October 8, 2024 | Crux Investor
- Hot Chili is developing the Costa Fuego copper project in Chile, aiming to be one of the top five large-scale copper developers outside of major mining companies.
- The project has an estimated annual production of 95,000 tons of copper and 50,000 ounces of gold, with a 16-year mine life based on current estimates.
- Hot Chili has a strategic partnership with Glencore for 60% of offtake for the first 8 years, leaving 40% uncommitted for potential future deals.
- The company is developing a water supply business, Huasco Water, which could potentially be monetized to help fund the main copper project.
- Hot Chili is targeting completion of prefeasibility studies for both the copper project and water business by late 2023/early 2024, with the goal of securing project financing by late 2026/early 2027.
In an era where the global demand for copper is steadily rising, driven by the green energy transition and infrastructure development, Hot Chili Limited stands out as a compelling investment opportunity in the copper mining sector. As one of the preeminent large-scale copper developers outside of major mining companies, Hot Chili is advancing its flagship Costa Fuego project on the Chilean coastline. With a combination of strategic advantages, including a favorable location, significant resource base, and innovative approaches to infrastructure development, Hot Chili is positioning itself to become a major player in the copper market.
Project Overview: Costa Fuego
Hot Chili’s Costa Fuego copper project is located on the Chilean coastline. The project benefits from several natural advantages that set it apart from many of its peers in the copper development space.
Costa Fuego is projected to produce approximately 95,000 tons of copper and 50,000 ounces of gold annually. This substantial output places Hot Chili among the top five large-scale copper developers globally, outside of major mining companies. The current mine life is estimated at 16 years, based on a resource base of one billion tons, with potential for extension as further studies are completed.
Christian Easterday, CEO and Managing Director of Hot Chili, emphasizes the project’s significance:
“There are only five projects that are scaled at 100,000 tons per annum of fine copper production globally outside of the control of majors. For the independent projects, there are not many of those that are near term.”
Cost Advantages
One of the most compelling aspects of Costa Fuego is its relatively low capital intensity. Easterday notes:
“It’s a billion dollars to build. If we were in the high Andes and we required fresh water or desalinated water to process with, which we don’t, then we would be talking about a $2 billion project to put out that kind of metal production.”
This cost advantage is primarily due to the project’s coastal location, which eliminates the need for expensive water infrastructure and reduces overall development costs. The lower elevation also simplifies operations and reduces associated risks compared to high-altitude projects in the Andes.
Development Timeline & Permitting Progress
Hot Chili is making steady progress towards project development. The company is preparing to submit its environmental impact assessment in mid-2024, which will be the last major permit required before obtaining the mining permit for Costa Fuego. This puts Hot Chili ahead of many of its peers in terms of permitting progress. Easterday outlines the timeline:
“Conceivably, with our best timelines at the moment, early production no earlier than late 2028 is what we foresee in the schedule.”
This timeline includes a two-year construction phase and a six-month ramp-up period to reach nameplate capacity.
Glencore Partnership
Hot Chili has secured a strategic partnership with Glencore, one of the world’s largest commodity traders. This partnership includes an offtake agreement for 60% of Costa Fuego’s production for the first eight years. This arrangement provides Hot Chili with a guaranteed market for a significant portion of its future production while leaving room for additional partnerships or spot market sales.
Importantly, Hot Chili has retained 40% of its offtake uncommitted, providing flexibility and potential upside. Easterday explains the strategy:
“We very prudently kept 40% of our offtake uncommitted outside of the Glencore arrangement, and that’s getting a significant amount of interest.”
This uncommitted portion could be particularly valuable given the tight copper concentrate market and growing interest from Asian investors in securing supply from new copper projects.
Interview with Managing Director & CEO, Christian Easterday
Huasco Water: A Strategic Asset
In addition to its core copper project, Hot Chili has developed a potentially valuable water supply business, Huasco Water. This subsidiary holds rights to supply both saltwater and desalinated water to the region, including to Hot Chili’s own project and potentially to other mining and industrial operations in the area.
The water business represents a significant potential source of value for Hot Chili. Easterday draws a parallel to a recent transaction in the sector, “Antofagasta took their water rights, they sold them for 600 million to a consortium and is now also building their water expansion of 380 million – Antofagasta has supplied them a 20-year offtake agreement to supply water.”
While the situations are not directly comparable, this example illustrates the potential value that could be unlocked from Hot Chili’s water assets. The company is considering various options for monetizing this asset, including potentially selling a majority stake to a strategic investor in the water industry.
Infrastructure Cost Savings
The development of Huasco Water also provides direct benefits to the Costa Fuego project. As Easterday explains:
“Our water infrastructure is around $140 million of capital, and that is what we can now outsource out of our build cost.”
By potentially selling the water business while retaining the necessary supply for Costa Fuego, Hot Chili could significantly reduce its capital requirements for the copper project while also generating funds to contribute to overall project development.
