The Horizonte Minerals (LSE:HZM) share price has seen explosive growth over the last 12 months. In fact, despite not currently having any source of revenue, let alone profits, the stock is up by nearly 250%! What’s causing this impressive growth? And should I be adding this business to my portfolio?
The rising share price
Horizonte Minerals is an early-stage mining company operating out of Brazil. It’s currently developing two wholly-owned extraction sites called Araguaia and Vermelho. These sites have a deposit of ferronickel, and nickel-cobalt, respectively.
Both of these metals are in particularly high demand at the moment due to their applications within the electric vehicle battery market. But while the value of these materials may be going up, Horizonte has yet to extract anything from the ground. So why is the HZM share price going up?
2020 was a good year of progress for the business, despite the disruptions caused by Covid-19. It successfully secured a new debt facility with five different banks to access $325m in funding. This capital has accelerated the firm’s transition from its exploratory phase to its development/production phase. Metal extraction at Araguaia is set to commence in 2022. And the mine is expected to remain operational for 28 years. Production at Vermelho will begin shortly after, and based on its pre-feasibility study, this site has a projected lifecycle of 38 years.
With funding secured, production about to start, and a booming electric vehicle battery market, it looks like Horizonte is capable of becoming a key supplier for the industry next year. So, I’m not surprised that the HZM share price is taking off.
There are some risks
As exciting as this progress is, the company is still incredibly young and has a tough road ahead. While it’s certainly not as risky as an early-stage exploration business, the development/product stage still has plenty of challenges to contend with.
The main one is fluctuating commodity prices. Currently, the demand for nickel and cobalt is high, so their value is on the rise. This would be good news for Horizonte if it was already producing, since higher prices means larger profit margins. However, there is no guarantee these elevated prices won’t crash back down in the future if the supply eventually outweighs the demand. Needless to say, this could have a severe impact on the HZM share price.
It’s also worth noting that the new debt facility adds a notable level of credit risk. Any delays in developing the Araguaia project could result in the need to raise additional funding through alternative means to keep up with interest fees on these loans.
The bottom line
An unprofitable pre-revenue business always carries a significant level of risk. Horizonte looks like it’s going to be generating income in the near future. And if commodity prices remain at their current levels, it may be able to turn itself into a profitable business at the same time.
Having said that, I think it’s too early to add the stock to my portfolio. I’d rather wait and see how operations perform once production begins. And so it’s staying on my watch list for now.
