Hot Chili Ltd (HCH)

D J Carmichael Pty Limited ABN 26 003 058 857 AFSL 232571 Market Participant of ASX Limited Telephone: 08 9263 5200 Facsimile: 08 9263 5283 Email: [email protected] Webpage: http://www.djcarmichael.com.au

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Hot Chili Ltd (HCH) Chile Site Visit Report

DJC attended a site visit to Chile to review HCH s Productora and Los Mantos exploration projects. Chile Norte was not part of the field visit. Our visit coincided with the second drilling rig s arrival at Productora and included underground mine visits to both the Productora and Los Mantos operating mines. HCH have made very good progress since listing, albeit a late start due to drill rig availability. Results are now starting to flow and the recent top-up capital raising has enabled the company to amalgamate the original Phase I and Phase II drilling together in preparation for their first resource estimate in 2H 2011. Based on our observations, we maintain our Speculative Buy recommendation.

Key Points

Drilling has started at Productora with the first holes targeting the shallower, eastern most holes in the program. Wide intersection widths of copper-gold-molybdenum-cobalt-uranium

mineralisation have been encountered below a leached zone in a brecciated rhyolite.

Although the exploration is in its infancy, Productora has the hallmarks of a large mineralised IOCG-U system with considerable tonnage potential.

Drilling at Los Mantos has yet to begin. However, the drill pads have already been constructed. The topography necessitated extensive road cutting in some areas, which have

increased the exposure particularly in the south of the project area, increasing the geological

knowledge ahead of the drilling program. Drilling is due to start at Los Mantos in late January 2011.

HCH are working towards their first resource estimate by 2Q2011 which will include drilling

from both Productora and Los Mantos. Once that has been established a more direct peer analysis can be performed to gain an understanding of relative value.

However, even at this early stage we have assumed an estimated 40m to 60m tonnes for its first resource estimate to derive a value of between $117m and $175.6m, equating to a fully

diluted share price of between $0.64 and $0.96 per share. This represents a premium on the

current price of between 106% and 204%. We have used a peer group analysis derived EV / per resource tonne Cu of $226 based on peer companies that have resources of similar

grade. We take the midway point as a price target of $0.80 per share with a 6 month view.

As a result, we maintain our Speculative Buy recommendation on HCH anticipating the

release of new results as the drilling continues towards the production of the first resource

estimate.

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RECOMMENDATION

Speculative Buy

6 Month Price Target $0.81 per share

12 month volume 46.7m 12 month share low A$0.17 12 month share high A$0.33

Market Risk High Liquidity Risk Med Infrastructure Risk Med Country Risk Low

IRESS & DJC Research

ISSUED CAPITAL ASX HCH Share price $0.32 Mkt cap1 $26.3m Ordinary shares on issue1 83.4m Ordinary Shares Restricted 59.4m Options (Nov 2013, 20c) 40.7m 1 Undiluted Source: IRESS

DIRECTORS Murray Black Chairman Christian Easterday Managing Director Dr Alan Trench Executive Director

MAJOR SHAREHOLDERS Kalgoorlie Auto Services Pty Ltd 32.2% Port Finance Ltd 5.0% Ajava Holdings Pty Ltd 4.0% Norman Mountford 3.2%

12 MONTH PERFORMANCE

0.10

0.20

0.30

0.40

Apr-10 Jul-10 Oct-10

Source: IRESS

Paul Adams Head of Research +61 8 9263 5200 [email protected]

http://www.djcarmichael.com.au

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Company Profile

HCH is a recently listed Australian domiciled resource exploration company with a project

portfolio in Chile. Over the last three years HCH has undertaken project generation and reviewed

over 40 large multi-commodity project opportunities, culminating in secured agreements to earn significant interests in three of the largest iron-oxide-copper-gold-uranium (IOCG-U) projects in

Chile. However, HCH are leveraging off 15 years of experience in Chile and have developed

extensive relationships with a number of key stakeholders in the Chilean resources sector.

