Tom Wallace: Ladies and gents, this interview is coming to you from the sidelines of the 2017 Sprott Natural Resource Symposium. My guest today is Christian Easterday, Managing Director of Hot Chili Limited. Christian is a geologist with over 17 years of experience in the mineral exploration and mining industry. He holds an Honours Degree in Geology from the University of Western Australia, a Masters Degree in Mineral Economics from Curtin University of Technology, and a Masters Degree in Business Administration from Curtin Graduate School of Business.
He has held several senior positions and exploration management roles with top tier gold companies including Placer Dome, Hill 50, and Harmony Gold. Today Christian is going to talk to us about the copper market and how Hot Chilli is positioned to capitalise on rising copper prices. Without further ado, here is the interview.
Tom Wallace: Christian, thanks for joining me.
Christian Easterday: Thanks Thomas.
Tom Wallace: We've had a very interesting last 5 or 6 days in the copper space. What's going on there?
Christian Easterday: Yeah look, we are ... I guess we're starting to see potentially Doctor Copper starting to indicate the beginnings of hopefully the next cyclical boom in resources. Is what's my CEO's in the industry would be hoping. But in particular for Hot Chilli, our company, and the rest of the development and exploration space. Hopefully some long awaited enthusiasm coming towards those investing in the copper space globally.
Tom Wallace: Can you tell me a little bit of the history about Hot Chilli? How the company came about?
Christian Easterday: Well look, back in 2008 myself and our chairman Murray Black founded the company privately. We went to Chile to a tier 1 jurisdiction, very low sovereign risk to invest in large scale copper projects that had infrastructure advantage. And it was a business strategy that required us being able to do deals with the major companies that controlled a lot of the land holdings in Chile. And I guess it was really about chasing scale in a large sector of the resource market in copper. And utilising the skills that our group and our technical people had and were able to strike deals, which enabled us to collect a number of projects and a very enviable portfolio. Took us many years to do. And we were able to list on the Australian Stock Exchange in 2010 and obviously since then the discovery of the Productora copper project, which propelled Hot Chilli during the strong copper market is really the asset strength that sits behind the company today.
Tom Wallace: Yeah, Productora is your advanced stage copper development play and it's located in an enviable location. Can you tell me a bit more about the project?
Christian Easterday: Well look, most people in the industry know about Productora. It sits as one of the top development projects in the global pipeline for new mines to be built. And that, as you rightfully said is a lot to do with location that we were able to discover the project at. It sits on the coastline, about 800 metres altitude and it sits right next to the Pan-American Highway. Right next to one of the central grids largest power stations, right next to port infrastructure 40 kilometres away and rail infrastructure associated with our major partner CMP CAP, one of the Chilean majors. The largest iron ore miner of Chile. It sits right in the middle of their operational base in the Huasco Valley. So, those infrastructure advantages are something that we were able to really secure and ensure that Productora was one of the top 3 lowest capital intensity projects to build in the development pipeline globally. Because of those infrastructure advantages, Productora is missing a significant amount of the capital that would be required for a project of its scale.
Tom Wallace: Yeah, can you tell me where the project is currently at and what your plans are for it in the future?
Christian Easterday: Sure, well a lot of the resource sector is largely in part the success or the failure of companies is largely in part to do with timing. We were very fortunate when we started the company and made the discovery in 2010 to be able to deploy a significant amount of capital into the exploration definition drill out of what sits today as a 1.5 million tonne copper resource, 1 million ounce gold resource in ground, a very large open pittable project. We were able to put 70% of our mine life in place before the copper price deteriorated. Which means that we now sit here today on the other side hopefully of a down cycle for copper and global commodities.
With the very advanced stage pre-feasibility complete project with the majority of it's mine life in place and extremely leveraged copper price. For people that followed Hot Chilli, we were a company that grew to great heights very quickly in a 3 dollar plus per pound copper price environment. And the leverage that most of the developers in the copper space have experienced with the deterioration of the share prices of the market cap. Hopefully, the time is not very far away for us to be able to, like everybody else I guess, take advantage of the rising copper price.
And to give you an example of what leverage represents in the large scale copper space, you know, Productora at the moment it's pre-tax MPV if copper price moves from three dollars to three dollars fifty, our leverage represents a move in our pre-tax MPV from 500 million dollars to 1 billion dollars with the 50 cent shift in the copper price. So that leverage is going to be worn out in a phenomena that we all know that when the tide rises, most boats rise with the tide. And of course, it's I guess in my interest of my shareholders to ensure that Hot Chilli is very well placed. And we're certainly positioned with an excellent asset, with excellent opportunity exposure to copper price rise. But also, the actual opportunity of the project to grow Productora into something a lot more significant than it currently is today.
