Mea Culpa, Mea Culpa
I was once told that there is no such thing as bad press as long as they spell your name right. I hope that’s correct because last week The Gold Report released an interview with me where I said that Hot Chili Ltd had copper projects in Peru.
Karen Roche of TGR did the interview and she reminded me on Friday that their name is Hot Chili, not Hot Peru. Like Saul on the road to Damascus I had a revelation. Actually they are named Hot Chili because all of their projects are in Chile.
Karen said that she would give me points for at least getting the continent right but as the company correctly pointed out, I also said that it would take $1.2 billion to get into production instead of the correct $600-$700 million. I’m abashed. The company naturally had a hissy fit.
Mea Culpa, Mea Culpa, Mea Maxima Culpa.
To my credit, I did get it right about Hot Chili having a really good story and excellent management.
To understand how brilliant the management has been in Chile with their lead project, Productora, you need to understand the mechanics of the nationalization of the copper industry in Chile.
In the 1950s, the largest copper mines in Chile were American owned and operated by Anaconda Copper and Kennecott Copper. These mines were pretty much run as company towns with the parent company operating the water, power, stores and even their own police forces.
While Socialism never seems to actually work in practice, the concept of robbing Peter to pay Paul is always quite popular with Paul. During the 1960s the call for outright nationalism of the copper industry was quite loud in Chile culminating with the election of the Socialist/Marxist Salvador Allende in the 1970 election. He promptly seized the mines and turned them over to a state owned mining company named Codelco.
The United States CIA under orders from President Nixon soon supported a coup run by the military generals who spent the next seventeen years murdering as many supporters of Allende as possible as they proved they could be just as incompetent at running an economy as the Communists.
The net effect of the nationalism of the industry and the subsequent operation of copper mining by Codelco was to centralize most of the highly prospective copper properties under their control. It should be also understood that there were dozens or hundreds of informally owned and operated small copper mines in the country that were not affected. They remained in private hands.
In addition, at some point most of the highly prospective iron projects were centralized under the control of a holding company named Campania de Acero del Pacífico (CAP) and their wholly owed iron mining venture named Compañía Minera del Pacífico (CMP).
This provided an interesting opportunity for a tiny Australian junior with the name of Hot Chili. The company was formed with the intent of finding and advancing a company making copper projects in Chile. Company Managing Director Christian Easterday found such a project they named Productora. There was one tiny glitch.
As a result of the nationalization of the copper and iron industries, Productora came in thirds. Think of CMP owning 1/3 because there is an iron component, Codelco owned 1/3 because there is a copper component and a private owner controlled 1/3 because he owned a private high grade copper mine right in the center of the deposit.
CMP has lots of iron projects. They didn’t need the aggravation of trying to put together the package. Codelco has lots of copper projects so they didn’t need the fuss. The private high-grade copper mine owner didn’t have the time or the resources to work with the giant CMP and even bigger Codelco.
Now you could debate from now until the cows come home the wisdom of taking on a project that would take years to massage the management of giant iron and copper interests in Chile to turn into Productora. I don’t doubt there were people questioning the sanity of Christian Easterday. Putting that deal together had to look like a fool’s errand for years. Everyone in Chile understood it was a massive project but the real issue was getting three groups together to march in the same direction.
Easterday managed to stitch it together and from a technical point of view, it has to seem as if it’s been all downhill from there.
The company has just under 350 million shares outstanding. It’s an Aussie company and that’s low for them. The top five shareholders own about 56% of the shares according to their latest presentations.
2013 was a banner year for Hot Chili with 102,000 meters of drilling completed at Productora during the year. An increased JORC Resource released early in the year doubled the resource to about 165 million metric tonnes at 0.6% copper, 0.1-g/t gold and 132-g/t moly. That makes a tonne of material worth about $61 in the ground and gives about $9 billion worth of raw rock in a company with a market cap of $135 million US.
There is a high-grade component to the resource that offers the opportunity for a nice rich starter pit: 53 million tonnes at 0.8% copper and 0.2-g/t gold. When I was there Christian explained that a lot of the 2013 drill program was testing a high-grade eastern flank of the deposit. He expects to release an updated Resource in H1 of 2014. You can reasonably expect a higher resource and additions to the high-grade portion. A lot of what was considered waste will be converted to ore.
