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What’s changed at Hot Chili (HCH.ax) (HCH.v)

This evening in Australia, the Aussie junior copper play now trading in Canada, Hot Chili (HCH.ax) (HCH.v), is doing this…

…on the back of the resource update for Costa Fuego in Chile, announced just before the Antipodean open. That’s a decent bump on good volume, so let’s check out what’s changed and the quick hack is to use the maps provided by the company in before/after style. First here’s the resource visual as seen previously:

And here’s the new one, published this evening:

There are only small changes at the Productora deposit, the place to look is Cortadera to the Southeast. Grade has dropped, the open pit cut-off reduced to 0.21% CuEq (and 0.3% CuEq cut-off for underground mining) and after its recent drilling plus reinterpretation of results tonnage has moved up bigtime, resulting in an extra 1.1m tonnes copper and 1.1m oz gold (plus some moly) added to the M+I. Meanwhile, inferred has dropped accordingly as some of the rock moves up in confidence, that’s normal. Finally, the new San Antonio resource is so far small, but higher-grading and planned as feed to improve overall head grade in an eventual operation. Makes sense.

So now the reason why I still pass on HCH, resource upgrade or not. For sure the “numbers work” and you can justify a mine that offers good free cash flow but the thing is, at C$4.50/lb+ copper they all work, every single copper project out there will be able to say the same. HCH isn’t the rattiest, but the current price deck means it’s difficult to find a deposit that cannot show positive economics, on paper at least, and you cannot build ’em all. Regarding HCH and Costa Fuego, with copper prices up that turns more waste grade into ore so seeing overall grade drop is reasonable, but low grade is low grade and that’s not going to change. But my main issue is the new cut-off, because it’s not as if costs have stood still in Chile. Seeing HCH drop cut-off to 0.21% at the same time smacks of “too much optimization” and while on the subject, good luck with that 0.3% cut assumption for underground material.

While putting this quick post together, I went back to some old files on the computer and in particular, a couple of August 2014 analysis reports on Hot Chili, just after it had put its deal together with CMP (from Argonaut Equity and DJ Carmichael, to be exact) and though the story has changed since then, in many ways it’s the same proposition. Yes for sure, Cortadera added to Productora makes HCH and “Costa Fuego” an area play instead of a single target. And yes, we can debate over the desal project but aside that, its low capex intensity is still an advantage, but there’s no escaping the low overall grade and Cortadera hasn’t improved that, quite the contrary in fact. HCH was a tough sell eight years ago, it’s a tough sell today and as an added “bonus”, Glencore now has its claws in and is bound to get between the company and its long-term equity price (because that’s what Glencore does). However many times you do the Excel spreadsheets there are other projects with better, easier and more robust economics than Costa Fuego, that’s the long and the short of it and why the company is a pass.

By the way, back in August 2014 those Australian sell side anal yst reports were targeting a double-plus on the stock price:

That didn’t happen.

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