Tom Wallace: What are some catalysts that investors can expect in the next sort of 6 to 12 months?
Christian Easterday: Sure, well look, I mean all CEOs can certainly wait for the external environment and the price of their commodity to shift to change their valuation. We're not doing that at Hot Chilli, we've been very prudent over the last 4 years, with a very beaten up copper price, not to expose our shareholders to significant expenditure during that time. But to continue to advance the project forward. We were able to deliver the pre-feasibility in 2016. We were able to look at optimization opportunities in the project but largely over the last 18 months, we've been doing a large assessment of the growth potential of the project. We focused most of our exploration budget into an assessment of a very large 6 kilometre by 4 kilometre scale, porphyry lithocap, which sits next to our advanced asset that we'd drilled out over the previous 5 years.
That exploration up sided Productora through the studies that we've done and the experts that have been pouring over the geological information that we've put together, indicates that Productora has the potential to grow quite significantly by many multiples. So already at one and a half million tonne copper play, we certainly believe that Productora has the potential to grow towards a tier 1 asset. If you put a tier 1 asset, the top 3 jurisdictions such as Chile at lower altitude with all of those infrastructure advantages, and we believe that that is the formula to significantly rewrite and generate very impressive returns in the future for our shareholders.
Tom Wallace: Yeah, my next question was going to touch on what you just mentioned about a rising tide lifting all boats. You've sort of covered it, but, could you expand upon why Hot Chilli as its copper boat, is going to rise faster than everybody else's copper boat?
Christian Easterday: Look I think that Hot Chilli ... when we delivered the pre-feasibility it was quite clear to the market that we were not finished with the exploration and the growth of the mine life and the asset. We have a secured Chilean major into the project, we were able to secure all of that infrastructure advantage by signing a joint infrastructure deal with our Chilean partner CMP CAP group, Chile's largest iron ore miner. So we certainly have a large partner alongside us contributing 20% to the development costs of Productora.
So firstly in terms of partnership and our ability to develop this project, we had the right partner next to us that is a very strong local partner in the area. And we had the infrastructure advantage that is secured and cuts our development timeframes by 3 to 5 years by having access to all of those easements that allow to establish cheap infrastructure at Productora. But most importantly, as I touched on, I think that is the exploration growth of the project. The fact that the project is going to be one of the largest scale coastal range new copper mines. That it allows us to look at other opportunities within the orbit of Productora that may well be also able to be unlocked into a large scale mother mill located on the coastline of Productora.
Tom Wallace: No worries. Is there anything else you wanted to cover on Productora?
Christian Easterday: I think that the pre-feasibility we put out in 2016 was a 3 dollar per pound copper price I used for that feasibility, not unlike the 90% of our peers in large scale copper. For the past 3 to 4 years ... look, the valuations of companies in our space has been significantly downgraded. That gives you some indication of what the potential is for the re rating into a rising copper market. Everyone's views will be different on when that is likely to happen. I imagine that ... I'm of the school of thought it's not a matter of whether it's going to happen, it's a matter of when it's going to happen. Some of the recent price movements that you asked about at the beginning of this interview, we've been sitting in a trading range of 2 dollars per pound for some couple of years.
Particularly at the beginning of 2016, most of the copper equities were significantly devalue because of the copper price. The majority of the copper is actually coming from mines at about half a percent copper as a head grade of production. Which happens to be the average head grade globally for copper production, which also happens to be the average head grade of Productora's production. Those assets will not be built without an incentive price of around 3 dollars per pound.
Tom Wallace: Yep.
Christian Easterday: So, the significance of what is going on in the market and certainly most people know that copper is called Dr. Copper for a reason. It's a very good predictor of the turn in the resource commodity cycle. So for copper of the last 9 months, to move from two dollars per pound trading range to two dollars fifty, to two dollars sixty per pound trading range. And then in the last week to be able to make such a large jump, a 7, 8, percent jump within a week. We're now starting to see the real tightness of supply and demand in the global copper market. So we've had pressure on suppliers. There is not a major wall of copper supply coming. There has been a 3 to 4 year freeze of all the development projects coming into production. And most importantly, disruption at major mines around the world, have exacerbated the supply constraint at the moment in the industry.
