Horizon Minerals [ASX: HRZ]
Metals & Mining
A high-grade Western Australian gold developer
We initiate coverage on Horizon Minerals (ASX: HRZ) with a 12-month target price of A$0.10 – representing a 156% upside from the current share price of $0.039. HRZ is a gold exploration and development company that owns multiple gold projects in proximity to each other and to the existing infrastructure in the prolific Goldfields of Western Australia. It has a total defined gold resources estimate of 1.8Moz at 1.84 g/t. Horizon’s long-term goal is to develop its two cornerstone assets of Boorara and Burbanks gold projects into a standalone operation. In the meantime, Horizon is bringing forward cash flows by monetising some of its gold deposits through ore sales and toll-treating operations to benefit from the currently strong gold price environment. This will reduce the company’s reliance on dilutive equity capital raising to develop its core assets and become a mid-tier WA gold producer in due time. HRZ also holds substantial deposits of silver, zinc, cobalt and nickel at its other projects in WA, as well as significant investments in four ASX listed mining companies.
Poised to generate significant free cash flows in the short term
Horizon has entered into a binding Ore Sale Agreement (OSA) with Paddington Gold to treat 1.24Mt of Horizon ore from the Boorara open pit at Norton’s 3.8Mtpa Paddington Mill, located ~56km by road from Boorara. The mining operation is planned to commence in September 2024, with the first gold pour expected in October 2024. Horizon has also entered into a binding Toll Milling Agreement (TMA) with FMR Investments Pty Ltd to treat 200kt of Horizon ore from the Cannon underground project or other deposit, commencing in the December 2024 Quarter. Based on HRZ and our estimates, Boorara OSA and Cannon TMA are expected to generate free cash flows (FCF) of A$19.9m and A$11.5m at a gold price of A$3,300/oz, and A$30m and A$15.3m at a gold price of A$3,600/oz, respectively.
A bullish gold market outlook enhances HRZ’s attractiveness
While global geopolitical tensions show no immediate signs of easing, we do not expect them to worsen in the medium term, with the possibility of long-term peace agreements, as no war lasts indefinitely. Consequently, we anticipate that safe haven buying pressure on gold will gradually decline. Conversely, current positive real interest rates are expected to decrease gradually as higher nominal interest rates eventually bring down inflation, supporting investment demand for gold. Considering these opposing factors, we expect gold prices to remain in the range of US$2,300-2,500 for the rest of 2024 and well into 2025 before gradually increasing further.
Valuation range of A$0.091–0.108 per share
To drive at our fair valuation of HRZ, we have utilised a Sum of the Parts valuation methodology by adding the discounted value of FCFs expected from Boorara OSA and Cannon TMA, plus the value of Horizon’s remaining gold resources using the peer group average EV/weighted average resource multiple of A$53.2/oz gold, plus the current value of HRZ’s investments in ASX-listed companies. Our valuation excludes the value of the company’s significant deposits of silver, zinc, cobalt and nickel at its other projects in WA. The key risks to our investment thesis include commodity price risk, funding risk, execution risk and geological risks.