WA Resources: Copper developer

Transcription

1 HCH.asx Speculative Buy Hot Chili Ltd WA Resources: Copper developer HOT CHILI LTD Industry interest and next study to improve economics Hot Chili owns the very large, but low grade, Productora Copper Project in Chile. The Company has completed a scoping study, and is close to finalising a PFS. Productora is planned to be a long life, bulk tonnage open pit mine producing up to 60ktpa of copper, hopefully with first production in In the Reserve (March 2014), C1 cash costs were estimated to be ~US$1.70/lb Cu (US$3,750/t) after credits for ~45kt pa payable copper. With capex ~$US600m, and current commodity prices, it suggests the project is marginal. However, HCH hopes to improve the economics with the current PFS, by increasing scale (lower units costs), decreasing strip ratio (include oxide heap leach), increasing mine life and introducing higher grade feed (from Alice). Hartleys estimates US$4.00/lb for strong economics Our pre-tax project value for Productora is minimal using cost assumptions similar, but more conservative, than the scoping study and commodity prices similar to consensus. We estimate Productora would generate an average of ~$50m pa EBITDA, and based on capex of US$600m, that means our valuation is minimal. However, using copper prices of US$4.00/lb, we estimate EBITDA is closer to $155m pa, and hence it becomes a very viable mine. We hope that the PFS is able to improve on our cost/capex estimates, such that the operation is viable even on conservative copper prices. HCH could be cash backed 17-27cps? In May 2015, when the copper price was ~US$2.90/lb and HCH market cap was ~$55m, HCH completed a transaction with CMP to sell a 17.5% interest in Productora in exchange for easement rights, surface rights and interests in various mining rights over the project. In addition, CMP have been granted an option to acquire a further 32.6% interest and increase its stake to 50.1% of Productora for ~US$80-110m. The decision to exercise will be taken in two tranches. Tranche 1 is 90 days after the PFS (we expect end CY15) and Tranche 2 is 90 days after DFS (we expect early CY17). We assume the option tranches are exercised, but the valuation is at the lower end of the range (implying total value US$80m for 32.6%). We therefor estimate that HCH will be net cash ~A$70m at June 2017 once the DFS is complete and assuming Tranche 2 is exercised. Based on the implied valuation for the upper and lower end of the exercise price, and our estimated net cash position after exercise, we value HCH between ~28cps and 41cps assuming further dilution to fund development. Assuming no further dilution, implies a valuation 41-59cps. Initiate with Speculative Buy recommendation We initiate with a Speculative Buy recommendation, with a 24cps price target despite our low valuation. This is because there is significant upside should the CMP options be exercised (cash backed ~18-27cps). Note also, if HCH is below 25cps, then the whole EV of HCH is less than the lower end of the option to acquire up to 50.1%. However, there is downside risk if the option were not exercised, given it could undermine confidence in the project. In particular, unless the PFS improves on the scoping study, the lapsing of the option seems a risk. The modest net debt position is another short term risk, although it can easily be repaid if CMP exercises the Tranche 1 option. Share Price Valuation $0.00 Price Target (12 month) $0.24 Brief Business Description: Low grade, bulk tonne, Copper developer in Chile Hartleys Brief Investment Conclusion Marginal project on scoping study but very large and hence leveraged to copper prices and PFS could improve on scoping estimates. Option to buy implies strong cash backing if counterparty exercises it. Chairman & MD Top Shareholders Kalgoorlie Auto Services (assoc M Black & C 15.8% Cap S.A. (Port Finance) 12.8% Taurus Funds Mgt 12.0% Megeve 7.9% Exploration Capital Partners (affil. Sprott) 5.5% Blue Spec Sondajes Chile (assoc M Black) 5.5% Company Address Applecross, WA, 6153 Issued Capital - fully diluted Market Cap - fully diluted Cash (30 Sep 15a) Debt (30 Sep 15a) EV EV/Resource Cu eq lb EV/Reserve Cu eq lb Prelim. (A$m) FY17e FY18e FY19e Prod (kt Cu Eq) Op Cash Flw Norm NPAT CF/Share (cps) EPS (cps) P/E Mt grade Cu Eq Resources (Mt CuEq) % 1.4 Reserves (Mt CuEq) % 0.5 Author: Trent Barnett Head of Research Ph: E: trent_barnett@hartleys.com.au 13 Nov 2015 Murray Black (Chairman & Non-Exec Director) Christian Easterday (Managing Director) First Floor, 768 Canning Highway Nov-14 Hot Chili Ltd $ m 433.7m A$52.8m A$54.2m A$7.3m A$13.9m A$59.4m A$0.09/lb A$0.27/lb A$ 1. M Mar-15 Jul Nov-15 Volume - RHS Source: IRESS HCH Shareprice - LHS Sector (S&P/ASX SMALL RESOURCES) - LHS Hartleys Limited ABN (AFSL ) 141 Page St Georges 1 of 28 Terrace, Perth, Western Australia, 6000 Hartleys does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Further information concerning Hartleys regulatory disclosures can be found on Hartleys website