And against that backdrop, from the demand side of the equation. The Chinese, which are obviously such a major influence on what happens with copper demand. Some 42% of global demand comes out of China. They have ... the Chinese government has managed to ... I guess, control and moderate some of the issues with their economy and that has certainly led to a renewed amount of confidence in the ability of the Chinese government to manage their growth prudently.
Against that, we hear other respondents in the industry talking about the technical factors which will either increase demand, limit supply and those are quite well known quantities. Probably the biggest disruption for the industry, for the copper sector is what the impact of electric vehicle uptake will be. Most people know that copper is going to be a big beneficiary of this. In that, electric vehicles require four times the amount of copper for the construction of an electric vehicle, rather than the current internal combustion engines.
So, these kind of demand shocks or demand disruptions are going to be a little bit unpredictable. But when you look at the copper industry and you say you know the ... if we had a stoppage of all production today, the world has about 3 weeks of supply of copper available. The market has always been tight and I expect it to get tighter. The international copper study group has just indicated that we've just gone through another month of copper deficit.
So there was not meant to be a supply deficit until 2018. We're seeing it this year early because of the factors that I've talked about. And certainly I think that it's going to be a very interesting 12 to 18 months ahead. And in particular I think that investors will be turning their attention to who is in the copper development space, exactly where are their market caps from the market caps they were ... order of magnitude 3 to 4 years ago. Because we expect that there is going to be a significant amount of interest turned toward the copper sector and certainly we are very pleased to be one the advanced development plays that is still in a very robust position.
Tom Wallace: Can you go over the share structure of the company and the management insider and institutional ownership?
Christian Easterday: Sure. Well on the capital structure we have a 543 million shares on issue. We recently completed a funding that was supported by our major shareholders in Sprott, in Taurus Funds Management out of Sydney in Australia. And also, our chairman's group, Kalgoorlie Group. That allowed Hot Chilli to pay off all of its debt, which was just a couple of weeks ago. And the removal of all securities associated with the facility that the company had taken on while the copper price environment was strong.
That has allowed us to boost our treasury and remove the debt encumbrance that was costing the money, costing the company quite a significant amount of working capital to facilitate. So now that the balance sheet has been significantly strengthened, I guess that we are fully focused on another growth phase for the asset.
The management of Hot Chilli comprises a number of very experienced technical professionals and business professionals. Our chairman, Murray Black, is a man with 45 years experience in the industry, has managed and created many ASX listed companies in the gold exploration space and also copper exploration space with Hot Chilli. We have representatives from some of the major groups, which have supported and allowed Hot Chilli to be able to deploy a significant amount of capital into the development of Productora.
Michael Anderson is a geologist and business manager from the industry with some 40 years experience, another geologist like myself, he represents Taurus Group. We have a representative of CAP, Chile's largest iron ore mining company, Roberto de Andraca, business development manager and currently sitting on the board of the parent company cap as a non-executive director. Dr. Allen Trench is a very well known professional in the Australian industry. He's a director of CIU, a global study group, sits on the board of 5 or 6 quite well known junior companies in the Australian Stock Exchange and is a professor in mineral economics at Curtin University in Western Australia.
Myself, I'm a geologist by background, I'm a founder of Hot Chilli along with our chairman Murray Black. A geologist by background. Spent many years in the gold industry of Australia, working for companies such as Hill 50 gold where I learnt from the best in Peter Cooke, a very well known mining entrepreneur and mining business leader in Australia. And worked for companies such as Placer Dome, working globally and looking at a number of projects and also working for my chairman Murray Black at several of his companies to date.
So, I guess the management and the technical group that sits behind Chilli, which are lot of the ex-Placer technical generative heads. People such as Dr. Scott Halley on geochemistry. Greg Hall, the former Chief Geologist at Placer Dome. Dr. John Beeson, one of their senior structural geologists. We have an immense amount of technical talent behind the company that has allowed us to obviously have a technical advantage in not only discovery but development and assessment of growth opportunities for the company. So, I guess on the technical professional front and the management of the company there is certainly probably plus 200 years of experience just on the board.
Tom Wallace: Christian, where can investors find out more about Hot Chilli?
Christian Easterday: Well look, we're listed on the Australian Stock Exchange. Our ticker code is HCH. But our website has an extensive amount of information. Information ranging from our completed pre-feasibility on Productora to our growth strategy and to a blow by blow account of the exploration successes that we've had in Chile and the partners that we enjoy in Chile. So all of that is on our website and is quite succinctly managed for all investors to review at their leisure.
Tom Wallace: No worries. Thanks for joining me Christian.
Christian Easterday: Thank you Tom.
Tom Wallace: Much appreciated.
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