Hillgrove Resources Limited [ASX:HGO]
Metals & Mining
A lucrative copper play near production
Hillgrove Resources (ASX: HGO) is an Australian mining company focused on the operation of the Kanmantoo Copper Mine in the Adelaide Hills of South Australia. The mine site is located less than 55km from Adelaide in SA. After the completion of open pit operations in 2020, HGO is planning to resume production in 2024 through an underground mining project. Given all the required infrastructure and funding in place, we think HGO is well- positioned to become Australia’s next copper producer in early 2024.
A near-production project with low risks
With all the required infrastructure and a processing plant in place, the first copper sales from the Kanmantoo Underground Stage 1 Project are expected in early 2024. Years of copper production from the area has significantly de-risked the project’s technical aspects and has left the Project with established logistics routes and marketing solutions for the sale of the expected products to international markets. Subject to shareholder and Foreign Investment Review Committee (FIRB) approval, the project is also fully-equity funded to production, and it will also have enough funds for undertaking further drilling programs to expand resources and increase the mine life.
Decarbonisation megatrend driving demand for copper
Copper’s applications in energy transition technologies, such as EVs, are set to catapult the base metal’s demand in the next several years. While each internal combustion engine uses around 23kg of copper, each EV on average uses more than 60kg of copper. On top of that, there will be a huge demand for copper to build EV charging points and to upgrade the distribution network. On the supply side, dwindling copper reserves and lower ore grades at some of the world's largest mines means that a new deposit would just be replacing the existing output, leading to a long-term supply deficit forecast for copper.
Valuation range of A$0.107–0.136 per share
Using the DCF approach and conservative assumptions on commodity prices, exchange rates and operating costs, we have valued HGO at A$0.107 per share in a base-case scenario and A$0.136 per share in a bull-case scenario. Our target price range represents a Price/NAV of 0.44x, which we believe provides enough upside potential given the low-risk profile of the stock. We have assumed HGO to successfully raise A$38m at A$0.053 per share to fully equity fund the Kanmantoo UG Stage 1 Project. The key risks to our investment thesis include commodity price risk, funding risk and project delay risk.