Through HCH s local Chilean subsidiary company Socieded Minera El Aguila Limitada

( SMEAL ), HCH has secured two advanced projects, Productora and Los Mantos, and an early stage exploration project, Chile Norte. Through SMEAL, HCH has executed six agreements

comprising 65% Joint Ventures and 100% purchase options in addition to securing large

tenement holdings in its own right across available extensions at the Productora and Chile Norte projects.

Figure 1. Project Location Map Source: HCH

Through these negotiations HCH has partnered with two of Chile s largest local mining

companies, CODELCO and CMP. CODELCO is the world s biggest copper miner. CMP is the largest iron ore miner in Chile and it s parent company, CAP, became a 5% shareholder of HCH

on listing, with a preferential right to participate in future capital raisings.

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Corporate Structure

HCH runs its Chilean operations through a 100% owned local subsidiary, El Corazon, which

inturn owns two local vehicles. One for the administration of the uranium focused projects, and another for any potential future copper / precious metals focused projects.

Figure 2. HCH Corporate Structure Source: HCH

The additional local vehicle (SMEHL) has been established to provide a company through which HCH can pursue other opportunities as they arise. HCH believe they have established important

relationships with local organisations and are well placed to capitalise on opportunities that may

be presented to them. However, the company is focused on establishing a large resource base at its current projects, particularly the more advanced Productora and Los Mantos projects.

Capital Structure and Recent Capital Raisings

In November 2010, HCH completed a capital raising of $4.65m before costs through the issue of 18.6m shares at $0.25 per share. The funds will be used to accelerate the drilling program for

Productora and Los Mantos by combining the Phase I and Phase II drilling programs into a single

campaign, in addition to allowing HCH to be in a stronger financial position should the opportunity arise for further project acquisitions.

Subsequent to the raising, the fully diluted shares on issue have increased to 142.8m shares and a market capitalisation of $47.0m (at $0.33 per share) and an Enterprise Value (EV) of $38.0m

after taking into account the approximately cash position of $9.0m.

Quoted Securities Number of SecuritiesOrdinary Fully Paid 83,390,000

Unquoted SecuritiesFPO (in escrow) 59,420,527

Options (20c, 2013) 40,740,000

Market Capitalisation (FPO) 47,127,474

Table 1. HCH Capital Structure (post raising) Source: DJC

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Chile as a Mining Destination

Chile is the world s largest copper producer accounting for about 35% of the world copper output.

Other significant metals and minerals include gold, silver, molybdenum, lithium, zinc and iron ore. Gold exploration and mining in the country has also picked up steam in recent times, widening

the prospects of the Chilean mining industry (Chile Mining Report Q1 2009,

Researchandmarkets.com). The country's mining industry contributes approximately 17% of its GDP and 25% of its exports and its growth in copper production has been the main driver for

mining production increases throughout 2009.

Historically the preserve of the majors For many years mining in Chile has been the preserve of the major mining houses

for example

BHP/RIO (Escondida, copper), Codelco (Chuquicamata-copper), Xstrata/ Anglo-American (Collahuasi - copper), Freeport-McMoran (El Abra, copper) and Barrick (Pasca Lama, gold).

Between the majors, including CAP, Antofagasta, SQM and others much of the available Mineral

Concessions are locked up and those available are often held by numerous, small, family-owned businesses where small scale artisanal mining of one form or another occurs on a sporadic

basis.

The State-owned small scale mining promotion company ENAMI, provides milling and

processing facilities for artisanal miners but often takes a large proportion of the value of the

copper as payment for providing the services. Whilst ENAMI (whose mandate is to create associations between small producers and increase the scale of their operations) has

successfully managed to provide these services, the high rates charged also act as a

disincentive where copper grades are marginally over 1.0 % Cu.

A quick look at the CAPEX requirements of a range of Chile s projects also provides a revealing

insight. New development projects are requiring larger amounts of development capital which is often beyond the reach of mid-tier companies. Many new projects in Chile are the large, low

grade copper porphyry style deposits that require significant economies of scale to be profitable.

Figure 3. Projects Developed (Period 1992-1999 Yellow vs 2102-2015 Blue)

Source: HCH, Inversión en la Mineria del Cobra, 2010-2015

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Chile has an immature exploration industry Given the level of mining activity in the Chile, one would expect to see a very mature exploration

industry. It is our contention that this is not the case and we identify four main reasons for this.

