It is not easy to buy shares of Hot Chili, one of the most promising copper exploration companies (in my opinion). But for those interested in copper mining sector, Hot Chili could of some interest.
The
company overview
Hot Chili is a copper exploration company that is totally focused on projects
located within the
iron-oxide-copper-gold (IOCG) belt in Chile. According to the company:
“The advantage there over the high Andes projects is
stark. They're low altitude, close to the coast and close to infrastructure, so
development hurdles will be lower.”
Currently, the company's
immediate objective is to to develop its flagship Productora Project, while also
undertaking exploration work programmes over other advanced projects - Frontera, Banderas and Los Mantos. All projects are
located in
the coastal range of northern Chile, where the company plans to emerge as a major
copper producer with potential future annual production target of 120 – 150
thousand tons of copper.
The map below presents the location of the company's properties in Chile:
The Productora
deposit
The company’s main property, currently under intensive exploration and
development, is called Productora. It is located 15 kilometers south of the
township of Vallenar in Chile’s Region III. The ore deposit is near surface,
near the coast, at low altitude (< 1,000 meters) and has significant
infrastructure advantages. Importantly for a Chilean project, it has access to
power and water. Hot Chili started the Productora’s exploration program in
2010. As history of that exploration shows, it was a quite strange process.
First of all, in 2010, when
Hot Chili was acquiring the first rights to Productora, this property was
perceived as a uranium deposit, one of the largest and most advanced uranium
projects in Chile. The company had only fractional knowledge that the property could
comprise some amount of copper as well.
Next, since the very beginning
the company was aware that to conduct the exploration process properly, it had
to consolidate many properties, which were owned by the State, private owners
or private or state-controlled companies. It was a hard and time-consuming
process that nobody before was able to carry out. But the consolidation plus
intensive exploration program brought very impressive results.
Firstly, the company
discovered the so-called Main Zone. According to the company, the Main Zone is
a breccia style deposit comprising significant amounts of copper of relatively
high grade, located near surface (in large breccia chambers).
What is breccia? According to
many geological sources, breccia
is a sedimentary rock of angular or subangular
fragments larger than 2 millimetres. The spaces between the large
angular fragments can be filled with a matrix of smaller particles or mineral
cement that binds the rock together.
There are two main areas of the
Main Zone. The first one is the sulfide copper deposit comprising a few zones
of concentrated mineralization (as, for example, the zone called Habanero). The
second one is an oxide copper deposit, which is located within the Main Zone
and at its northern and southern ends.
Up till now the company has
delivered the Main Zone resource estimates only.
The Main Zone reserves and
resources
The Productora’s Main Zone indicated
mineral resources comprise 214.3 million tons of ore grading 0.48% copper,
which is equal to 1,029 thousand tons of copper. Mineral resources also contain
675 thousand ounces of gold and 29 thousand tons of molybdenum.
According to the Australian JORC Code 2012,
mineral resources are inclusive of mineral reserves,
which comprise 90.5 million tons of ore grading 0.48% copper. It means that
mineral reserves contain 433 thousand tons of copper, 308 thousand ounces of
gold and 15.5 thousand tons of molybdenum. Both reserves and resources were
calculated using price assumptions of $3.0 per pound of copper, $1,250 per
ounce of gold and $10.0 per pound of molybdenum. Since these prices are around
today’s market prices, there is a low possibility that the company would have
to downsize its reserves.
The above described resources
and reserves do not include copper oxide deposits, which are located around the
main sulfide deposit. The company estimates that these oxide deposits contain
additional 25.6 million tons of ore grading 0.52% copper, which is equal to 133
thousand tons of copper. On February 19, 2015 the company announced that the
Productora’s pre-feasibility study would include a copper-oxide project. Including
this deposit should improve the project’s economics through adding the
additional production of around 6 thousand tons of cathode copper per year.
Alice deposit
The Alice deposit, discovered
in 2014, is a porphyry style deposit located 400 meters west of the Main Zone.
What is a porphyry deposit?
Well, according to a number of geological sources, porphyry deposits are large
mineralized systems comprising large tonnage of ore. These systems are
low-grade deposits (below 1% of copper), where copper is mined as open-pit
operations. As much as 65% of world’s copper supply comes from porphyry mines.
There is one special feature
of these deposits. According to the book “Understanding Mineral Deposits” by
Kula C. Misra:
“Most
porphyry copper systems contain one or more varieties of breccias.
