Hot Chili Q1 2024 Update – Two Years of Catalysts Ahead

Hot Chili (TSXV:HCH, ASX:HCH) released Q1 2024 financials that showed significant progress in both exploration and development at the company’s flagship Costa Fuego copper project in Chile. Hot Chili is still on track to begin producing up to 150k tonnes of copper annually by 2028.

Highlights:

  • 6% increase in total contained copper and 9% increase in high grade component since the initial PEA at Costa Fuego.
  • Pre-feasibility study to be released by the end of 2024 which could be a significant catalyst for the shares.
  • Creating large standalone water supply company, a potentially significant new source of revenue.
  • Up to 25,000 meters of exploration drilling over the next year
  • Beginning a bankable feasibility study within the next 18 months on the road to targeted production by late 2027, 2028.

Bottom Line

Hot Chili is one of the best positioned copper juniors in the world. Costa Fuego has copper grades in line with other projects moving forward, attractive economics even excluding additional exploration success and unique water access that will both generate non-copper revenue and make Hot Chili a low cost producer in the region.

A preliminary feasibility study (PFS) and bankable feasibility study (BFS) will be out within 6 and 24 months respectively on top of exploration drilling that could really move the needle. Hot Chili is in the sweet spot to see a rerating of its 70% NPV discount regardless of what happens with copper prices now hovering near $4.50/lb.

Quarterly Milestones

Minerals Resource Update added 6% to total contained Copper

Hot chili has grown the copper equivalent resource at Costa Fuego to 4.2 million tonnes from 3.5 million tonnes over the past 4 years with significant nearby exploration still to come.

Management is already contemplating a 35% planned production increase and with 97% of resource from the PEA in the indicated category, the probability of improving project economics are growing by the day.

Costa Fuego Estimated Resource Over Time

Hot Chili Delivers Water Study and Prepares to Create New Water Company

Hot Chili is aggressively exploiting a key location and permitting advantage it has over other copper projects in the region.

Sitting only 30 miles from the ocean and with a water permit in hand that took 10 years to acquire, Hot Chili is well positioned to build Costa Fuego at a lower cost than peers.

Hot Chili is Close to Water and at a Low Elevation

The company is also talking with potential partners to create a regional water company, which could become an additional revenue generator on top of the copper mine.

The net present value to startup capital ratio for Costa Fuego is in line with much larger projects, demonstrating the value of location and water rights.

Further Regional Consolidation for Costa Fuego

Hot Chili continues to consolidate the region, buying up underexplored areas nearby with high potential based on past production history and initial geophysics.

In the quarter the company acquired Domeyko, the largest land package since the 2019 acquisition of Cortadera. Domeyko is only 30km south of Costa Fuego and sits on top of four historically producing copper mines that were exploited for oxide but not copper sulphide mineralization, leaving them significantly underexplored.

And management isn’t done yet, saying they have plans to acquire additional land that has potential to further expand the scale of Costa Fuego.

Domeyko Sits On Top of Four Past Producing Copper Mines

Source: Hot Chili Press Release May 2024

Execution of MOU for Port Agreement

Hot Chili has officially begun the process of acquiring export rights on the local Las Losas port. This will ensure lower production costs and will lock in export capacity regardless of ebbs and flows in production.

Las Losas Port Down the Road from Costa Fuego

The company is also spinning off its water rights into a standalone water supply company, an impressive differentiator showing the value of water rights that took 10 years permitting back and forth to acquire. Management said more details and developments with potential local utilities and partners will be released in the coming year.

Map of Hot Chili’s Second Maritime Application for Seawater Intake

Source: Hot Chili Q1 24 Earnings

Exploration Advancing

Hot Chili is drilling up to 25,000 meters over the next 12 months which could potentially lead to a significant increase in copper resource, a larger project and improving economics.

Two recent drill results that returned lower grades of copper than anticipated spurred management to slow down and run high definition, deep penetrating electrical geophysical surveys across the main resource areas of Costa Fuego.

These surveys will allow the team to better pinpoint where to place the 25,000 meters of drilling this year to maximize discovered ounces per dollar.

Productora Survey Area and Drillhole Grades

Source: Hot Chili

Cash Position of A$39.5 million assuming full allocation of recently announced capital raise.

Hot Chili is now well funded to advance a number of catalysts over the next 1-2 years. The recent capital raise of A$30 million means total cash is nearing A$40 million against a spending rate of ~A$17 million per year as of Q1.

A large drill program increases the chances that Hot Chili releases a significant resource increase when the mineral resource update is released in the first half of 2025.

24 months of Multiple Catalysts

Source: Hot Chili May 2024

The next two years will see multiple opportunities for Hot Chili to close its significant valuation discount.

60% Cheaper Than Group Average Discount to NPV

Source: The Global Market Developer Peer Group of market-listed companies were selected on the following basis: Global copper development companies (not controlled by a major miner), with by-product metals where applicable, reporting development studies of average annual life-of-mine copper production of greater than 40 kt, which have been published within the last 4 years. Companies with older studies were considered to have their development project on hold. Companies with significant projects such as Pebble and King-king were excluded due to high perceived geopolitical risk, limiting the probability of development. Mining companies already in production but part of the Global Developer Peer Group were excluded (Lundin – Josemaría, Capstone Mining – Santa Domingo, Mantos Blanco and Mantoverde). Source: Published Company reports on studies undertaken on projects that were not in production at the time of the studies. Net Present Value from projects has been sourced from publicly available data that has been provided under differing economic assumptions. Public information for projects has been adjusted to provide a standardised data set under a US$ 3.85/lb Cu price. Published sensitivity data provided results that bracketed an US$ 3.85/lb Cu price, which was then calculated. Details of the adjustment are provided in the reference table on Benchmarking Data in the appendix (see slides 37 to 39) . The projects that were not studied at an 8% discount rate were Hillside (5%) and Caravel (7%). Weighted average of Ratio of Market Capitalisation / Post-Tax NPV8% reduces impact of outliers by weighting for Post-Tax NPV8% . The PEA is preliminary in nature and includes 3% of production feed from Inferred Mineral Resources that are considered too speculative geologically to have the economic considerations applied to them that would enable them to be categorised as Mineral Reserves, and there is no certainty that the PEA will be realised. Mineral Resources that are not Mineral Reserves do not have demonstrated economic viability. See Slides 2 and 40 for additional cautionary language

Qualified Persons – NI 43-101

The information pertaining to the Mineral Resource Estimates included in this report has been reviewed and approved by Ms. Elizabeth Haren (FAUSIMM (CP) & MAIG) of Haren Consulting Pty Ltd. All other scientific and technical information in this report has been reviewed and approved by Mr Christian Easterday, MAIG, Hot Chili’s Managing Director and Chief Executive Officer. Each of Ms. Haren and Mr. Easterday are a qualified person within the meaning of NI 43-101.

Hot Chili is an Investor Awareness Client of Capital 10X. Please see our disclaimer for more details.

The opinions provided in this article are those of the author and do not constitute investment advice. Readers should assume that the author and/or employees of Capital 10X hold positions in the company or companies mentioned in the article. For more information, please see our Content Disclaimer.

Duane Hope is a Partner at Capital 10X, he brings over 15 years of communications and research experience to the firm. His research and writing have appeared in publications for North American, European and Asian audiences.

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