1. Chile lacks a venture capital market. The depth of companies on the Chile bourse is very

shallow with only a handful companies listed compared to the deep and liquid mining

markets of Australia and Canada.

2. In the Coastal Cordillera, over 70% of the prospective geology is held within just 3

companies

Codelco, CMP and SQM. It is probably a similar statistic in the high Andes. The lack of available ground gives the impression that modern exploration techniques

have been applied to much of the area. However, this is unlikely to have occurred,

especially where large, long-life projects have been discovered.

3. A considerable legal and therefore financial effort is required to deal with the numerous

small, family-owned groups to amalgamate a project of reasonable size. This has been a formidable barrier of entry for many smaller players. Relationship building in Chile takes

time.

4. Until now Codelco and CMP have not entered into joint ventures or famed-out their land

bank with smaller exploration groups. Projects that were deemed not to be of sufficient

size or interest to Codelco, were handed down to ENAMI, another State-owned agency, to manage.

Figure 4. Expenditure by sector (2010-2015) in Chile mining industry Source: HCH

We therefore take the view that considerable opportunity exists for those groups who have built

relationships in Chile over an extended period of time and who have the legal and negotiating

ability to either form joint ventures with major mining houses and / or amalgamate small artisanal concession owners into a larger, more meaningful projects.

We believe HCH have been able to perform both of these crucial tasks over the last 3.5 years.

Chilean Mining Law Reforms In Chile, a mature market for mining properties has developed which has made a significant contribution to local capital formation and generating significant taxable capital gains. The key

features of the Chilean legal framework which have enabled this development are the reliability

of the mining cadastre, security of title and unrestricted transferability of rights under the Mining Code and constitutional guarantees of mining property rights.

The changes to the Mining Code followed major structural reforms from the previous code. Structural macroeconomic reform was followed by a process of mining legal reform, enhanced by

constitutional reforms that strengthen private property rights.

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In Chile there are two laws governing the mining industry. The Organic Constitutional Law on Mining Concessions (1982) and the Mining Code (1983). There are basically no distinctions

between Chileans and non-Chileans regarding the enjoyment of basic rights, the acquisition of

property and the carrying out of economic activities.

The key components are:

Rights granted by a mining concession can be exercised in connection with the mineral

substances existing in an area encompassed by the concession with the exception of

liquid hydrocarbons, lithium and deposits in territorial waters.

Mining concessions are granted by judicial decision rendered by a competent court to

identify, define and create the concession, whether for exploration or exploitation. The depth is indefinite and two sides shall have a north-south orientation

Mining Exploration Concessions have a term of 2 years starting from the date of the court awarding it. The concession can be extended for a further 2 years on written request with

the abandonment of 50% of the concession area.

Mining Exploitation Concessions are granted for the purpose of extracting grantable

mining substances and becoming the owner of those substances at the time of their

extraction. The tem of the Exploitation Concession is indefinite.

As in most Latin American countries, under Chilean law, the registration of an exploration or

Exploitation Concession does not itself prevent an application by a third party over some or all of the lease area. Where existing over-lapping claims have been lodged and given preference over

HCH s concessions, that area has been excised from the project maps. HCH has in place

internal and external land management and monitoring mechanisms to ensure appropriate objections are lodged and protection of the leases are maintained.

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Regional Geology and the IOCG-U Model

HCH are targeting IOCG-U deposits in the Andean Coastal Cordillera. The term IOCG (U) refers

to polymetallic deposits that are characterised by elevated magnetite / hematite with various amounts of copper (± gold) occurring in a variety of tectono-magmatitc settings over a large

range of geological periods. The magnetite deposits being mined by CMP are seen as the

copper-poor, end members of the IOCG clan (Sillitoe, 2003). Smaller, manto-style and porphyry deposits, such as HCH s Los Mantos Project, represent the copper-rich end of the spectrum.

