Tight Global Copper Supply – Play Small Caps: Hot Chili

Copper has one of the best fundamentals of all commodities. Small cap miners are the value opportunity, and Hot Chili (TSXV:HCH) (ASX:HCH) is one of the best positioned.

Copper’s Strength vs. Commodities

Commodities have been in a rut since the beginning of 2023, the Bloomberg Commodity Index has fallen 11% since then. However through this period copper has remained resilient – rising 3%.

One of the reasons copper has held up so well is that supply is structurally challenged, without significant capital investment demand will meaningfully outpace existing supply.

Source: Goldman Sachs

While copper demand growth is project to remain steady, copper mine supply is projected to fall well below demand after 2024.

Source: Goldman Sachs

Chile: A Major Copper Producer & Important Source of Future Supply

What country will help alleviate this supply crisis? Chile. On a global basis, Chile is the world’s largest producer of copper – the country accounts for 24% of current global production and 26% of the world’s future projects.

Source: RBC Capital Markets

Hunting for Copper Value: Small Caps & Developers

Examining mining investment landscape, we can clearly see that small cap copper stocks are the value opportunity. Large cap copper miners trade at 1.7X price-to-net-present value (P/NPV), while small cap peers trade at a two-thirds discount at 0.6X P/NPV.

Source: BMO Capital Markets

Copper developers offer mining investors even greater value. Hot Chili is a deep value stock that investors should have on their radar. Their Costa Fuego project is one of the largest and lowest cost development projects not owned by a major miner. The company trades at a 70% discount vs peers with a P/NPV of 0.07X

Who is Hot Chili? (TSXV:HCH, ASX:HCH)

When looking for copper stocks to own, we believe there are three key metrics to judge copper miners on with the greatest probability of success.

  1. Valuation: Is the stock pricing in good times already or can small operational milestones translate to big stock price gains.
  2. Operating Costs: In commodity businesses you need to be on the low end of the global cost curve to make sure you can operate profitably through both bull markets and downturns.
  3. Concrete Production Milestones: For exploration and development companies, a well defined and well timed path to production.

To demonstrate what high marks look like for each of these metrics we’ve chosen Hot Chili Ltd, a company we’ve spent the past year getting to know and can confidently say checks all the boxes above.

Hot Chili is a copper developer poised to become one of first independent large-scale copper projects to help replace supply from struggling South American mines.

Hot Chili possesses all the qualities that historically lead to successful investor outcomes, a cheap valuationo, low capital costs and multiple important permitting and exploration planning milestones under its belt.

Low Capital and Production Costs

Hot Chili’s Costa Fuego project is the third largest copper resource in Chile not owned by a major mining company. Costa Fuego is at a low elevation, close to the ocean for export, which means it has a cost advantage over other projects at higher elevations and with questionable water access.

Source: Hot Chili Investor Deck January 2024

Cheap Valuation

Hot Chili screens extremely cheap on a number of different metrics. Low valuations on good companies offers investors a margin of safety against unanticipated delays and operational setbacks, which come with the territory in mining.

Lower valuations also dampen volatility, making it easier for an investor to stomach the ups and down as a project moves from exploration to production and a possible buyout along the way.

With the latest preliminary economic assessment putting the post-tax net present value of Hot Chili’s Costa Fuego project at US$1.1 billion ($3.85/lb copper), Hot Chili trades at a substantial discount, 93% at the current US$81 million market value. This discount is also larger than all but one peer with credible production timelines.

Source: Hot Chili Investor Presentation Jan 2024
Hot Chili estimates Costa Fuego will have an all-in sustaining cost of $1.74/lb which is firmly in lowest 25% of all copper mines and 20% below the average cost the average copper mine in 2023 according to S&P Global.

And most mining analysts expect closer to $4.00/lb copper over the next five years. The upside potential from lagging supply is far higher than the downside, judging by analyst estimates below.

Analyst Expectations for Copper Prices

Source: Hot Chili, Bloomberg Estimates

Concrete Development Milestones

Hot Chili has already passed key milestones such as a top tier preliminary economic assessment and the granting of water rights that typically take a company starting from scratch 10 years to acquire.

Most importantly the company has concrete plans and timelines to achieve the remaining milestones that will take them to a construction decision in 2026.

Over the next 18 months Hot Chili will release a pre-Feasibility study, environmental impact assessment and mineral resource upgrade, the last three milestones before the definitive feasibility study, funding and construction.

Source: Hot Chili

Hot Chili also has the benefit of good timing, with Costa Fuego expected to be only the second or third ~100,000 ton non-major owned copper project to start up globally following the 300,000 tons/year Quellaveco mine in 2024.

Just in time to harvest higher copper prices expected in the coming years as demand from renewable energy and transportation outpace supply.

In mining its better to be lucky than good and Hot Chili has made some key strategic decisions that position the company to have the twin benefit of good rocks and good macroeconomics.

Production Timeline of Senior Copper Development Peers

Source: Hot Chili Estimates

Bonus Exploration Catalysts Can Offset any Project Timing Delays

Hot Chili recently closed a royalty deal for US$15 million that is funding the current 30,000 meter drill campaign plus operations for the next 12-18 months.

The drill campaign could expand the resource at Costa Fuego and will be instrumental a coming resource estimate upgrade scheduled before the end of Q1 2024.

Hot Chili is expanding current deposits at Productora, San Antonio and Cortadera and has over 20,000 meters of drilling remaining in the current 30,000 meter program, meaning many potential exploration catalysts remain over the next 12 months.

Exploration Targets for 2024 (Non-red circles)

Source: Hot Chili

Overall Hot Chili feels to us like one of the copper developers with the best chance of reaching production and the most upside for investors when they do. Hot Chili owns one of the few projects ready to provide near term, large scale copper supply to a market that can’t get enough. Trading at a ~70% discount to the project based valuation of major mining peers, Hot Chili offers significant upside potential with a strong balance sheet and the backing of a major global mining operator.

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.

LEAVE A REPLY

Please enter your comment!
Please enter your name here