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Column 1Effect of high-grade acquisitions on the Productora Project20/04/18Current Price: $0.03 Key Points
- HCH has made a number of agreements with local Chilean vendors on several high-grade development properties in close proximity to its large, low-grade Productora copper project (1.5Mt copper metal and 1.0 million ozs gold).
- Rec-cap on Productora – EBITDA US$185m p.a. at Cu price of US$3.00/lb, 10-year life of Mine, completed PFS.
- HCH’s partner, CMP (20%, contributing) has an agreement with HCH on adding to its equity holding in the project to bring its holding to 50.1% for between US$80m and US$110m, under certain metrics including copper price (US$>3.00/lb) and mine life (~15 years).
- The recent acquisitions enable HCH to significantly increase the feed grade to the Productora plant. The new acquisitions have production grades at between 2% and 5% Cu – significantly higher than the Productora reserve of 0.43% Cu.
- Even moderate additional ore tonnage feed, at high grade, has a significant effect on the average feed grade and results in higher margins (see example below).
- The strategy involves making Productora the centre of a large, coastal operating hub.
 San Antonio emerging as a jewel in the high-grade crown
- HCH has recently acquired three high grade projects – San Antonio and Valentina, which together are located in the El Fuego Project Area, and Lulu, located to the west of Productora.
- Each has been owned by Chilean families for c.50 years having received no modern exploration and have significant potential for development.
- San Antonio is emerging as the jewel in the El Fuego crown
- Historic production from the San Antonio ore zones come from ore zones averaging 7-30m wide and at grades averaging 2% Cu. Grades of between 2% and 4% are currently being exploited from the mine by the existing owners.
- San Antonio strike length is now extended to 1.5km at surface and is still open along strike and at depth
- Importantly, parallel lodes have just been confirmed on both the Hanging Wall and Foot Wall, adding to the potential.
 Figure 2. Historical production and new rock chip results from 60-Level, San Antonio Source: HCHOther corporate initiatives
- HCH intend to list on the TSX-V (dual listing) later this year.
- HCH has stated that they intend to continue to consolidate other properties in the immediate area around Productora to enhance the role out of a production hub strategy.
News flow
- Surface results from mapping and sampling at surface on a number of targets are pending
- Expansion of the regional geochemical sampling around high grade prospects.
- Commencement of drilling program to test the multiple high-grade targets at El Fuego.
- Partnerships being sought on other opportunities.
- Further consolidation and successful results planned to coincide with timing on the dual listing on the TSX-V.
Our viewHCH needed to enhance the production and financial metrics on Productora. In our view, a roll-up strategy that quickly acquired high grade targets was the only real option for HCH to generate the necessary step change in production for the Productora Project to achieve more robust financial metrics. Successful negotiations with family groups in the region was the catalyst the company needed to achieve this. We believe there is a significant opportunity presented by the high-grade projects to address the grade issue at Productora, and to some extent, the mine life. HCH has stated they intend to continue to consolidate projects in the area. This has the potential to address the mine life issue. We believe that combined, the additional grade and extensions to mine life, will address the requirements for CMP to take an additional equity stake in the project, as long as the copper price remains healthy. To give an example of the effect that high-grade feed has on the average feed grade, at a combined annual feed rate of 15Mtpa: Productora OnlyAverage feed grade from Productora : 0.5% CuMill feed per annum from Productora : 15.0 MtpaCopper production (86% recovery) : 64,500 tonnes copper metal Ore from other sourcesAverage feed grade from high grade sources : 2.5% CuMill feed per annum from high grade sources : 2.5 Mtpa CombinedWeighted average feed grade from all sources : 0.77% CuTotal mill feed per annum : 15.0 MtpaCopper production (86% recovery) : 99,330 tonnes copper metal In the above example, the average feed grade to the plant is increased by +50% by supplanting 2.5 Mtpa, or just 17%, of mill feed from Productora by feed from higher grade resources at an average grade of 2.5% Cu. HCH has a current MCAP of just A$19.3m, or close to $30m on a fully diluted basis. Should CMP exercise its option to purchase an additional 30.1% in the project, HCH will receive a significant cash payment, of between US$80m and US$110m, under the current terms of that agreement, determined by an independent valuation. We believe that the prospectivity in the additional projects combined with the low market capitalization, HCH could present an entry opportunity for new investors, or, an opportunity for existing shareholders to top up their holdings in anticipation of newsflow around exploration on the high-grade projects and ahead of a dual listing on the TSX-V.Head of ResearchPaul Adams |
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