Some authors (Currie, 2007) believe that there are essentially two IOCG deposit models used to

classify deposits in the IOCG Belt in Chile. The mantos style (flat lying, stratigraphically controlled copper (± gold) zone (Los Mantos) and a structurally emplaced, vertical to sub-vertical

gold-rich (± copper) style (Productora). The world s largest IOCG-(U) deposit, Olympic Dam in

South Australia, owned by BHP Ltd, has a completely different geological setting and age and shows how broad the IOCG-U style of deposits can be.

In Chile, the world s youngest IOCG belt is located in the coastal Cordillera of northern Chile and southern Peru (Sillitoe, 2003), where it forms part of a volcano-plutonic arc of Jurassic through to

early Cretaceous age (100 - 135Ma). The younger copper-gold porphyry deposits in the high

Andes are thought to be related to a shallowing in dip of the subducting oceanic plates and are in general much larger than the deposits in the Coastal Cordillera. There is therefore a temporal

relationship between the deposits in the IOCG Belt and those younger deposits to the east

related to the mechanics of subduction and extension.

The volcano-plutonic rocks in the IOCG Belt close to HCH s projects range from early to middle

Cretaceous calc-alkaline gabbros to granodiorites through to volcanic rhyolitic tuffs. During the site visit we observed numerous occurrences of mafic xenoliths floating

in granitic rocks,

providing evidence for the theory that the plutonic rocks have a primitive, mantle-derived origin.

This arguably provides evidence for the origin of the metals from enriched oceanic rocks being subducted below the South American plate and brought to emplacement positions in relatively

permeable volcano-sedimentary rocks incised by deep, crustal scale fault systems.

From a structural point of view, the IOCG belt in the vicinity of Productora and Los Mantos is

associated with the Atacama Fault System which is orientated essentially orogen parallel (N-S).

Potassic alteration with copper-(gold) associations and development of magnetite are common in IOCG deposits and both elements are observed at Productora and Los Mantos, where locally

developed splay structures off the main N-S trend provide increased fracture density and

conduits for fluid flow. Often in the Coastal Cordillera IOCG deposits, the fractures are intruded by relatively late basaltic to andesitic intrusives, where at Productora, they act as relatively un-

altered and impermeable loci for the damming up or ponding of late stage ( occasionally

uranium-rich ) fluids. These intrusive phases at these structural locations are plainly visible in the underground mine at Productora where they are exploited as mining pillars.

In the Manto-style, cross-cutting faults through the permeable sedimentary host rocks provide the conduit system, wherein fluids invade and replace carbonate rich sediments laterally within the

Mantos. Where the density of cross-cutting structures are high, there is an expectation that

mineralisation grades are elevated relative to more poorly developed conduit systems.

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IOCG Deposits in the Andes

Of the IOCG deposits in Chile, Candelaria is perhaps the most well known and has been referred

to as the type deposit for IOCG s in the region. Major IOCG deposits are listed in the table below.

Deposit Country Tonnes Cu Grade Au Grade(Mt) (%) (ppm)

Mina Justa Peru 209 0.86 minorMontecristo Chile 15 1.6 0.6Cerro Negro Chile 249 0.4 0.15Teresa de Colmo Chile 70 0.8 TraceMantoverde Chile 230 oxide 0.55 0.11

400 sulphide 0.52Candelaria Chile 470 0.95 0.22Punta del Cobre Chile 120 1.5 0.2El Espino Chile 30 1.2 0.15

Table 2. Selected larger IOCG Deposits of Peru and Chile Source: Sillitoe, 2003

Figure 5. Metallogenic Map, Coastal Cordillera, Chile Source: Currie, Carrera, 2003

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Productora

In August 2010, HCH increased its tenement footprint at the southern end of Productora to bring

the total strike length of prospective geology to 12.5km, an increase of 2.5km. The southern extensions (100% HCH) contain a strong IP anomaly that provides evidence for the continuation

of the prospective geology to the south and west of the main mineralised trend seen in the

central lease and the IP anomalies seen in the original southern concessions.

HCH have focused their exploration activities so far to the central lease area where the existing

Productora Mine and the previously mined Santa Innes Mine have exploited a highly mineralised rhyolitic breccia unit which has been intruded by late stage Andesitic dykes along NW striking

linkage structures between large NNE trending faults. The structures are in turn interpreted to be

splays off the Atacama Fault Zone (AFZ) located 5km to the West.

