Hot Chili Ltd (HCH): Research Report

$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.

Key Points

  • 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.


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This Research report, accurately expresses the personal view of the Author.

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Recommendation Definitions

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BUY – Anticipated 10% or more outperformance
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Paul Adams

Head of Research

Paul joined DJ Carmichael in 2006 as a Resource Analyst. Paul has an honours degree in Geology, is a member of the Australian Institute of Mining and Metallurgy and has 16 years experience in the mining industry in exploration, open pit, underground and operational roles, both in Australia and overseas. Before joining the company, he was Chief Geologist and Evaluations Manager at Placer Dome's Granny Smith mine. Paul has a Graduate Diploma in Applied Finance and Investment, fromthe Financial Services Institute of Australasia.