Financial Position & Funding Strategy
Hot Chili is well-funded for its current phase of development. Easterday notes:
“Hot Chili’s been able to fund itself very well this year in a really well-timed capital raising, which means we’re sitting here with $30 million and doing what we need to do to get the project pushed forward.”
This funding allows the company to advance its prefeasibility studies for both the copper project and the water business, as well as prepare for the environmental impact assessment submission.
Looking ahead to project construction, Hot Chili is developing a multi-faceted strategy to fund the estimated $1 billion capital cost. This strategy could potentially include:
- Monetization of the Huasco Water business
- Streaming agreements on precious metals production
- Additional offtake agreements
- Strategic partnerships or investments, particularly from Asian investors
- Traditional project finance from banking syndicates
Easterday is confident in the company’s ability to attract funding.
“We have a copper asset that’s going to have a prefeasibility at the end of the year, a water asset that’s going to have a prefeasibility not far after, and you know, both of those project values are significantly large.”
Market Outlook & Timing
Hot Chili’s development timeline aligns well with projected supply-demand dynamics in the copper market. Many analysts anticipate a significant supply deficit in the coming years, driven by growing demand from electrification and renewable energy sectors, coupled with a lack of new large-scale projects coming online.
Easterday notes the industry’s chronic underestimation of challenges in bringing new supply to market:
“Since 2014, so the last 10 years, they’ve overestimated the progression of supply forecast. There is a huge gap between what has been forecast every year to come and what has actually come.”
This dynamic could create a favorable pricing environment for new producers like Hot Chili as they enter the market.
Hot Chili’s goal is to be “first in line to finance a 100,000 ton per annum project,” as Easterday puts it. By advancing its studies and permitting processes now, the company aims to be ready for a final investment decision and financing in late 2026 or early 2027, potentially ahead of many competing projects.
This timing could allow Hot Chili to secure favorable terms for project financing and offtake agreements, as well as potentially benefit from strong copper prices as it enters production.
The Investment Thesis for Hot Chili
- Large-scale copper project with significant production potential (95,000 tons copper, 50,000 oz gold annually)
- Low capital intensity due to favorable coastal location ($1 billion vs. $2 billion for comparable high-altitude projects)
- Advanced permitting status with environmental impact assessment submission planned for mid-2024
- Strategic partnership with Glencore, with potential for additional offtake agreements
- Unique water business (Huasco Water) that could be monetized to fund a significant portion of project development
- Well-funded for current development phase with $30 million on hand
- Aligns with projected copper supply deficit, potentially benefiting from favorable pricing environment
- Management team with clear strategy and timeline for project development and financing
Hot Chili presents a compelling investment opportunity in the copper development sector. With its large-scale Costa Fuego project, strategic coastal location, cost advantages, and innovative approach to water infrastructure, the company is well-positioned to become a significant player in the copper market.
The company’s progress on permitting, strategic partnerships, and funding strategies demonstrate a clear path towards project development. Moreover, the potential monetization of the Huasco Water business could provide a unique source of funding, setting Hot Chili apart from many of its peers.
As the global demand for copper continues to grow, driven by the green energy transition and infrastructure development, well-positioned projects like Costa Fuego are likely to attract significant interest from investors, offtakers, and strategic partners. For investors seeking exposure to the copper market, Hot Chili offers a combination of scale, advanced development status, and potential for value creation that merits serious consideration.
Macro Thematic Analysis
The global transition to clean energy and electric vehicles is driving unprecedented demand for copper, creating a compelling macro environment for copper developers like Hot Chili. As countries worldwide commit to decarbonization targets, the need for copper in renewable energy infrastructure, electric vehicles, and energy storage systems is set to surge.
Concurrently, the supply side of the copper market is facing significant challenges. Years of underinvestment in exploration and development, coupled with declining ore grades at existing mines, have created a looming supply deficit. Many analysts predict this supply-demand imbalance will persist and potentially worsen in the coming years.
This situation is further complicated by the increasing difficulty in developing new large-scale copper projects. Environmental concerns, water scarcity, and geopolitical tensions in key mining jurisdictions are making it harder to bring new supply online. Projects like Hot Chili’s Costa Fuego, with its favorable location and lower environmental impact, are therefore particularly valuable.
Moreover, the growing focus on responsible sourcing and ESG (Environmental, Social, and Governance) factors in the mining industry adds another layer of complexity. Copper projects that can demonstrate strong ESG credentials, including efficient water use and community support, are likely to be preferred by both investors and offtakers. Christian Easterday succinctly captures the opportunity this creates:
“We’re starting to approach this inflection point where a lot of the greenfield projects are starting to become lower capital intensity options for new supply.”
This dynamic positions well-advanced, economically robust projects like Costa Fuego to potentially command premium valuations as the copper supply crunch intensifies.