Figure 6. Geology (original Tenement footprint) and IP (new tenement footprint) Source: HCH

HCH have spent a considerable time undertaking a regional geology mapping exercise. Although these activities don t have much value from an ASX announcement point of view, the

benefits of the mapping come from better drill target definition and drill site placement. We

believe this early detailed work has been instrumental to HCH s ability to have such a good understanding of the controls to mineralisation so early in the projects development.

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Benefits of the Underground Mine

Of course the benefit of having an operating underground mine right in the middle of the ore zone

is huge and can t be over-stated. The amount of detailed structural information that can be gleaned from an underground mapping exercise would be considerable (HCH are likely at some

stage to undertake such an exercise later in 2011) with the added benefit of being able to easily

and cheaply access bulk samples for metallurgical testwork.

On our site visit underground at Productora, we were struck by two observations:

The thickness of the breccia zone underground and the tenor of the mineralisation did not

reflect in the material at the surface. In fact the surface 50-70m is so leached that the rock is

virtually stripped of all mineralisation bar small veins containing low grade copper mineralisation. Walking over the surface at Productora is not that inspiring.

The competency of the rock underground is extremely good. Apart from the andesitic dykes that act as pillars within the mine, there was no rock support of any description. The rock is

competent and stable

Figure 7. Rhyolite breccia, Underground Development and surface view, looking north Source: DJC

Management at the Productora Mine recognise a broad zonation of mineralisation and grade. The inner core of the ore zone contains the highest grade copper mineralisation in the dominant

form of chalcopyrite. Around this, extending for perhaps 40m is a lower grade, pyrite dominated

mineralised zone. Cross-cutting andesite dykes are essentially non-mineralised and act as mining pillars between the 3 major stope blocks over 3 levels of development to 100m below

surface.

Current Work Programs

HCH are currently in the middle of a major drilling program at Productora involving two RC drilling rigs on the central lease area that has a strike length of prospective geology of 1.4km. A

total of 16,000m of drilling has been planned for the initial program on a relatively wide drill holes

and section line spacing. The aim of the program is to assess the potential of the central lease by confirmation of previously drill results and to assess the continuity of the geology and

mineralisation south of the Productora Mine.

The first 13 holes of the program were drilled with an RC rig. However there were depth

limitations and hole collars were restricted to the shallow holes on the eastern side of the target

zone. As a result 3 of the 4 widest intersections in the host rhyolitic breccia ended in

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mineralisation and the breccia zone has been confirmed to extend at least 800m further to the south.

The target mineralisation for the whole of the Productora project in the prospectus was between 56 and 75 million tonnes at copper grades between 1.0 and 2.0% (0.6 to 1.5 million tonnes of

contained copper) plus uranium and gold contained within intersection widths of between 2 and

15m.

The first results released to the market in late November 2010 revealed much wider zones of

continuous mineralisation than had been anticipated and we now believe that there is potential for the discovery of a large, bulk-tonnage resource over an extended strike length. These were

backed up by a second release of results on 8 December. Significant copper equivalent

intersections included :

116m at 0.92% Cu equivalent (finished in mineralisation)


26m at 1.17% Cu equivalent


40m at 1.2% Cu equivalent

Figure 8. Interpretation of the Breccia structure and significant intersections from early drilling Source:HCH

Most assays received so far are from the shallower, eastern most dill holes on each section,

where we would expect to see the up-dip intersections of the breccia zones and associated peripheral mineralisation. The deeper holes to the west are those in which we would expect to see thicker intersections at grades approaching 1.0% Cu grades, as a result of complete penetration of the breccia zone, as in the 116m intersection noted above (that

finished in higher grade mineralisation due to rig performance constraints).

