Hot Chili closes $22 million deal to boost copper play

The West Australian | 26 July 2023

Hot Chili’s Costa Fuego copper project has got a timely cash boost. Credit: Claudia Aliste/File.

A cashed-up Hot Chili will ramp up a new exploration campaign at its Costa Fuego project in Chile after banking $22 million in a strategic deal with leading United States royalty streaming group, Osisko Gold Royalties.

Management says money from the deal – from which Osisko will get a 1 per cent net smelter return royalty on copper and a 3 per cent royalty on gold – will be used to fund the next steps in its project’s development, including a 30,000m drilling program.

It will also help fund the completion of the project’s resource upgrade and the delivery of its much-anticipated prefeasibility study (PFS). The company has pencilled in late this year for its resource upgrade and the second half of 2024 for unveiling its PFS.

We are very pleased to have closed the Investment with Osisko Gold Royalties enabling the Company to advance the project without the dilution of a share issuance. Costa Fuego is globally relevant, being one of only a handful of projects with potential to deliver near term, meaningful, new copper supply into a looming global copper supply shortage.

Hot Chili managing director Christian Easterday

Management sees Osisko’s involvement as a heavy-hitting endorsement for the operation. It argues that the group’s presence, alongside mining giant Glencore’s strategic lead shareholding in the company, demonstrates Costa Fuego’s global relevance and the project’s potential to deliver a near-term, meaningful, new copper supply.

The company recently revealed a preliminary economic assessment (PEA) showing the project will spit out a whopping $309 million a year on average in free cash across a 16-year mine life.

With the impressive set of numbers outlined, the project is emerging as one of the world’s biggest and lowest-cost copper plays, with an estimated post-tax net present value (NPV) of US$1.1 billion (AU$1.66 billion).

Despite the eye-watering US$1.05 billion (AU$1.57 billion) Hot Chili says it will cost to build its project, it says its payback period will be just three and a half years. Average annual operating costs clocked in at US$1.33 (AU$2) per pound of copper in the study, positioning the company at the low end of the cost curve among its industry peers.

Keys to the lower-cost estimates include the fact that at its relatively low altitude, it does not face the extraordinary costs of having to pump water up into the mountains, in addition to the fact it has proven better recoveries using salt water and does not need an expensive desalination plant. It is believed those factors alone save the company about US$1 billion (AU$1.51 billion).

The economic evaluation pegged a long-term average selling price at US$3.85 (AU$5.76) per pound of copper and US$1750 (AU$2620) per ounce of gold. But the company says that for every extra 10 cents added to that copper selling estimate – and at a time when global predictions of a significant price hike are growing by the day – it will add another US$100 million (AU$150.1 million) to its post-tax NPV.

An pre-tax internal rate of return of 24 per cent and a pre-tax NPV of US$1.54 billion (A$2.30 billion) were also predicted in the study.

Costa Fuego holds 725 million tonnes of measured and indicated resources grading 0.47 per cent copper equivalent for 2.8 million tonnes of copper and 2.6 million ounces of gold with molybdenum credits.

A PEA study is similar in nature to an Australian JORC scoping study. Hot Chili believes its cursory assessment at its Costa Fuego project suggests it could churn out about 112,000 tonnes of copper equivalent each year for the first 14 years of an initial 16-year mine life.

American investment bank Morgan Stanley has already predicted copper to have a strong quarter, largely on its central role in anything to do with electrification and decarbonisation. Key to its success in the next few months could be a meeting of the Chinese politburo next week, where a much-anticipated package of economic stimulus could be announced, especially if it boosts spending on electric vehicles and electronics.

A shortage in copper has been widely predicted as demand heats up. According to global consultancy firm McKinsey, the want for the red metal is expected to increase to 36.6 million tonnes by 2031, compared to the current demand of about 25 million tonnes.

However, the copper supply is forecast to be around 30.1 million tonnes, leaving a gap of 6.5 million tonnes by the start of next decade.

So with a hungry market baying for more copper, Hot Chili will be keen to get some to the table in double quick time and its latest cash boost should make that pursuit a little easier.

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