There are some subtle dimensions to the Hot Chili story that are simply not obvious via their website. Productora is centered in the core of CAP/CMP’s iron production. The project is located some 15 km south of the town of Vallenar and perhaps 75 km SE of the major port of Huasco where CAP has a major iron pellet plant. CAP is interested in the iron component so how to move forward with the iron is the source of much discussion between HCH and CAP.
In addition, there is a copper oxide cap that was treated as waste and pre-strip material in the Scoping Study. The government corporation ENAMI has a processing plant about 15 km from Productora in the process of being expanded. Traditionally ENAMI has provided processing and marketing assistance to small-scale miners. ENAMI would be thrilled to get a steady and known supply of oxide material. Hot Chili would be thrilled to lower their startup capital.
Hot Chili released a Scoping Study in February of 2013 along with an updated resource. The Scoping Study called for mining and milling 30,000 TPD, a strip ratio of 3.5-4.5:1, recovery of 90% copper 80% gold and 75% moly with a capex of what they say is $500-$700 million (contingent on off balance sheet options for mining and certain infrastructure.)
Everybody in the mining business fudges some figures. If you look at the $3.9 billion capex required for McEwen Mining’s Los Azules copper/gold project in Argentina, they plan on producing 120,000 tpd using a figure of $3.00 for copper, $1300 gold and 100% recovery. Well, copper isn’t much above $3 and gold just went above $1300 and nobody in Christendom recovers 100% of anything under any circumstance.
Likewise, a reasonable capex for Productora without the (contingent on off balance sheet options for mining and certain infrastructure) would be more like ¼ of McEwen’s $3.9 billion capex. But Productora is right in the middle of mining country in the biggest copper producing country in the world and Los Azules is in Argentina.
Los Azules of McEwan Mining will find suitors eagerly waiting in line to feed $3.9 billion into a cone crusher about the same time hell freezes over. It is Argentina for crying out loud. The Harvard PHD running the central bank swears up and down that printing money doesn’t cause inflation.
Hot Chili plans on releasing a Pre-Feasibility study for Productora in the first half of 2014. That should show more accurate numbers. What has become painfully obvious over the correction of the last two years is that majors have become increasingly unwilling to fork over billions of dollars to build mines that take years to get into production in an increasingly dangerous financial world. Low cost mines such as Productora will go into production. $4 billion dollar mines will not go into production no matter where they are located.
I believe there is an excellent chance that China is slowing down and the demand for base metals will decrease. As I explained in my AUReport interview, some copper projects will succeed even faster in a low price for copper environment.
HCH is already partners with CAP and CODELCO. They are right in the heart of mining country with power and a major port located just 75 KM away. Christian Easterday has created the perfect mining story where everyone involved has a vested interest in seeing the project move forward. A low cost for copper will put all of the marginal copper mines out of production and increase demand for copper from Chile.
Don’t think for a minute that Hot Chili is a one trick pony. They have a 2nd major project in the pipeline named Frontera located some 70 km south of Productora next to the Pan American Highway. The company has completed some 12,000 meters of RC drilling and expects to release a resource early in 2014. Frontera is a copper/gold porphyry.
Hot Chili has yet another copper project they call Banderas located about 50 km north of Productora. It’s an early stage project where they are targeting areas to test in a first pass 10,000-meter drill program starting in the first half of 2014.
The company is making every move forward with the intention of becoming a production company with copper production of 120-150 thousand tonnes in the future. I suppose it’s possible they they could be bought out but with so much insider and institutional ownership, management will be the masters of their own ship.
I did get it dead wrong about what country they were operating in but I’m old and old people get brain farts on all too regular a basis. It was stupid of me and for that I apologize. But I did get it right about great projects and great management. The company doesn’t seem to have participated as yet in the major rally that started in early December but as more people become aware of their story, I expect to see them move higher. If you are looking for a good copper story, well advanced on the way to production with excellent management, you need to be thinking about Hot Chili.
Hot Chili is an advertiser and I am biased. As always take some responsibility for your own investment decisions and do your own due diligence.