Hot Chili - Advances Costa Fuego Copper-Gold Project with PFS by End-2024

• Hot Chili is developing the large-scale, low-elevation Costa Fuego copper-gold project in Chile, with a prefeasibility study on track for completion by end of 2024
• The company has secured unique water rights which could enable supply to the entire region and unlock stranded copper projects, providing significant potential value
• Costa Fuego has a low capital intensity of around $10,000 per annual ton of copper equivalent production, well below the industry average, due to its coastal location
• Hot Chili's water rights provide optionality to monetize this asset to help fund Costa Fuego's development, reducing equity dilution
• Strong copper market fundamentals driven by electrification and lack of new supply point to higher prices, which would further enhance Costa Fuego's economics

Hot Chili Limited is an ASX-listed copper developer on the cusp of a significant re-rating as it advances its district-scale Costa Fuego copper-gold project in Chile towards a construction decision. The company has spent 14 years patiently consolidating the Costa Fuego area and recently completed a $30 million capital raise to fund a prefeasibility study (PFS), putting it in pole position to help fill an impending supply gap in the copper market.

Lack of Copper Supply to Drive Prices Higher

Copper is critical for electrification and the global energy transition. However, a dearth of new supply is looming due to years of underinvestment, declining grades, and ever-longer project lead times. Bank consensus forecasts now point to copper prices averaging $4.07/lb ($8,975/t) over 2024-27, 22% above the $3.35/lb price used in Costa Fuego's 2024 preliminary economic assessment (PEA).

According to Hot Chili CEO Christian Easterday, 2.5% annual growth in copper demand and a 2.5% yearly decline in global head grades means the world needs to develop the equivalent of a new Escondida mine (1Mt Cu/year) every year. However, a lack of investment means supply will undershoot even as demand accelerates.

"The supply response this time is not likely to come. 70% of the supply response in the last cycle came from existing mines dropping their cutoff grades. The industry will have to look for new supply, but unfortunately, new supply has very long lead times," explains Easterday.

Interview with Managing Director & CEO, Christian Easterday

Low-Risk, Low Capital Intensity

Fortunately for Hot Chili, Costa Fuego is one of a handful of projects capable of producing over 100,000t copper per annum that is not already controlled by a major. Crucially, Costa Fuego boasts a world-class scale (1.2Bt at 0.46% CuEq in Indicated & Inferred resources) at a low altitude, just 50km from the coast and close to existing infrastructure.

"Coastal projects, especially those that don't require freshwater, can skip up to a billion dollars in capital. That's why we have such low capital intensity," says Easterday.

Indeed, at roughly US$10,000 per annual tonne of copper equivalent production, Costa Fuego's capital intensity in the 2023 PEA was well below the industry average of over US$20,000/t.

The other key advantage of Costa Fuego's low-altitude, coastal location is that it largely de-risks the project from an ESG perspective when numerous high-altitude projects in Chile and Peru face major permitting and community challenges. By contrast, Costa Fuego's oxide ore is expected to be processed using seawater. Hot Chili already has a maritime concession to extract seawater and is permitting a second concession.

"Low-risk projects are probably going to get the most attention at the start of this new copper cycle," says Easterday.

Water Rights Provide Funding Optionality

Perhaps the most unique aspect of the Costa Fuego story is Hot Chili's foresight in securing substantial water rights in the region at an early stage. The company has concessions to extract up to 8,000 litres per second of seawater and supply desalinated water to other regional users.

In a country where water rights for miners are increasingly scarce, this provides Hot Chili with significant project financing options. The company is completing a formal business case study on its water rights and plans to convert them to a vehicle that could potentially be monetized via sale to an infrastructure fund or strategic investor.

"Just simplistically, if we were to utilize our water rights as a private company, we could sell down Hot Chili's equity stake, ensuring no risk to our own water supply, and distribute the proceeds to fund a large chunk of Costa Fuego's equity portion," explains Easterday.

As an example, Antofagasta recently sold water rights to its Centinela expansion project to a Japanese consortium for US$600 million, reducing the expansion's capex by US$380m. Chile's new government actively promotes multi-user, desalinated water solutions to reduce mining's environmental footprint and share benefits with local communities.

"We're not contemplating building a multi-billion dollar water network ourselves. But by vending our water rights into a private vehicle, we can monetize this to fund a significant portion of Costa Fuego's development and in doing so, hopefully enable a lot of stranded regional deposits that might otherwise miss this cycle," says Easterday.

Potential to Grow Mine Life

While Costa Fuego's PEA already outlined a robust 16-year operation producing 95kt copper and 49koz gold per annum, upcoming work programs aim to expand the resource and mine life. Only 70% of the PEA mine plan was based on Indicated resources, pointing to potential to convert more Inferred material.

Additionally, Hot Chili has consolidated several historic mines south of Costa Fuego which could further extend the project's longevity. Potential also exists to deepen Costa Fuego's open pits and expand its higher-grade underground component at higher copper prices.

Next Steps

Key catalysts for Hot Chili include completing the Costa Fuego PFS by the end of 2024, submitting an environmental impact assessment (EIA) by mid-2024 to start the project permitting process, and releasing the formal business case for its water rights in early 2025.

Results from ongoing resource extension drilling could also provide regular news flow, although Easterday stresses Hot Chili is focused on "long-term value creation" rather than "talking about rock chips." The company will also look to opportunistically consolidate regional exploration ground, potentially adding a second development asset.

Hot Chili has patiently consolidated the Costa Fuego area for over a decade. It is now poised to deliver a major new copper mine into a market facing significant supply challenges. The company's unique coastal setting and water rights help to de-risk the project from both a permitting and financing perspective.  With a PFS expected by end-2024 and the share price still well below previous highs, the scene appears set for a potential re-rating of Hot Chili as it advances Costa Fuego towards development.

The Investment Thesis for Hot Chili

• Hot Chili represents a unique investment opportunity in the copper space, with an advanced, large-scale coastal project being progressively de-risked
• Costa Fuego is one of few projects globally capable of producing +100ktpa copper not already controlled by a major miner, putting it in the M&A sweet spot
• Low capital intensity of <$10,000/t CuEq and proximity to infrastructure make Costa Fuego a lower-risk development proposition than most greenfield projects
• Unique water rights provide significant optionality to monetize this asset and help fund development, reducing the need for equity dilution as the project advances
• Copper market fundamentals remain highly favorable and are likely to strengthen further, with higher prices boosting Costa Fuego's economics

Macro Thematic Analysis

The global energy transition is driving unprecedented demand for copper. Under the IEA's Net Zero by 2050 scenario, copper demand from clean energy technologies is forecast to triple by 2040. At the same time, copper supply is becoming increasingly constrained due to declining head grades, community opposition to new mines (especially in Chile and Peru), and a lack of new discoveries.

Bank analysts estimate that without much higher prices to incentivize new supply, the world could face a 6Mt copper supply deficit by 2030 and a potential shortfall of 16Mt by 2040. Even if every single copper project in the pipeline were to be developed, the world would still face a supply deficit from 2025 onwards, according to S&P Global Market Intelligence.

As Hot Chili CEO Christian Easterday puts it:

"This cycle is a lot different to the last one. The last cycle was driven by demand out of China; this cycle will be driven by a lack of supply, and that will produce quite dramatic volatility in prices... The supply response this time is just not likely to come."

This structural supply shortage is expected to drive copper prices much higher and force a complete rethink of project economics. In this environment, large-scale, low-risk projects such as Costa Fuego that can be advanced quickly should be in high demand.