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Significant uranium and molybdenum results also included :

17m at 1.08% Cu equivalent (uranium at 140 ppm, Mo at 58 ppm)

7m at 2.65% Cu equivalent (uranium at 173 ppm, Mo at 1,650 ppm)

15m at 1.14% Cu equivalent (uranium at 100 ppm, Mo at 1,122 ppm)

12m at 1.40% Cu equivalent (uranium at 252 ppm, Mo at 148 ppm)

The uranium (and cobalt) grades were surprisingly high in some areas and re-enforced the

interpretation that Productora has a strong geochemical zonation

Figure 9. Cross section through A-B (see Fig. 9) Source: HCH

The cross section above displays the zonation in copper grade within and without the breccia unit

and mimics what the operators of the Productora underground mine see in their development. The core breccia, higher grade copper zone is enclosed in a pyrite rich, low grade copper

peripheral zone. The discovery of modestly dipping, stratigraphically controlled, mantos horizons

below the leached zone provide opportunities for additional tonnes in the forthcoming resource estimate.


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Los Mantos

The Los Mantos project lies 58km from La Serena in Region IV of Chile close to the township of

Ovalle. The central mining portion of the project covers an area of 2.0km by 1.0km and is surrounded by leases owned by CODELCO and CMP. HCH has entered into a 5 year 100%

purchase option with the local vendor and mine operator on the Mining Lease with a payment of

US$220,000 on 11 June, 2009. HCH have the right to purchase the mine and surrounding ground at any time within the 5 year exploration period following satisfaction of all outstanding

yearly option payments (US$50,000 in years 2010 to 2012 and US$100,000 in years 2013 to

2014) and an exercise payment of US$2.0m. A 0.5% gross royalty is to be paid from marketable minerals produced.

The project consists of 9 leases. Five are Mining Exploitations and four are Exploration Licenses. The Exploration Licenses are to provide a layer of protection and do not add to the

area of the project.

Figure 10. Los Mantos Tenement Map and Geology Interpretation Source: HCH

Geologically, the project is located in an early Cretaceous volcanic arc and mineralisation is hosted in volcanics and sediments. The Los Mantos Region is cut by the large Romeral Fault

system, lying to the west of the project area. Mineralisation may be associated with north-south

splay faults off this large structure and hosted by specific sedimentary units within the Arqueros Formation.

The ENE fault system bisecting the mineralisation is believed to be the conduit system for the copper

uranium mineralisation, which is characterised by multiple stacked tabular Mantos

horizons dipping moderately east but locally also west, and may have a moderate northerly

plunge.

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The Los Mantos Copper Mine

The owners of the Los mantos copper mine are exploiting high grade (+4%) copper

mineralisation from both surface and underground operations. The project has been privately owned for 40 years with only limited work completed. CCHEN and more recently, Empresa

Nacional de Minerria (ENAMI) completed limited mapping and surface and underground surveys.

HCH s work has confirmed that the anomalous uranium mineralisation is coincident with copper-

rich cross faults. Verbal communication between HCH and the operator of the mine suggest that

average grades run at 1.5

2.0% Cu with higher grade operations averaging 3.8

4.2% Cu. Depth continuity has been confirmed at over 200m.

On our trip underground, we were impressed, as we were at Productora, with the competency of the rock. In spite of the dip of the Mantos horizons and the modified room and pillar mining

method, observed roof support was negligible. We were also of the view that the mantos

horizons appeared slightly thicker in underground exposure than the surface outcrop would suggest, but this was not confirmed by direct measurement at the time of our visit. The mine

itself and level of operation is much more rudimentary than at Productora, but again the benefit of

having the ability to get an inside 3_D view of the mineralised body is invaluable.

Figure 11. Underground at Los Mantos, inside the one of the mantos horizons Source: DJC

Recent Exploration and Exploration Potential

Multiple-stacked lodes were observed outcropping in surface mapping over 2km N-S, with the upper horizons approximately 2-3m thick and a lower horizon at 6m thick. Other deeper horizons

are evident in other parts of the project. Work undertaken suggests that the uranium grades

increase with depth. A sample from the sulphide rich portion of the wider lower Mantos horizon to the south gave grades of 1% Cu, 440ppm U3O8, 4,060ppm Mo and very high grade REE (Rare

Earth Elements).


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However, no drilling has ever been conducted at Los Mantos in spite of the existence of the underground mine. Recent geological mapping and surface sampling by HCH confirmed the

previously identified grades and geological mapping in the southern end of the project has

identified shear hosted mineralisation which dips west, back into HCH s concession. At the time of the IPO, HCH had thought that this zone dipped to the east and out of their concession. This

has raised the potential for Los Mantos to host additional tonnes beyond the original estimates.

