Here is a good read from Warwick Grigor, Far East Capital,1 June...

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