Here is a good read from Warwick Grigor, Far East Capital,1 June 2024
Hillgrove is a promising copper recovery story The news that BHP is walking away from the bid for Anglo America will likely lead to reduced enthusiasm for copper stocks in the short term, though the general thematic remains in place. This chapter of the copper story has run its course. This week we feature Hillgrove, a copper producer that has recently restarted the Kanmantoo Copper Mine in South Australia. It should benefit from the renewed investor interest in copper, and the stronger copper price we have been seeing. The is also a small price on the specialist copper explorer, Copper Search. Hillgrove on Track to be a Profitable Copper co. I’ve been following the Kanmantoo Copper Mine story since BH South owned it in the 1970s. More recently we have provided commentary in 2021, noting that the grade profile of the open pit orebody had been over-estimated when the mine was restarted. By 2015/16, the mine was operating under severe financial stress as a result. A rescue package was initiated but debt had blown out to $70m (it has since been repaid). The operation was placed on care and maintenance in late 2020. Yet, at the time there was hope that underground extensions could provide new life. This is a mine site that has been around for multiple generations of activity. It seems that the more the geologists look, the more they find. This, underground iteration of activity, has only just started. If you look at the recently released presentation, you will see that there are about seven orebodies that have potential for depth extensions. Impressive intercepts got the ball rolling again Optimism was vindicated in May 2021, with the reporting of three deep holes. The best one returned 170m at 1.01% Cu and 0.11 gpt Au from 339m down hole, including a higher grade interval of 23m at 2.48% Cu and 0.24 gpt Au. The share price doubled on the back of the ASX release. A subsequent Underground Stage 1 Plan was announced based on a Mineral Resource of 5.7 Mt at 1.1% Cu and 0.3 gpt Au in December 2021. The restart of the mine was estimated to cost $26m at the time. This was covered by a $39m placement at 5.3¢ in March 2023. Kanmantoo is almost an urban mine, less than an hour’s drive from downtown Adelaide, in the Adelaide Hills. Its location ensures availability of a local workforce and good infrastructure in what is generally regarded as a miningfriendly State. Underground development commenced in May 2023, and the formal decision to proceed was made a month later. The crushing circuit was commissioned in December 2023, and the first concentrates were produced in February 2024, in-line with guidance. While the plant has capacity to process 3.6 Mtpa, designed for the earlier open pit operation, this exceeds the deliverability of the underground ore. The mill will only operate at about 1.4 Mtpa for the foreseeable future, on a campaign basis. Over-call on grade is most useful … So far the Company has avoided the issue it suffered from with the open pit operation; over-estimation of the grade. Attention to detail has enabled a positive reconciliation of the block model, at times up to 20% overcall. This will be very positive if it continues. … as is the higher copper price The jump in the copper price has come at the perfect time for Hillgrove. There is some flexibility with the grade it pulls out of the ground with the ability to mine material that might have otherwise been left in the walls. Hedging is a necessary strategy with many base metals mines but it shaves the upside on the higher prices. With only 30% of production hedged, Hillgrove still offers good exposure to the higher copper price. The strong earnings power of Kanmantoo Hillgrove is another one of those companies that is impeded in what it can say about future earnings due to compliance and the need for reserves. Thus, there is no official guidance, but a half smart analyst can work out numbers from what has been released. The starting point is the Economic Assessment released a year ago. That said the plan was to produce 14,000 tpa of copper in concentrate on a throughput of 1.4 Mtpa. Using a ball park copper price of US$4.70/lb and all up costs of $9-10m p.a. (about US$3.00/lb), Hillgrove could be generating A$5m per month cash flow or $60m p.a. With a market capitalisation of around $163m, this places the shares on a modest cash flow multiple of < 3x. Another benefit of the higher copper price is the ability to drop the cut-off grade a little by taking incrementally wider cuts into the wall rock. There is a gentle gradient of copper grade that can enable greater tonnes per vertical metre - always an important factor in maximising cashflow. The Bottom Line The Hillgrove share price has been reasonably well supported during the recent bear market. It didn’t collapse, though it didn’t do anything spectacular either. The recent market enthusiasm for copper stocks has been helpful and the shares are trading at recent highs with a market capitalisation of around $163m. The Company is now debt free and generating positive cash flows. There is a significant JORC Exploration Target of 60-100 Mt at 0.9-1.2% Cu that could underwrite a long term future for the Company, particularly if the copper price maintains long term strength. This commentary is provided at no charge and in good faith from sources believed to be reliable and accurate. Far East Capital Ltd directors and employees do not accept liability for the results of any action taken on the basis of information provided or for any errors or omissions contained therein. Readers should seek investment advice from their professional advisors before acting on information contained therein. Please see Disclosure of Conflicts of Interest at the end of this commentary.
Hillgrove offers good leverage to the copper price based on existing production as well as blue sky appeal in extensions and new discoveries. It is a more conservative way to play the copper cycle than the myriad of speculative exploration companies on the market.
Cheers Mulac1
HGO Price at posting:
7.9¢ Sentiment: None Disclosure: Not Held