The price of copper has been quite volatile in recent years, so a hedging facility for the company makes sense as it ramps up to a cash-flow-positive situation.
Overall, copper has a very strong long-term price dynamic at play. Grades have been steadily decreasing over time, and we've had to dig deeper and deeper to find viable deposits. It is relatively price-inelastic. For its properties, it's the best fit for purpose in many applications. It will take a dramatic price rise before other materials, such as gold, silver, and aluminium, become viable substitutes in many applications. On the demand side, we see an increasing ramp-up in copper demand as new applications such as electric vehicles and renewable energy generation, storage, and transmission continue to gain dominance. Other existing uses, such as electronic devices and homes, will continue to deliver steady demand increases as well.
Let's return to the second explanation for HGO jumping into growth initiatives early. They might be expediting phase two because phase one is well in hand, and the exploration and development opportunities are too exciting.
This is the ideal scenario, and the ramp-up seems well in hand by the tone of HGO's current messaging. We'll have to wait for the next quarterly cash flow release for an updated financial view.
Recommendation
Hillgrove Resources is Australia's newest ASX copper play, with production kicking off in February 2024. This is an easy restart of an old mine site, converting the operation from an open pit to an underground one. So, it's a cheap and easy cash flow play.
But HGO isn't about the existing operation. That's just a short four-year mine life to get things moving. In the meantime, we can expect the exploration drilling campaign to ramp up. The company is working on a revised mineral resource, which we expect will aim to extend mine life and mill throughput. They only utilise 40% of their mill capacity, so increased throughput would come at very little additional cost. We are at one of those pivotal moments where the company has hinted at impending good news with a revised mineral resource and the release of some early drilling results. This makes now a good time to position for a potential re-rate on a mineral resource expansion and either a mine life extension or mill throughput expansion.
We reaffirm our Buy recommendation on Hillgrove Resources (ASX: HGO).
Technical Update
The following chart shows the weekly price bars of HGO against the front month Nymex copper futures contract(HG1!) in orange. It's easy to see that the HGO share price has not participated in the copper rally but has sadly been left behind. This gives substantial upside potential to the HGO share price as we see revenues materialise in the quarterly cashflow reports for one. But more importantly, any expansion of mineral resources will increase the stock sensitivity to the price of copper.
The disparity between the moves in copper and the HGO share price creates the potential for a big upswing in price if and when we see positive results released.
In the meantime, there are a few good technicals to pay attention to. The rising blue support is putting a floor under price and is being tested again. This is a good buying opportunity, with a significant support just below that at 4.9 cents.
The next swing up could test the horizontal resistance at 9.8 cents. If the move corresponds with a positive release, we see a good chance that the level breaks. However, if it's just the story as it is now, we would expect take-profit selling to keep the price below the 10-cent handle.
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