ONDO and HZM are polar opposites in the AIM market. Both have their place.
On FTSE AIM, there are two types of companies.
The first is the high risk, high reward business — usually a junior resource explorer or biotech with a significant asset but no cash — where investors buy shares in a few companies, hoping one will make them rich and expecting several to fail.
This aptly described, and to an extent, continues to describe Horizonte Minerals. Long-time readers will know that I specialize in high-risk shares through baskets of securities — whether in lithium, gold, copper, graphite, oncology etc. A key aspect of this strategy is to not put all eggs into one basket, but to diversify.
The second is high quality growth companies, which are suitable for an AIM inheritance portfolio. They tend to have a groundbreaking new product that has the potential to revolutionize an entire market — businesses I tend to characterize as ‘new tech.’
Ondo is of course a top pick in this sector for its LeakBot — others include Abingdon Health for the saliva pregnancy test, alongside Tekcapital and OptiBiotix for their salt and sugar substitutes respectively. While you can’t categorize growth companies as low risk in a high-rate environment, you can be relatively assured that you won’t wake up to a horror RNS.
Of course, there’s space in the market for both types of companies — but what I find most interesting about HZM and ONDO is that they perfectly epitomize both ends of the market.
Let’s dive in.
Horizonte Minerals gamble
When HZM announced that capex costs at Araguaia would need to increase by at least 35% in early October, the stock promptly collapsed. Of course, just because you’re 90% down, doesn’t mean you can’t go another 90% down — even if the opportunity for a punt presents itself.
At the time, management indicated that the Reta Engenharia review into capex costs would report back in mid-Q4 2023, which would give some indication of whether shareholders would be obliterated or enjoy a solid recovery. Anyone who invested at this point was doing so in full knowledge that this was now a gamble.
Today’s RNS is bad on several fronts. HZM:
- is reducing construction activities to advance only ‘critical work streams’
- only has sufficient working capital to around mid-December 2023
- which can only be extended to late Q1 2024 if suppliers, other cash preserving measures, or other financing solutions are agreed
Or in other words, they’re out of money in a few weeks. HZM is still ‘continuing to work closely with its senior lenders and its cornerstone shareholders on a financing solution,’ but we are now in mid-Q4, so I suspect that the company already knows the cost overrun and it’s large enough that lenders need longer to decide how to proceed.
Key shareholders and lenders visited the site over the past seven days, and they are ‘undertaking their respective due diligence as part of a funding plan and expect to finalise their respective internal diligence processes in early Q1 2024 with funding completion targeted for late Q1 2024.’
This should allow HZM to continue to access its Senior Debt Facility. HZM notes that ‘first production at Araguaia will be contingent on the result of the various funding discussions and the Company will continue to provide updates on its financing progress as required.’
Of course, the share price has now slumped another 45% to circa 10p per share — and now the options are either an asset sale, or some cash gets lent out at a steep premium to buy the company time. Interestingly, there is still a scenario where HZM manages to acquire funding on acceptable terms — but the risk is now higher for the same reward, and the share price is reflecting this.
There is a good chance that shareholders lose everything.
Ondo InsurTech breakthrough
When you’re a ‘new tech’ company, there are two key catalyst stages — when you patent a product that both solves a problem AND works, and then when you get that one key client that will take the product global.
The LeakBot design has been proven for some time, but the client announcement today is the second catalyst that truly de-risks the company. ONDO has now partnered with Fortune 100 insurer Nationwide to offer the LeakBot device to US homeowners insurance customers as part of the insurer’s Smart Home Program.
While ONDO has many other clients, this is the big ticket. Nationwide is the eight largest homeowner insurer in the US, and launch is planned for early 2024 for one US state — and then further state launches through 2024 and beyond.
CEO Craig Foster enthuses that ‘it is a great honour to be chosen by one of the biggest and best insurance companies in the U.S. to deploy our water damage prevention system’ with a senior Nationwide representative noting that ‘the average cost of a water claim is more than $12,000, but many water losses are preventable.’
This will be the stepping stone to much greater things for ONDO — and the share price rocket today underscores this. The company now goes from a high risk investment to an Inheritance Portfolio choice — but with significant growth potential.
AIM investors tend to be drawn to the riskier side of the market — but high risk, high reward cuts both ways.
This article has been prepared for information purposes only by Charles Archer. It does not constitute advice, and no party accepts any liability for either accuracy or for investing decisions made using the information provided.
Further, it is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.