All
copper-bearing, intrusion-related breccia bodies are not integral parts of porphyry
copper deposits, although they often show close space-time associations with
porphyry copper emplacement in a given tectonic unit. Such breccias bodies,
often referred to as breccia pipes or chimneys because of their cylindrical
morphology, are of minor importance compared to porphyry copper deposits, but
they are attractive targets of exploration as they tend to carry higher grades
and require less capital investment to develop. “
Taking into account the above
citation, it was quite probable that after the discovery of the Main Zone,
which was a breccia style deposit, a porphyry system could be somewhere in a
close vicinity to it. But in 2012 the company ceased exploration program at
Productora and focused on development of the Main Zone aiming at preparing a pre-feasibility
study as quickly as possible. It took two years and the study is expected very
soon.
Then, last year Hot Chili
renewed exploration and very quickly the theory was confirmed - Hot Chili
discovered the Alice deposit. In the first quarter 2015 the company continued
intensive drilling program at Alice.
At the moment there are no
resource estimates for Alice but the company is confident that the discovery of this deposit should
substantially increase the Productora’s mineral resources.
According to the company:
“Drilling
returned from Alice has intersected very wide zones of copper extending from
surface, outlining the potential for significant extensions of higher grade
copper. Results include 204m grading 0.6% copper and 0.1g/t gold from within a
broader intersection of 237m grading 0.5% copper and 0.1g/t gold from surface.
Importantly, these wide zones
of higher grade copper at Alice remain open toward the west and at depth.
Further drilling is planned to expand the extent of Alice mineralisation in
advance of a maiden resource estimate.”
It is probable that the Alice resources (and reserves)
estimates will be an integral part of the incoming pre-feasibility study. If Hot
Chili chooses this approach, investors should have much broader knowledge on
the Productora’s total mining potential.
Productora
– economics and development timeline
It is too early to make
advanced estimates of the Productora’s mining potential and its value.
Investors should wait for the pre-feasibility study, which is supposed to
disclose many details on the deposit’s future. Currently only a fractional
knowledge is available. Anyway, Productora is supposed to be a medium-size mine
of low capital intensity (measured as capex per production volume). The chart
below shows how Productora is positioned among other Chilean copper development
projects:
According to the company’s
announcements and press publications the basic economic assumptions for
Productora mine are as follows:
·
Productora should produce approximately 45 thousand to
55 thousand tons of copper concentrate annually; the estimated initial life of
mine is nine years
·
Apart from copper concentrate, for six to eight years approximately
6 thousand tons to 6.5 thousand tons of cathode copper per year will be
extracted from the oxide deposit
·
The above mentioned production figures are expected to
be revised after including the Alice deposit
·
the estimated capex should stand at least $650 million;
this figure includes $80 million - $90 million cathode production capex
Productora – development
timeline
·
End of the second quarter 2015- publication of the
pre-feasibility study on Productora.
·
Fourth quarter 2016 – publication of definitive
feasibility study and closing of financing
·
From the fourth quarter 2016 to the end of the second
quarter 2018 – mine construction
·
Second half 2018 – commencement of production.
Other
mineral projects
Apart from Productora, there
are three projects at various stages of exploration and development:
Frontera
copper project
The project, a copper-gold porphyry deposit, is located 50 km south of
Productora, in Region IV of Chile. Frontera is in a close vicinity to the
Pan-American Highway and existing power transmission corridor. The project’s
mineral resources comprise 50.5 million tons of ore grading 0.4% copper and 0.2
g/t gold, which equals to 187 thousand tons of copper and 356 thousand ounces
of gold.
Currently Hot Chili is conducting drilling program at the property.
Banderas
copper project
The project is located in Region
III of Chile, 50 km north of Productora. Currently Banderas is at its early
exploration stage.
Los
Mantos copper project
Los Mantos is located in
Region IV of Chile. Similarly to the Banderas project, Los Mantos is at an
early exploration stage.
Financial
situation
Hot Chili is an exploration /
development company. At the moment it does not report any operating revenue. Therefore,
to conduct exploration and development, Hot Chili has to be very smart in
finding financing sources. And this company is indeed very smart at it.
Between 2010 and June 30, 2014
the company spent around A$71 million (A$ - Australian dollar) on exploration,
evaluation, plant and equipment. These expenditures were financed mainly
through equity financing. In that period Hot Chili issued 347.7 million shares
(this year the company issued additional 67.1 million shares via placement to
major shareholders). The main Hot Chili shareholders are as follows (as of
March 2015):
·
CAP S.A. - one of the biggest Chilean steel producers,
holding a stake of 11.8%
·
Taurus Funds Management, an-Australia based global
fund manager, holding a stake of 11.7%
·
Exploration Capital Partners, an affiliate of Sprott,
holding a 5.4% stake
·
Kalgoorlie Auto Service Pty Ltd – holds a 19.3% stake.
