$13m funding package and porphyry drilling
We believe it may be time to look once again at Hot Chili Ltd (HCH-AU). HCH has announced a $13m unsecured Convertible Note funding package from its major shareholders and released the first results from its 2017 porphyry drilling program at its Productora copper project. HCH believe that a successful program into the cluster of porphyry targets east of the main deposit could materially change the scale and economic metrics of the project. The funding package also removes all finance encumbrances on HCH, its subsidiaries and its assets and significantly de-risks the company in our view. HCH offers exceptional leverage to an increase in the copper price and to exploration success.
- A $13m funding package, led by Sprott Capital Partners and affiliates, includes support from major shareholders, Taurus Funds Management and CAP, the parent company to HCH’s JV partner at Productora. Funds will in part be used to payout the outstanding Sprott US$6.5m loan. This is important as it will extinguish all finance encumbrances remaining on HCH, its subsidiaries and its assets.
- The 2017 drilling program has begun with a number of reconnaissance RC holes directed towards several porphyry targets east of the main Productora Zone. Diamond drilling will commence once the analysis of the reconnaissance holes has been completed. The 2017 drill program is being conducted by Blue Spec Sondajes Chile, a drilling company associated with HCH’s Chairman, Murray Black, at no risk and at no cost to HCH.
- The first drill results have been successful in extending the known mineralisation at the Alice porphyry copper deposit. A 64m intersection of 64m at 0.5% copper, 0.1g/t gold and 185ppm molybdenum, was recorded from 200m to end-of-hole at 264m before difficult drilling conditions terminated the hole prematurely. This will change the interpretation of the Alice deposit.
- Success at Alice would be incrementally positive for the Productora Project. However, the main game remains the large IP/resistivity/conductivity targets being tested by the RC and diamond drill program. Success from the porphyry copper program would materially change the nature and scale of the project and in our view, be one of the catalysts for CMP to consider its position with respect to the option to acquire more of the Productora Project.
- The next step forward for HCH will largely be determined by the success of this program. We anticipate that diamond drilling follow-up to the reconnaissance RC drilling will start in a few weeks’ time. We therefore believe that early results from the program will be announced around late June or early July.
- A recap of the metrics from the 2016 PFS shows how sensitive the Productora Project is to the copper price. A $0.50/lb increase from US$3.00/lb (Base Case) to US$3.50/lb more than doubles the NPV to just over A$1.0 billion.
- Due to its size, Productora offers HCH exceptional leverage to both exploration success and to an increasing copper price.
$13m funding package with a ‘no risk’ drilling program to HCH
A $13m funding package, led by Sprott Capital Partners and affiliates, includes support from major shareholders, Taurus Funds Management and CAP, the parent company to HCH’s JV partner at Productora. Funds will in part be used to payout the outstanding Sprott US$6.5m loan. This is important as it will extinguish all finance encumbrances remaining on HCH, its subsidiaries and its assets.
Our view was that the finance encumbrances were a major influence on the perception of risk around HCH and we think that the removal of those encumbrances is a positive step for the company.
The package is via an unsecured convertible note structure ($100 per Note), with an annual 8% coupon charged on a quarterly basis in cash or shares, at the election of HCH. The notes have a 5-year maturity and were issued at a $0.03333 per share, a premium to the share price of $0.025 at the time of the announcement. The issue of the Notes is still subject to shareholder approval, which we anticipate around early June. Sprott will also nominate a Non-Executive Director to the HCH Board.
This Research report, accurately expresses the personal view of the Author.
DJ Carmichael Pty Limited, members of the Research Team; including authors of this report, its directors and employees advise that they may hold securities, may have an interest in and/or earn brokerage and other benefits or advantages, either directly or indirectly from client transactions in stocks mentioned in this report. The author of this report holds securities in Hot Chili Limited.
DJ Carmichael Pty Limited is a wholly owned subsidiary of DJ Carmichael Group Pty Limited ACN 114 921 247.
In accordance with Section 949A of the Corporations Act 2001 DJ Carmichael Pty Limited advises this email contains general financial advice only. In preparing this document DJ Carmichael Pty Limited did not take into account the investment objectives, financial situation and particular needs (‘financial circumstances’) of any particular person. Accordingly, before acting on any advice contained in this document, you should assess whether the advice is appropriate in light of your own financial circumstances or contact your DJ Carmichael Pty Limited adviser. DJ Carmichael Pty Limited, its Directors employees and advisers may earn brokerage or commission from any transactions undertaken on your behalf as a result of acting upon this information. DJ Carmichael Pty Limited, its directors and employees advise that they may hold securities, may have an interest in and/or earn brokerage and other benefits or advantages, either directly or indirectly, from client transactions. DJ Carmichael Pty Limited believe that the advice herein is accurate however no warranty of accuracy or reliability is given in relation to any advice or information contained in this publication and no responsibility for any loss or damage whatsoever arising in any way for any representation, act or omission, whether express or implied (including responsibility to any persons by reason of negligence), is accepted by DJ Carmichael Pty Limited or any officer, agent or employee of DJ Carmichael Pty Limited. This message is intended only for the use of the individual or entity to which it is addressed and may contain information that is privileged, confidential and exempt from disclosure under applicable law. If you are not the intended recipient or employee or agent responsible for delivering the message to the intended recipient, you are hereby notified that any dissemination, distribution or copying of this communication and its attachments is strictly prohibited.
The Author of this report made contact with the Hot Chili Limited for assistance with verification of facts, admittance to business sites, access to industry/company information. No inducements have been offered or accepted by the company.
The recommendation made in this report is valid for four weeks from the stated date of issue. If in the event another report has been constructed and released on Hot Chili Limited, the new recommendation supersedes this and therefore the recommendation in this report will become null and void.
SPECULATIVE BUY – Anticipated 10% or more outperformance, high risk
BUY – Anticipated 10% or more outperformance
HOLD – Anticipated 10% underperformance to 10% over performance
SELL – Anticipated 10% or more underperformance
Period: During the forthcoming 12 months, at any time during that period and not necessarily just at the end of those 12 months.
Stocks included in this report have their expected performance measured relative to the ASX All Ordinaries index. DJ Carmichael Pty Limited’s recommendation is made on the basis of absolute performance. Recommendations are adjusted accordingly as and when the index changes.
To elect not to receive any further direct marketing communications from us, please reply to this email and type 'opt out ' in the subject line. Please allow two weeks for request to be processed.
© 2017 No part of this report may be reproduced or distributed in any manner without permission of DJ Carmichael Pty Limited.