Has anyone seen this report ?

Hillgrove Resources (ASX: HGO) Hillgrove Resources (ASX: HGO) recently released its 2023 Annual Report. The big story is the commencement of copper production at its Kanmantoo underground mine, located in the Adelaide Hills of South Australia. The site was previously an open pit operation that closed in 2020. The company announced its first copper production on 12 February 2024 and its first cash from production on 19 February, although the actual amount of cash was kept under wraps, and we can expect it to be quite small. Concurrent with restarting the mine, the HGO is exploration drilling further areas. A revised mineral resource is being established to include maiden resources from Emily Star and North Hub. There's also a deeper target at Kanmantoo Deeps, which shows strong potential. The current lease has significant copper resource potential, and based on recent drill results, we expect to see an increase in the mineral resource. Therefore, there is great potential for further mining expansion past the original mine plan they now execute. The Capital Raise Shortly after the annual report was released, we saw a $10 million institutional placement to raise funds for mine extension, exploration and general working capital. It might seem odd to see a capital raise after the company announced its first cash from operations. We don't get a look at cash flow numbers until the next quarterly is released, which should be about 20 April 2024. So we have to take our hints where we can get them. The annual report shows that December ended with $10.2 million in cash, $1.5 million in receivables, and $3.2 million in inventories. Accounts payable stood at $13.7 million, reflecting the increased cost of getting to production. Current lease liabilities stood at $4.3 million, and employee benefit liability at $1.6 million. Other current liabilities were $3 million. Looking at accounts payable alone at $13.7 million and comparing that to the $10.2 million cash on hand, it's clear that HGO was running out of cash then. The annual report didn't provide a guidance. However, getting the operation up to cash flow positive will take some time. The HGO marketing pitch has been that Kanmantoo will be one of the world's least capital-intensive underground copper projects. We are currently in phase one of their strategy, which is to return the site to cashflow positive as quickly as possible with as little extra spending as possible. However, we know that they are already taking steps on phase two, growth. That's the drilling of new sites adjacent to the existing mine to extend mine life and increase throughput. So, there are two possible explanations. The first could be that costs have increased dramatically, which they have across the board for miners. HGO is now seeing that it won't make enough from the existing operation and thus needs to expand in order to hit a meaningful cash flow. The company has put our minds at ease by putting some figures out in February in their investor presentation. While the table below doesn't include any recent resource updates, it is the cash flow that we are trying to understand, as the next twelve months for HGO are all about cash. In the same report, the company advised that it is hedging copper sales at $12,500/t. So far, they have hedged 3kt under the total facility limit of 16kt. So, they are expecting a margin of $4,449/t or 35.6%. The 44kt of copper production under the stage 1 mining plan would yield about $196 million in gross profit at this margin. The Copper Outlook This hedging price is even slightly lower than the current futures price. The Nymex copper futures contract trades at US $3.8530/lb or roughly $13,030/t in AUD. 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.