2 Hot Chili Ltd Share Price Speculative Buy HCH $0.125 Directors Company Information Key Market Information Murray Black (Chairman & Non-Exec Director) First Floor, 768 Canning Highway Share Price $0.125 Christian Easterday (Managing Director) Applecross, WA, 6153 Market Capitalisation - ordinary A$53m Dr Allan Trench (Non-Exec Director) Net Debt (cash) $7m Dr Michael Anderson (Non-Exec Director, Taurus Nom.) Market Capitalisation - fully diluted A$54m Roberto Adriasola de Andraca (Non-Exec Director) EV A$61m Melanie L:eighton (exec., alternate director for M Black) Issued Capital 422.7m Top Shareholders m shares % Options (ITM) 11.0 Kalgoorlie Auto Services (assoc M Black & C Easterday) % Issued Capital (fully diluted inc. all options)* 433.7m Cap S.A. (Port Finance) % Issued Capital (fully diluted inc. all options and new capital)* 633.7m Taurus Funds Mgt % Megeve % Valuation $0.000 Exploration Capital Partners (affil. Sprott) % 12month price target $0.238 Blue Spec Sondajes Chile (assoc M Black) % Reserves & Resources Mt % Cu Cu Kt g/t Au Koz Mo ppm Mo kt P&L Unit 30 Jun Jun Jun Jun Jun 20 TOTAL RESOURCE % Net Revenue A$m M&I % Total Costs A$m Inferred % EBITDA A$m Productora Resource % margin % 19% M&I % Depreciation/Amort A$m Inferred % EBIT A$m Productora Reserve % Net Interest A$m Transitional % Norm. Pre-Tax Profit A$m Fresh % Reported Tax Expense A$m Frontera Resource % Normalised NPAT A$m M&I % Abnormal Items A$m Inferred % Reported Profit A$m Production Summary Unit Jun 18 Jun 19 Jun 20 Jun 21 Minority A$m Mill Throughput Mt Profit Attrib A$m Mined grade Cu% 0.5% 0.5% 0.5% Mined grade g/t Balance Sheet Unit 30 Jun Jun Jun Jun Jun 20 Production - Copper Kt Cash A$m Production - payable - Copper Kt Other Current Assets A$m Production - payable - Gold (koz) Total Current Assets A$m Production - payable - Molybdenum Mlbs Property, Plant & Equip. A$m Cu Equiv Kt Exploration A$m Gold Equiv (koz) Investments/other A$m M&I Resource Conversion % 79.9% 76.9% 75.6% Tot Non-Curr. Assets A$m Mine Life yr Total Assets A$m Assumed inventory Mt grade Cu % 0.5% 0.5% 0.5% Short Term Borrowings A$m grade Cu g/t Other A$m Costs Unit Jun 18 Jun 19 Jun 20 Jun 21 Total Curr. Liabilities A$m Cost per milled tonne $A/t Long Term Borrowings A$m EBITDA / tonne milled ore $A/t Other A$m Total Cash Costs $A/lb Cu eq Total Non-Curr. Liabil. A$m C1: Operating Cash Cost = (a) $A/lb Cu eq Total Liabilities A$m (a) + Royalty = (b) $A/lb Cu eq Net Assets A$m $US/lb Cu eq Net Debt A$m C2: (a) + depreciation & amortisation = (c) $A/lb Cu eq Cashflow Unit 30 Jun Jun Jun Jun Jun 20 (a) + actual cash for development = (d) $A/lb Cu eq EBITDA A$m AISC: (c) + Royalty $A/lb Cu eq chg in working capital A$m (d) + Royalty $A/lb Cu eq Operating Cashflow A$m Price Assumptions Unit Jun 18 Jun 19 Jun 20 Jun 21 Income Tax Paid A$m AUDUSD A$/US$ Interest & Other A$m Gold US$/oz Operating Activities A$m Copper US$/lb Molybdenum US$/lb Property, Plant & Equip. A$m Hedging Jun 18 Jun 19 Jun 20 Jun 21 Exploration and Devel. A$m Hedges maturing? No No No No Other A$m Sensitivity Analysis Investment Activities A$m Valuation FY20 NPAT Base Case Borrowings A$m Spot Prices 0.00 (0.0%) ( %) Equity or "tbc capital" A$m Spot USD/AUD 0.71, Gold $1084/oz. Dividends Paid A$m AUDUSD +/--10% 0.00 / 0.00 (0.0% / 0.0%) / 6.60 (-870.7% / %) Financing Activities A$m Gold +/--10% 0.00 / 0.00 (0.0% / 0.0%) 2.13 / (276.1% / %) Production +/--10% 0.00 / 0.00 (0.0% / 0.0%) / (4504.4% / %) Net Cashflow A$m Operating Costs +/--10% 0.00 / 0.00 (0.0% / 0.0%) / ( % / %) Unpaid Capital Shares* Unit 30 Jun Jun Jun Jun Jun 20 Year Expires No. (m) $m Avg price % ord Ordinary Shares - End m Jun % Ordinary Shares - Weighted m Jun % Diluted Shares - Weighted m Jun % 30-Jun % Ratio Analysis Unit 30 Jun Jun Jun Jun Jun Jun % Cashflow Per Share A$ cps TOTAL % Cashflow Multiple x Share Price Valuation (NAV) Risked Est. A$m Est. A$/share Earnings Per Share A$ cps % Productora (pre-tax NAV at disc. rate of 12%) Price to Earnings Ratio x Frontera Dividends Per Share AUD Other Exploration Dividend Yield % 0.0% 0.0% 0.0% 0.0% 0.0% Forwards Net Debt / Net Debt + Equity % -49% 742% 71% 87% 85% Corporate Overheads Interest Cover X na na na na 1.0 Net Cash (Debt) Return on Equity % na na na na 1% Tax (NPV future liability) Options & Other Equity Hedging "tbc capital" could be equity or debt. Our valuation is risk-adjusted for how this may be obtained. Total Sources: IRESS, Company Information, Hartleys Research Last Updated: 13/11/2015 Page 2 of 28

3 BUSINESS OVERVIEW Hot Chili listed on the ASX (HCH.asx) in March The Company owns the very large, but low grade, Productora Copper Project in Chile. The Company has completed a scoping study, and is close to finalising a PFS. Productora is planned to be a long life, bulk tonnage open pit mine producing up to 60ktpa of copper, hopefully with first production in Following development of Productora, HCH plans to develop the nearby Frontera project. Fig. 1: HCH projects Source: HCH Fig. 2: Resources and Reserves In-situ Grade Contained Recoveries Payable % revenue Mt Cu Au Mo Cu Au Mo Cu Au Mo Cu Au Mo Cu Au Mo % g/t ppm Mt Moz Mt Mt Moz Mt Mt Moz Mt Mt Moz Mt Productora RESOURCE % % 49% 58% % 6% 6% Measured Indicated % Inferred % RESERVE % % 49% 58% % 7% 7% - Transitional % % 38% 77% % 1% 1% - Fresh % % 51% 56% % 6% 6% - Oxide Resource % % 0% % Frontera RESOURCE % % 85% % 33% 0% Measured Indicated % Inferred % RESERVE Transitional Fresh TOTAL RESOURCE % Measured Indicated % Inferred % RESERVE % Transitional % Fresh % GREY = Hartleys assumption Source: HCH Page 3 of 28

4 4 Hartleys Limited Hot Chili Ltd 13 November 2015 Fig. 3: Productora Resource and Reserve Source: HCH, Hartleys Research. GREY is Hartleys estimates PRODUCTORA COPPER DEVELOPMENT (82.5%) Productora is a breccia hosted Cu/Au/Mo deposit. HCH began drilling the deposit in 2010, and released a maiden reserve in March The low grade, bulk tonne nature of the deposit means infrastructure solutions are very important. Infrastructure is very good, as there are nearby iron ore mines. However, obtaining access has been difficult and negotiations have been drawn out over several years. In the past year there have been some milestones achieved that suggest the hard negotiations to agree to a deal have been completed. In particular, Hot Chili recently completed a landmark infrastructure deal with CMP, with CMP earning 17.5% in Productora in return for contributing surface rights, easements and its mining rights related to Productora. CMP (Compañía Minera del Pacífico S.A.) is owned by CAP S.A. (Chili s largest iron ore and steel producer and HCH s second largest shareholder) and Mitsubishi Corporation. Additional to securing infrastructure agreements, the Company also had to finalise ownership of the tenements. At time of the IPO Productora was secured through a combination of Hot Chili s own landholding interests, and various five-year earn-in and purchase option agreement. These have also been exercised, and other holdings acquired or agreed, such that the JV between HCH and CMP effectively now holds 100% of the relevant tenements. Hot Chili s March 2014 Ore Reserve assumed the oxide ore is not processed, however the current PFS (expected by year end) is likely to include oxide ore by including a heap leach. Fresh recoveries are expected to be high (benchmarking of other similar Chilean copper operations and limited test work results already achieved) with average recoveries applied to the Probable Ore Reserve for fresh ore to be Cu: 88.8%; Au: 65%; Mo: 60% and payability Cu: 96.5%, Au: 78% and Mo: 98% In-situ Grade Contained Recoveries Payable % revenue Mt Cu Au Mo Cu Au Mo Cu Au Mo Cu Au Mo Cu Au Mo % g/t ppm Mt Moz Mt Mt Moz Mt Mt Moz Mt Mt Moz Mt Productora RESOURCE % % 49% 58% % 6% 6% Measured Indicated % Inferred % RESERVE % % 49% 58% % 7% 7% - Transitional % % 38% 77% % 1% 1% - Fresh % % 51% 56% % 6% 6% - Oxide Resource % % 0% % Page 4 of 28

5 4 4 Hartleys Limited Hot Chili Ltd 13 November 2015 Fig. 4: Pit design Source: HCH Fig. 5: Productora is Breccia hosted Porphyry maybe be nearby Source: HCH Page 5 of 28

6 4 Hartleys Limited Hot Chili Ltd 13 November 2015 Fig. 6: Productora Assumptions Productoria Units Scoping Study (13 Feb 2013) Reserve (March 2014) Hartleys Hartleys vs reserve Hartleys using spot prices Hartleys spot versus base Hartleys using US$4.00 Cu Hartleys US$4/lb versus base Mining Inventory Mt % - grade Cu % 0.48% 0.50% 4% - grade Au g/t % - grade Mo ppm % Implied resource conversion % 42.3% 98.74% 134% Life of mine Mill Feed (mt pa) Mt pa 11.0mt pa 11.0mt pa 10.8mt pa -2% Mine life Yrs 8.2yrs 20.0yrs 143% Capex - Total US$m % Life of mine Strip Ratio (x) x x 3.9x -5% total earth movements Mt pa 55.0mt pa 56.1mt pa 52.7mt pa -6% Contained - Copper Kt pa % Contained - Gold Koz pa % Contained - Mo Mlb pa % Recoveries - Copper % 90% 81% 82.4% 2% - Fresh % 89% - Transitional % 50% Recoveries - Gold % 80% 50% 61.3% 23% - Fresh % 65% - Transitional % 50% Recoveries - Mo % 75% 58% 55.0% -5% - Fresh % 60% - Transitional % 50% Concentrate Kt pa % - grade Cu % 25% 25% 25% 0% - grade Au g/t % - grade Mo % 5.4% 3.1% 2.1% -31% Produced - Copper Kt pa % Produced - Gold Koz pa % Produced - Mo Mlb pa % Payability - Copper % 97% 96% 0% Payability - Gold % 78% 78% 0% Payability - Mo % 98% 97% -2% Payable - Copper Kt pa % Payable - Copper Eq Kt pa % Payable - Gold Koz pa % Payable - Mo Mlb pa % Avg Mining Costs US$/t 1.80 Avg Mining Costs US$/t ore to the mill (a) 9.18 Avg Processing Costs US$/t ore (b) TOTAL COSTS US$/t ore = (a) + (b) % TOTAL COSTS US$m pa % Life of mine avg C1 cash costs (Cu eq / lb) US$/lb % % % Life of mine avg payable C1 cash costs (Cu / lb) afteus$/lb % % % Life of mine avg C2 cash costs (Cu eq / lb) Life of mine avg C3 cash costs (Cu eq / lb) US$/lb US$/lb SELLING PRICES Copper Price US$/lb % % % Gold Price US$/oz % % % Molybdenum US$/lb % % % AUDUSD US$/A$ % % % Revenue LOM US$m pa % % % EBITDA LOM US$m pa % % % Payback (avg EBITDA) yrs 7.2yrs 12.2yrs 70% -75.1yrs -714% 3.7yrs -70% NPV12 $/shr 0.00 nm % % Source: HCH, Hartleys Research Page 6 of 28

7 4 Hartleys Limited Hot Chili Ltd 13 November 2015 Geology Mineralisation within the Main Zone at Productora is associated with a series of vertical lodes and some minor sub-horizontal lodes (mantos zones) within a felsic volcanic host rock sequence which has been extensively intruded by a tourmaline breccia along the main mineralised north-east trend. Mineralisation is pre-dominantly hosted by steeply west dipping lodes that locally widen into larger and higher-grade mineralisation near the upper surface of the tourmaline breccia (within the shallower extents of the Mineral Resource). In late 2014, steep easterly dipping lodes were also recognised with the discovery of the high-grade Habanero zone within the eastern flank of the central pit area. Sulphide ore mineralogy comprises pyrite, chalcopyrite, bornite and molybdenite developed as breccia, vein and cavity fill, as well as disseminations within the brecciated host rocks. Within the oxide zone copper is predominantly associated with malachite although further work has recognised other copper oxide species including azurite, chrysocolla and neotocite. HCH, March 2014 Fig. 7: Productora Core Source: HCH Page 7 of 28

8 4 4 Hartleys Limited Hot Chili Ltd 13 November 2015 Alice exploration Recent exploration efforts at Productora have focussed on Alice and an associated +6km-long, copper porphyry footprint immediately west of the Main Zone. Recent RC results include 129m grading 0.6% copper from 188m depth, including 8m grading 1.2% copper and 0.1g/t gold. The Company plans to release a maiden Alice resource in combination with a resource revision for the entire project when the PFS is delivered before the end of Fig. 8: Alice Source: HCH Fig. 9: Main Zone and Alice Core along with a photo of the historic St Innes mine Source: HCH Page 8 of 28

9 4 Hartleys Limited Hot Chili Ltd 13 November 2015 Fig. 10: Frontera Resource and Reserve Source: HCH, Harlteys Research. GREY is Hartleys estimates FRONTERA COPPER EXPLORATION (100% HCH) The Frontera project lies 70km directly south of Productora, and is intended to be HCH s second project. The resource extends from surface with transitional and sulphide material dominant and accessible from near-surface. Frontera is located within a linear trend of porphyry intrusions which include the Dos Amigos copper-gold mine (approximately 10km NNE of Frontera). Mineralisation at Frontera is hosted within an andesitic complex intruded by multiple phases of dioritic porphyry intrusions. Copper and gold mineralisation is commonly located in, or proximal to, potassic alteration zones characterised by intense veining and biotite-magnetite alteration. The current Frontera mineralisation is open at depth and further drilling may extend the resource beyond the Company s land position. Efforts to expand the Company s landholding are being pursued through discussions with surrounding landholders. Recently, Hot Chili and its partner in the Productora Project, Compañía Minera del Pacífico S.A. (CMP) have executed a non-binding Letter of Intent (LOI) to eventually form a Joint Venture (JV) and combine landholdings to explore and develop a second copper project in Frontera. Drilling undertaken by Noranda in the 1990 s, and more recently by CMP, has confirmed large-scale porphyry copper-gold resource potential within CMP s surrounding landholding. Hot Chili and CMP are now working together to negotiate formal agreements to the proposed JV at Frontera. The final agreements, once completed, will be subject to Board approval by both companies. In-situ Grade Contained Recoveries Payable % revenue Mt Cu Au Mo Cu Au Mo Cu Au Mo Cu Au Mo Cu Au Mo % g/t ppm Mt Moz Mt Mt Moz Mt Mt Moz Mt Mt Moz Mt Frontera RESOURCE % % 85% % 33% 0% Measured Indicated % Inferred % RESERVE Transitional Fresh Page 9 of 28

10 4 Hartleys Limited Hot Chili Ltd 13 November 2015 Fig. 11: Frontera Historic Mine Source: HCH BANDERAS COPPER EXPLORATION (100%) The Banderas copper project is approximately 50km north of the Productora project. The project is at an early exploration stage and has seen some historical, small-scale, copper mining within an extensive, large-scale alteration system where observed. Hot Chili intends to explore the potential at Banderas to discover and delineate higher grade copper resources as an additional supply source to a copper production hub centred around Productora. LOS MANTOS (65%) The Los Mantos copper project is located on the coastal range in Region IV, Chile approximately 60km south of La Serena, in a known Iron-Oxide-Copper-Gold (IOCG) province. In 2012, the Company significantly increased the size of its Los Mantos copper project under a joint venture earn-in agreement with a wholly owned subsidiary of CODELCO, the world's largest copper producer. Page 10 of 28

11 INDUSTRY EXPOSURE HCH is primarily exposed to copper. Traditionally, the marginal unit of copper demand comes from new building construction, and hence indirectly, HCH is exposed to global building/housing supply. China has become the largest single user of copper, and hence HCH is exposed to the Chinese building cycle. Fig. 12: Uses of copper in USA Source: Fig. 13: Country demand for copper Source: GEOGRAPHIC EXPOSURE HCH operations are in Chile, South America. Chile has been a democracy since 1990 and has shown improving economic stability. It is an export orientated economy, with copper exports being a substantial component. With an aging population, the Government has a strong incentive to allow mining developments. Page 11 of 28

12 SFR FND CDU RTG KBL SRQ TGS PNA HGO AVB OZL VRX RER HCH DML KGL VXR MMC AOH AVI RXM MNC NCO ABY IAU A$/lb OZL PNA SFR CDU AVB FND TGS ABY AOH HCH IAU RTG HGO KGL RXM KBL DML MNC VXR SRQ RER AVI MMC VRX NCO A$m Hartleys Limited Hot Chili Ltd 13 November 2015 PEERS AND COMPETITORS Fig. 14: 1,600 ASX Copper Comparatives Market Capitalisation 1,400 1,200 1, Source: Hartleys, IRESS Fig. 15: ASX Copper Comparatives EV/Resources lb $0.03/lb Source: Hartleys, IRESS Page 12 of 28

13 OZL MNC PNA ABY MMC DML RXM AOH TGS HCH IAU AVB AVI SFR CDU SRQ VXR KGL HGO FND NCO RTG RER KBL VRX Kt Cu Grade %Cu Hartleys Limited Hot Chili Ltd 13 November 2015 Fig. 16: 9,000.0 ASX Copper Comparitives Resources Kt Cu , , , , , , , , Source: Hartleys, IRESS Page 13 of 28

14 Fig. 17: CAP / CMP Ownership KEY SUPPLIERS & CUSTOMERS CMP is owned by CAP (75%) and Mitsubishi Corporation (25%). Hence, HCH has a relationship with both CAP and Mitsubishi, as well as CMP. Following completion of a PFS, CMP will be responsible for funding its share of expenditure on Productora. Drilling services have been provided by Blue Spec Sondajes Chile Limitada, which is a related party with the HCH Chairman, Mr Black. Source: HCH February 2015 Fig. 18: Productora Ownership structure Source: HCH Page 14 of 28

15 Fig. 19: Productora/CMP shared infrastructure Source: HCH Page 15 of 28

16 Port In February 2015, HCH executed a MOU with PLL (a 51/49 JV between CAP S.A. and Agrocomercial A.S. Ltda) to study port services at Las Losas, Huasco, which is 40km directly west of Productora. Las Losas port facility is a multipurpose port, originally designed to handle grain off-loading. PLL had previously completed a Scoping study into a potential expansion of the Las Losas port facility to incorporate a copper concentrate ship loading capability for potential future customers. Importantly PLL has been granted a favourable Environmental Approval by the Chilean Environmental Evaluation Service. The approval allows PLL to construct and to operate the new copper concentrate port facilities ancillary to the already existing facility. Fig. 20: Las Losas Multi-purpose Port Source: HCH February 2015 Page 16 of 28

17 Economic Exposure of Board and key management Directors MANAGEMENT, DIRECTORS AND MAJOR SHAREHOLDERS Total Total Options Shares Economic # Exposure Position millions rank Mr Murray Edward Black Chairman & Non-exec Director 0 40,996,210 40,996,210 1 Christian Ervin Easterday Managing Director 0 17,050,000 17,050,000 2 Dr Allan Trench Non-exec Director 0 41,400 41,400 7 Dr Michael Anderson Non-exec Director (Taurus Nominee) Roberto Adriasola de Andraca Non-exec Director (CAP Nominee) 0 40,000 40,000 8 Melanie Leighton Exec (Projects Manager) - alternate director for M Black 300,000 40, ,000 6 Management John Sendziuk Company Secretary 300, ,000 1,270,000 3 Rodrigo Diaz Manager - Chile 700,000 31, ,511 5 Jose Ignacio Silva Chief Legal Counsel 500, , ,000 4 Source: HCH Biographies have been taken from the recent annual report Murray Black - Non-Executive Chairman Mr Black has over 40 years experience in the mineral exploration and mining industry and has served as an Executive Director and Chairman for several listed Australian exploration and mining companies. He part-owns and manages a substantial private Australian drilling business, has interests in several commercial developments and has significant experience in capital financing. Christian Easterday - Managing Director Mr Easterday is a geologist with over 17 years experience in the mineral exploration and mining industry. He holds an Honours Degree in Geology from the University of Western Australia, a Masters degree in Mineral Economics from Curtin University of Technology and a Masters Degree in Business Administration from Curtin s Graduate School of Business. Mr Easterday has held several senior positions and exploration management roles with top-tier gold companies including Placer Dome, Hill 50 Gold and Harmony Gold, specialising in structural geology, resource development and mineral economic valuation. For the past eight years, Mr Easterday has been involved in various aspects of project negotiation drawing together his commercial, financial and project valuation skills. This work has involved negotiations and valuations covering gold, copper, uranium, iron ore, nickel, and tantalum resource projects in Australia and overseas. Mr Easterday is a Member of The Australian Institute of Geoscientists. Dr Allan Trench - Non-Executive Director Dr Trench is a geologist/geophysicist and business management consultant with over 24 years experience across a broad range of commodities. His minerals sector experience spans strategy formulation, exploration, project development and mining operations. Dr Trench holds degrees in geology, a doctorate in geophysics, a Masters degree in Mineral Economics and a Masters degree in Business Administration. He currently acts or acted as Independent Director to Pioneer Resources Ltd, commenced 5 September 2008, Enterprise Metals Ltd, commenced 3 April 2012, Trafford Resources Ltd, commenced 7 May 2012, resigned 22 May 2015, and Emmerson Resources Ltd, commenced 3 March Dr Trench has previously Page 17 of 28

18 worked with McKinsey & Company as a management consultant, with Woodside Petroleum in strategy development and with WMC both as a geophysicist and exploration manager. He is an Associate Consultant with international metals and mining advisory firm CRU Group and has contributed to the development of that company s uranium practice, having previously managed the CRU Group global copper research team. Dr Trench maintains academic links as a Professor of Mineral & Energy Economics, Graduate School of Business, Curtin Business School, Curtin University of Technology. Dr Michael Anderson - Non-Executive Director (Taurus Nominee) Dr Anderson has more than 22 years industry experience, largely in southern Africa and Australia. His career commenced as a geologist with Anglo American, followed by roles in the metallurgical and engineering industries with Mintek, Bateman and Kellogg Brown & Root. Dr Anderson subsequently held senior management positions including Corporate Development Manager at Gallery Gold Limited and, most recently, as Managing Director at Exco Resources Limited where he oversaw the successful development of the White Dam Gold Project and the sale of the Company s Cloncurry Copper Project to Xstrata. Dr Anderson joined specialist resource investor Taurus Funds Management Pty Ltd as a Director in August He was appointed as a Non- Exectutive Director of Base Resources Ltd on 28 November 2011 and also as a Non- Executive Director of Ampella Mining Ltd on 18 June 2012, resigned 26 February 2014 and P M I Gold Corporation on 15 May He resigned on 6 February Roberto de Andraca Adriasola - Non-Exectutive Director (CAP Nominee) Mr de Andraca Adriasola is a business manager with 22 years experience in the financial and mining business. Over the past five years he has been working for CAP S A, the main iron ore miner and steel producer in Chile, and is currently the Vice President of Business Development overseeing infrastructure development and new business related to noncore assets. He also oversaw the construction of the first desalination plant dedicated 100% to producing water for mining companies in the north of Chile. Mr de Andraca Adriasola has finance experience working at Chase Manhattan Bank, ABN Amro and Citigroup, working both in Chile and in New York and holds an MBA from the Adolfo Ibanez Business School of Chile. He is currently a Director of Puerto Los Losas, a port in the Atacama Region of Chile. MAJOR SHAREHOLDERS There are four major shareholders in HCH. Murray Black (Chairman), CAP (owner of CMP which owns 17.5% of Productora) and two institutions. Fig. 21: Substantial shareholders Top Shareholders m shares % Kalgoorlie Auto Services (assoc M Black & C Easterday) % Cap S.A. (Port Finance) % Taurus Funds Mgt % Megeve % Exploration Capital Partners (affil. Sprott) % Blue Spec Sondajes Chile (assoc M Black) % Source: HCH Page 18 of 28

19 OPTIONS, CONVERTIBLES AND UNPAID CAPITAL HCH recently entered into an agreement with CMP. In May 2015, CMP acquired a 17.5% interest in Productora in exchange for shared infrastructure and interest in mining rights and access rights. CMP has an option (Tranche 1) to pay US$26m to acquire an additional percentage of the project. The percentage will depend on the Valuation produced by a jointly appointed independent expert at the PFS (Minimum US$80 million and maximum US$110 million for an additional 32.6% interest in Productora), but the spend (US$26m) is fixed. The option expires ~90 days after the PFS is completed (we expect the option expires in February/March 2016). Tranche 1 is to be used to repay the Sprott loan (US$10m drawn) and to fund HCH s share of the DFS. At Tranche 1, CMP will also issue HCH with a US$13m, 24month loan facility should HCH request this. The Tranche 2 option expires ~90 days after the DFS is completed (we estimate the option expires in February/March 2017). If exercised, CMP can then increase its stake (Tranche 2) to 50.1% by paying HCH the remaining Valuation amount of between US$54-84m. The range of values depends on the independent valuation at the time of the PFS. At a minimum valuation, this would equate to CMP acquiring a further 22% interest for US$54m. At a maximum valuation, this would equate to CMP acquiring a further 24.89% for US$84m. The Second Tranche payment shall also deduct any loan amount outstanding (ie US$13m) and the US$1.5 million paid to Hot Chili by CMP as the option issue price. We assume the option is exercised, but the valuation is at the lower end of the range (Tranche 2 of US$54m, implying total value $80m for 32.6%). We estimate that HCH will be net cash ~A$70m at June 2017 once the DFS is completed and assuming Trache 2 is exercised. Based on the implied valuation for the upper and lower end of the exercise price, and our estimate net cash position at that time, we value HCH between ~27cps and 41cps assuming further dilution to fund development. Assuming no further dilution, implies a valuation 41-59cps. Page 19 of 28

20 FINANCIALS PRODUCTION / PROFIT & LOSS Company guidance The Company expects to release a PFS before the end of CY15, and anticipates production could occur in CY19. Hartleys Forecasts We assume production in CY19. Our model assumes equity accounted Productora production despite our assumption for HCH owning 49%. Fig. 22: Production and Profit and Loss P&L Unit 30 Jun Jun Jun Jun Jun 20 Net Revenue A$m Total Costs A$m EBITDA A$m margin % 19% Depreciation/Amort A$m EBIT A$m Net Interest A$m Norm. Pre-Tax Profit A$m Reported Tax Expense A$m Normalised NPAT A$m Abnormal Items A$m Reported Profit A$m Minority A$m Profit Attrib A$m Source: Hartleys Research Estimates BALANCE SHEET Fig. 23: Balance Sheet Balance Sheet Unit 30 Jun Jun Jun Jun Jun 20 Cash A$m Other Current Assets A$m Total Current Assets A$m Property, Plant & Equip. A$m Exploration A$m Investments/other A$m Tot Non-Curr. Assets A$m Total Assets A$m Short Term Borrowings A$m Other A$m Total Curr. Liabilities A$m Long Term Borrowings A$m Other A$m Total Non-Curr. Liabil. A$m Total Liabilities A$m Net Assets A$m Net Debt A$m Source: Hartleys Research Estimates Page 20 of 28

21 Gearing ratios Fig. 24: Gearing Ratios Shares* Unit 30 Jun Jun Jun Jun Jun 20 Ordinary Shares - End m Ordinary Shares - Weighted m Diluted Shares - Weighted m Ratio Analysis Unit 30 Jun Jun Jun Jun Jun 20 Cashflow Per Share A$ cps Cashflow Multiple x Earnings Per Share A$ cps Price to Earnings Ratio x Dividends Per Share AUD Dividend Yield % 0.0% 0.0% 0.0% 0.0% 0.0% Net Debt / Net Debt + Equity % -49% 742% 71% 87% 85% Interest Cover X na na na na 1.0 Return on Equity % na na na na 1% Source: Hartleys Research Estimates Debt We expect a significant debt funding package for the development of Productora. CMP will provide HCH with a US$13m, 24mth loan if it exercises Tranche 1 and if HCH requires additional funding. The Tranche 1 US$26 million payment is expected to be used to repay the Sprott loan (US$25m, US$10m currently drawn) and to fund HCH s proportion of the DFS. The debt is due to be repaid to Sprott before June 30 th Hedging We expect that some hedging will be required when HCH obtains the debt financing (likely in CY17). CASH FLOW Fig. 25: Cash Flow Statement Cashflow Unit 30 Jun Jun Jun Jun Jun 20 EBITDA A$m chg in working capital A$m Operating Cashflow A$m Income Tax Paid A$m Interest & Other A$m Operating Activities A$m Property, Plant & Equip. A$m Exploration and Devel. A$m Other A$m Investment Activities A$m Borrowings A$m Equity or "tbc capital" A$m Dividends Paid A$m Financing Activities A$m Net Cashflow A$m Source: Hartleys Research Estimates Page 21 of 28

22 Capex requirements The scoping study assumed capex of between US$500m and US$700 million for a 11 Mtpa copper concentrate project. We assume HCH is responsible for half of that, but we understand that the agreement with CMP has the usual tag-along financing provisions. Dividends We do not expect any dividends in the foreseeable future. EQUITY ISSUANCE We assume the issuance of ~200m new shares. This may be conservative. ENSITIVITIES FX exposure HCH is exposed to the USD and the Chilean Peso. Interest Rate exposure Interest rate sensitivity is low. Commodity price exposure HCH is very leveraged to copper commodity prices. Page 22 of 28

23 VALUATION CONSIDERATIONS AND PRICE TARGET METHODOLOGY VALUATION Our pre-tax project for Productora is minimal using cost assumptions similar, but more conservative, than the scoping study. Using our commodity price assumptions, we estimate it generates an average of ~$50m pa EBITDA. Using capex of US$600m, means our valuation is minimal. However, using copper prices of US$4.00/lb, we estimate EBITDA is closer to $170m pa, and hence it becomes a very viable mine. We hope that the PFS is able to improve on our estimates, such that the operation is viable even on more conservative copper prices. If this proves to be the case, we will need to revise up our valuation. Based on the implied valuation for the upper and lower end of the exercise price, and our estimated net cash position at that time, we value HCH between ~28cps and 41cps assuming further dilution to fund development. Assuming no further dilution, implies a valuation 41-59cps. We estimate that cash backing, if the low end of the option is exercised, will be ~18cps. PRICE TARGET Our price target is derived using an arbitrary risk-weighting of several scenarios. HCH Price Target Methodology Weighting Spot 12 mth out NPV base case NPV at spot commodity and fx prices 25% $0.00 $0.00 5% $0.00 $0.00 NPV at copper US$4.00/lb 1% $0.52 $0.59 Net cash after DFS, lower end deal 5% $0.18 $0.18 Net cash after DFS, upper end deal 5% $0.27 $0.27 Upper end CMP deal, more dilution 20% $0.41 $0.45 Lower end CMP deal, more dilution 20% $0.28 $0.31 Upper end CMP deal, no new dilution 5% $0.59 $0.66 Lower end CMP deal, no new dilution 5% $0.41 $0.46 Net cash today 9% $0.00 $0.00 Risk weighted composite $ Months Price Target $0.24 Shareprice - Last $ mth total return (% to 12mth target ) 90% Source: Hartleys Estimate Page 23 of 28

24 4 Hartleys Limited Hot Chili Ltd 13 November 2015 Fig. 26: Productora Assumptions Productoria Units Scoping Study (13 Feb 2013) Reserve (March 2014) Hartleys Hartleys vs reserve Hartleys using spot prices Hartleys spot versus base Hartleys using US$4.00 Cu Hartleys US$4/lb versus base Mining Inventory Mt % - grade Cu % 0.48% 0.50% 4% - grade Au g/t % - grade Mo ppm % Implied resource conversion % 42.3% 98.74% 134% Life of mine Mill Feed (mt pa) Mt pa 11.0mt pa 11.0mt pa 10.8mt pa -2% Mine life Yrs 8.2yrs 20.0yrs 143% Capex - Total US$m % Life of mine Strip Ratio (x) x x 3.9x -5% total earth movements Mt pa 55.0mt pa 56.1mt pa 52.7mt pa -6% Contained - Copper Kt pa % Contained - Gold Koz pa % Contained - Mo Mlb pa % Recoveries - Copper % 90% 81% 82.4% 2% - Fresh % 89% - Transitional % 50% Recoveries - Gold % 80% 50% 61.3% 23% - Fresh % 65% - Transitional % 50% Recoveries - Mo % 75% 58% 55.0% -5% - Fresh % 60% - Transitional % 50% Concentrate Kt pa % - grade Cu % 25% 25% 25% 0% - grade Au g/t % - grade Mo % 5.4% 3.1% 2.1% -31% Produced - Copper Kt pa % Produced - Gold Koz pa % Produced - Mo Mlb pa % Payability - Copper % 97% 96% 0% Payability - Gold % 78% 78% 0% Payability - Mo % 98% 97% -2% Payable - Copper Kt pa % Payable - Copper Eq Kt pa % Payable - Gold Koz pa % Payable - Mo Mlb pa % Avg Mining Costs US$/t 1.80 Avg Mining Costs US$/t ore to the mill (a) 9.18 Avg Processing Costs US$/t ore (b) TOTAL COSTS US$/t ore = (a) + (b) % TOTAL COSTS US$m pa % Life of mine avg C1 cash costs (Cu eq / lb) US$/lb % % % Life of mine avg payable C1 cash costs (Cu / lb) afteus$/lb % % % Life of mine avg C2 cash costs (Cu eq / lb) Life of mine avg C3 cash costs (Cu eq / lb) US$/lb US$/lb SELLING PRICES Copper Price US$/lb % % % Gold Price US$/oz % % % Molybdenum US$/lb % % % AUDUSD US$/A$ % % % Revenue LOM US$m pa % % % EBITDA LOM US$m pa % % % Payback (avg EBITDA) yrs 7.2yrs 12.2yrs 70% -75.1yrs -714% 3.7yrs -70% NPV12 $/shr 0.00 nm % % Source: HCH, Hartleys Research Page 24 of 28