Apart from these shareholders,
the company’s management also holds a big stake in the company. The two
company’s directors, Murray Black and Christian Easterday, hold 16.8 million
and 17.1 million shares respectively (stakes of 4.8% and 4.9%). These directors
also hold significant amounts of options over ordinary shares.
Another source of capital is a
credit facility of $25 million from Sprott Resource Lending Partnership. Currently,
the amount drown against the facility is $10 million and Hot Chili, after the
last equity placement, is confident that it will not need to use additional
funds from Sprott.
According to my estimations,
the company currently has around A$10 million in cash at hand, which should
fulfill the company’s financial needs for the coming three quarters.
As I have mentioned above
(section on the Productora economics), Hot Chili will need at least $650
million to build the Productora mine. It is a lot of money but the company has already
found a partial solution to that problem. The last general meeting of the Hot
Chili shareholders approved a landmark deal with Chilean resources major
Compania Minera del Pacifico S.A. (CMP). CMP is a subsidiary of Compania de
Aceros del Pacifico S.A. (CAP), the largest iron ore mining company and
integrated steel business in Chile (and a big Hot Chili’s shareholder). As the
company states:
“This
approval opens the door to funding options and provides access to vital infrastructure,
saving time and money in the development of Productora.”
The deal is structured in the
following way:
·
CMP will contribute surface rights in certain
Productora tenements, enabling Hot Chili to build the project’s infrastructure
·
In exchange for these rights CMP will be granted a
17.5 stake in Productora
·
CMP holds an option to increase its stake in
Productora to 51% at a price between $80 million and $110 million (the option
price, $1.5 million, will be paid to Hot Chili) to be paid in two tranches;
·
Until the pre-feasibility study is completed, CMP will
be free of any financial contributions into Productora
·
If CMP exercises the option to increase its stake in
Productora, it will provide Hot Chili with $13 million loan facility
·
CMP, holding a 51% stake in Productora (if it exercise
the option), will be obliged to co-finance the mine construction.
Let me sum up all these
figures. The agreement with CMP will provide Hot Chili with cash of $1.5
million to $123 million, depending on exercising the CMP option. In my opinion,
if CMP exercised its option, Hot Chili would be very near to close the
Productora financing (to remind my readers – the Productora capex is at least
$650 million). If such were the case, CMP would be responsible to cover
expenditures of around $332 million (attributable to its 51% stake in
Productora).
Hot Chili, holding cash of
around $123 million (provided by CMP) would have to find additional $196
million to finance its share of the Productora construction. It is still a lot
of money but, well, it is much easier to find around $200 million than $650
million…
Valuation
Currently, the main value of
Hot Chili is attributable to Productora. Due to the fact that the Productora
pre-feasibility study has not been published yet, it is too early to value it.
Fortunately, in March 2015 the
company delivered some value assumptions. According to these assumptions,
Productora was valued between A$245 million and A$297 million, which translates
into A$0.58 – A$0.70 per one share of Hot Chili. Currently these shares, listed
on the Australian Stock Exchange, are trading at A$0.095 a share.
Key
people
There are two managers responsible for the
company’s operations:
Murray Black (Non-executive Chairman) – he has over 35 years experience
in the mineral exploration and mining industry and has served as an executive
director and chairman for several listed Australian
exploration and mining companies. Apart from Hot Chili, he part-owns and
manages four Australian drilling businesses, has interests in several
commercial developments and has significant experience in capital financing.
Christian Easterday (Managing Director)
– he is a geologist with over 15 years experience in the mineral exploration and
mining industry. Easterday held several senior positions and exploration management
roles with top-tier gold companies including Placer Dome, Hill 50 Gold and
Harmony Gold, specializing in structural geology, resource development and mineral
economic valuation. He was also involved in various aspects of project
negotiation and valuations covering gold, copper, uranium, iron ore, nickel, and
tantalum resource projects in Australia and overseas.
Summary
Today Hot Chili is a small
exploration / development company focused on the development of its flagship
project called Productora. If the company is successful, by 2018 it should
become a mid-tier copper-gold mining company producing at least 50 thousand
tons of copper per year. What is more, it is quite probable that the company
would produce even more copper – most recently Hot Chili has discovered another
copper deposit, which should be an integral part of Productora. Last but not
least – it seems that the estimated capex should be at least $650 million,
which positions this mine as one of the lowest capital intensive projects in
Chile.
In my opinion, investors
interested in investments in copper producers should take Hot Chili into their
consideration.
Price action as reported by the Australian Stock Exchange:
