Hot Chilli’s Share Price Up after Long-Term Copper Play

At the time of writing, shares of Hot Chilli Ltd [ASX:HCH] are up by 27.27% to 1.4 cents per share.

Why did Hot Chilli Ltd share price re-rate?

Hot Chilli Ltd signed a Memorandum of Understanding (MoU) for an option to acquire a major, privately-owned, copper-gold porphyry discovery named Cortadera. The project adjoins the company’s Productora and El Fuego copper projects, located on the Chilean coastal range:

Hot Chilli's share price
Source: Hot Chilli

Drill results from the Cortadera discovery have never been publicly released. They include numerous hits from over 23,000m of drilling to date, such as:

  • 90 metres of ore, grading 1.0% copper and 0.4 grams per tonne (g/t) of gold from four metres below the ground.
  • 52 metres of ore grading, 0.9% copper and 0.4g/t gold from six metres below the ground.
  • 864 metres of ore, grading 0.4% copper and 0.1g/t gold from 62 metres below the ground.

These are world-class copper intersections, despite the lack in grade. The Cortadera discovery could be a shallow and high tonnage system.

What’s up next for Hot Chilli’s share price?

The share price reacted positively to the news:

Hot Chilli's share price
Source: commsec

Hot Chilli’s share price has been in a downtrend for most of the past year. That said, it started to level off around December and has jumped sharply today. Whether the share price runs more is questionable in the short-term. Remember, the company must sign a binding deal to own Cortadera. The options agreement is currently a MoU (non-binding).

To date, Cortadera is merely a discovery with outstanding potential. A significant amount of work is still required to advance the project. There’s no JORC resources for example. That means, while highly attractive in nature, it requires a fair bit of drilling in the future. That’s before the company can start a pre-feasibility economic study, which takes several months.

The costs are likely to add up for shareholders over the next two years.

Hot Chilli’s share price has languished because it hasn’t advanced its main project, Productora, in recent years. Productora needs US$725 million to get into production ― a hefty price tag ― and a US$3 per pound copper price to repay the cost within four years. From a risk-reward perspective, Productora also has a relatively low internal rate of return of 15%.

That doesn’t mean it’s not attractive, mind you.

Hot Chilli is a pure play on the copper price. If that explodes in the future, Hot Chilli should do well.

The bottom line today: the Cortadera discovery looks attractive for shareholders and could turn things around for the company ― it seems shallow and high tonnage. That’s why the company has agreed to spend US$30 million to acquire it. Once a binding deal is signed (likely a few months away) and the company formally owns the project, the share price might finally turn around. But there’s a lot of work ahead, which is likely to take time.

Jason Stevenson,
Resources Analyst, Money Morning

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