25 RECOMMENDATION & RISKS We initiate with a Speculative Buy recommendation, with a 24cps price target despite our low valuation. This is because there is significant upside should the CMP options be exercised (cash backed ~18-27cps). INVESTMENT THESIS & RECOMMENDATION We initiate with a Speculative Buy recommendation, with a 24cps price target despite our low valuation. This is because there is significant upside should the CMP options be exercised (cash backed ~18-27cps). Note also, if HCH is below 25cps, then the whole EV of HCH is less than the lower end of the option to acquire up to 50.1%. However, there is downside risk if the option were not exercised, given it could undermine confidence in the project. In particular, unless the PFS improves on the scoping study, the lapsing of the option seems a risk. The modest net debt position is another short term risk, although it can easily be repaid if CMP exercises the Tranche 1 option. RISKS A key downside risk is that if the CMP option were not exercised, it could undermine confidence in the project. In particular, unless the PFS improves on the scoping study, the lapsing of the option seems a risk. The modest net debt position is another short term risk, although it can easily be repaid if CMP exercises the Tranche 1 option. Other risks for HCH are similar to most developers: attaining capital for development studies and construction, the outcomes of more detailed studies, management keyman risk, relevant government approvals, political risk, commodity prices, commissioning success and the asset performance versus nameplate design. SIMPLE S.W.O.T. TABLE Strengths Weaknesses Opportunities Threats Source: Hartleys Research Large deposit Large well capitalised partner Partial sale of Productora via sale of option Located in Chile Low grade Large capex Sale of project Exploration success Development of Fonterra Commodity pricing Funding Laps of options to sell Productora stake Page 25 of 28

26 Fig. 27: Commodity price assumptions US$/lb 6 5 Hartleys Assumption for Valuations Copper (US$) A$/lb 6 5 Hartleys Assumption for Valuations Copper (A$) Source: Hartleys Estimates, IRESS Page 26 of 28

27 EV/EBITDA BANDS Fig. 28: Using Hartleys base case commodity forecasts Shareprice HCH Actual Hartleys Target 8x EV/EBITDA 6x EV/EBITDA 4x EV/EBITDA 2x EV/EBITDA 1x EV/EBITDA Source: Hartleys Estimates, IRESS Fig. 29: Using spot commodity prices Shareprice HCH Actual 8x EV/EBITDA 6x EV/EBITDA 4x EV/EBITDA 2x EV/EBITDA 1x EV/EBITDA Source: Hartleys Estimates, IRESS Page 27 of 28

28 HARTLEYS CORPORATE DIRECTORY Research Trent Barnett Head of Research Mike Millikan Resources Analyst Scott Williamson Resources Analyst Simon Andrew Energy Analyst Janine Bell Research Assistant Corporate Finance Grey Egerton- Director & Head of Warburton Corp Fin. Richard Simpson Director Paul Fryer Director Dale Bryan Director Ben Wale Associate Director Ben Crossing Associate Director Stephen Kite Associate Director Scott Weir Associate Director Registered Office Level 6, 141 St Georges TcePostal Address: PerthWA 6000 GPO Box 2777 Australia Perth WA 6001 PH: FX: info@hartleys.com.au Note: personal addresses of company employees are structured in the following manner:firstname_lastname@hartleys.com.au Hartleys Recommendation Categories Buy Accumulate Neutral Reduce / Take profits Sell No Rating Speculative Buy Share price appreciation anticipated. Share price appreciation anticipated but the risk/reward is not as attractive as a Buy. Alternatively, for the share price to rise it may be contingent on the outcome of an uncertain or distant event. Analyst will often indicate a price level at which it may become a Buy. Take no action. Upside & downside risk/reward is evenly balanced. It is anticipated to be unlikely that there will be gains over the investment time horizon but there is a possibility of some price weakness over that period. Significant price depreciation anticipated. No recommendation. Share price could be volatile. While it is anticipated that, on a risk/reward basis, an investment is attractive, there is at least one identifiable risk that has a meaningful possibility of occurring, which, if it did occur, could lead to significant share price reduction. Consequently, the investment is considered high risk. Institutional Sales Carrick Ryan Justin Stewart Simon van den Berg Chris Chong Digby Gilmour Veronika Tkacova Wealth Management Nicola Bond Bradley Booth Adrian Brant Nathan Bray Sven Burrell Simon Casey Tony Chien Tim Cottee David Cross Nicholas Draper John Featherby Ben Fleay James Gatti John Goodlad Andrew Gribble David Hainsworth Neil Inglis Murray Jacob Gavin Lehmann Shane Lehmann Steven Loxley Andrew Macnaughtan Scott Metcalf David Michael Jamie Moullin Chris Munro Michael Munro Ian Parker Charlie Ransom (CEO) Brenton Reynolds Conlie Salvemini Mark Sandford David Smyth Greg Soudure Sonya Soudure Dirk Vanderstruyf Samuel Williams Jayme Walsh Disclaimer/Disclosure The author of this publication, Hartleys Limited ABN ( Hartleys ), its Directors and their Associates from time to time may hold shares in the security/securities mentioned in this Research document and therefore may benefit from any increase in the price of those securities. Hartleys and its Advisers may earn brokerage, fees, commissions, other benefits or advantages as a result of a transaction arising from any advice mentioned in publications to clients. This report was prepared solely by Hartleys Ltd. ASX did not prepare any part of the report and has not contributed in any way to its content. The role of ASX in relation to the preparation of the research reports is limited to funding their preparation, by Hartleys Ltd, in accordance with the ASX Equity Research Scheme. ASX does not provide financial product advice. The views express in this research may not necessarily reflect the views necessarily reflect the views of ASX. To the maximum extent permitted by law, no representation, warranty or undertaking, express or implied, is made and no responsibility or liability is accepted by ASX as to the adequacy, accuracy, completeness or reasonableness of the research reports. Any financial product advice contained in this document is unsolicited general information only. Do not act on this advice without first consulting your investment adviser to determine whether the advice is appropriate for your investment objectives, financial situation and particular needs. Hartleys believes that any information or advice (including any financial product advice) contained in this document is accurate when issued. Hartleys however, does not warrant its accuracy or reliability. Hartleys, its officers, agents and employees exclude all liability whatsoever, in negligence or otherwise, for any loss or damage relating to this document to the full extent permitted by law. Page 28 of 28