money needed ($125m) will then come from offtakes and a likely equity raise.
Should things go swimmingly (and existing holders aren’t massively diluted), I can see the small-cap’s shares being worth multiples of their current value in a few years. This is assuming, of course, that Horizonte isn’t acquired beforehand. With few nickel-focused assets so close to production, it must surely be on the radars of the usual (mining) suspects.
Nickel price play
A takeover becomes even more likely if the price of nickel keeps rising. Thanks to growing demand from the EV battery sector and stainless steel market, there’s certainly a chance it could hit the $16,133/t analyst consensus for when Araguaia is ready to roll.
The ‘Tesla-effect’ can’t be discounted either. Let’s not forget that Elon Musk recently urged miners to dig up as much nickel as they could, adding that Tesla would award a “giant contract for a long period of time” to the company that does so in an efficient and environmentally friendly way. This is where Horizonte’s second Tier 1 asset — Vermelho — comes into play.
Before you buy this small-cap…
But let’s not get ahead of ourselves. Despite recent progress (and a £15.6m cash position), Horizonte remains a high-risk proposition. Plenty of miners come a cropper on funding and the small-cap could still rip the shirt from your back.
Even if all the funding is secured, there will be traders ready to bank profits. This ‘sell on the news’ strategy means those intending to hold for the long term should brace themselves for volatility.
It also makes it essential for them to be diversified elsewhere (as I am) and not bet the house (which I haven’t). Like all investments, your exposure should take into account your financial goals, age and risk tolerance. If your stake keeps you awake at night, you’re probably doing it wrong.
All caution (and bias) aside, however, there’s a chance the reward might be worth the wait.