Our observations in the area during the site visit were that the southern end of the project

displays higher temperature, magnetite dominant (±tourmaline-K-spar) alteration with copper-

molybdenum-uranium mineralisation, representing a deeper part of the system proximal to the granitoids. There appeared to be strong development of the mineralisation and the apparent

thickness of the zone looked reasonable. However the true thickness and grade of the zone is

unknown at this stage

To the north, the alteration displays lower temperature mineral associations with copper-gold-

cobalt mineralisation. We also observed a possible continuation of the alteration system further to the north.

HCH is targeting a large copper-uranium resource amenable to open pit mining, over a footprint of 2km by 1km. An exploration target of the order of 450,000 to 700,000 tonnes of contained

copper plus credits from uranium, copper and molybdenum has been set by HCH, but at this

stage it is hard to know what resources tonnes could be added from Los Mantos in 2011.

All the drill pads are now in place ready for a 10,000m RC drilling program which is anticipated to

start in January 2011.

High drill density required at Los Mantos

Whereas the mineralised zone at Productora can be ascertained at reasonable drill densities, we

believe Los Mantos will require a higher drill density. The principal reason is that grades are

likely to be higher adjacent to the cross cutting faults, so although the zones are essentially stratigraphically bound within the sediments, high grade zones will occur at high angles to the

strike.

It is our belief that the density of cross faulting is higher than currently mapped. The negative issue is that two drilling directions may have to be employed to correctly estimate grade. The positive however, is that the higher the fault density, the better the potential is for higher grade.

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Peer Comparison Analysis and Price Target

Although HCH are in the very early stages of its exploration drilling program at Productora and have not yet even started at Los Mantos, beyond mapping and surface sampling, we want to get

a sense of potential future value range based on exploration success.

A peer analysis of ASX listed companies that have similar copper grades to those seen in the

early parts of the drilling program at Productora will shed some light on what value the market

places on tonnes of copper in the ground on an enterprise value metric i.e. EV / t Cu (equiv).

We have chosen companies with deposits of similar grade as we expect that there will be less

variation seen in the EV / t Cu metric than using a variety of copper companies that range from producers through explorers and those with a wide range in copper grades. For example we

have removed companies like Sandfire Resources Ltd (ASX:SFR) and Cudeco Ltd (ASX:CDU)

that have higher grade / and or anomalous EV / Resource tonne values. We believe a more focused peer group will give a better indication of potential value.

Company Name Code Country Stage Tonnes Cu Grade Gold Cu Equiv. Cont. Cu MCAP Cash EV Ev / t Cu(Mt) (%) (g/t) (%) (t) ($m) ($m) ($m)

Discovery Metals Ltd DML Botswana DFS 124.2 1.4 1.4 1,738,800 560.1 75.0 485.1 279

Rex Minerals Ltd RXM Australia Exploration 170.0 0.7 0.2 0.85 1,445,000 411.8 100.0 311.8 216

Hillgrove Resources Ltd HGO Australia Construction 32.2 0.9 0.2 1.05 292,000 193.1 68.7 124.4 426

Havilah Resources Ltd HAV Australia PFS/DFS 86.9 0.73 0.5 1.12 973,280 59.6 5.45 54.1 56

Exco Resources Ltd EXS Australia PFS 61.0 0.85 0.25 1.04 519,400 209.6 11.5 198.1 381

Average EV / t Cu 272

Table 3. Peer Comparison Analysis for HCH Source: DJC

We derive a peer group average enterprise value per resource tonne contained copper of $272.

We have estimated that in HCH s inaugural resource estimate, expected towards the end of 1H2011, that Productora could be in the range of between 40m and 60m tonnes at approximately 1.1% Cu equivalent.

On this basis, and upon initiation of a scoping study, applying our average EV metric of $272, we derive an enterprise value of between $119m and $179.5m, equating to a fully diluted share price of between $0.65 and $0.98 per share, representing a premium on the current price of between 94% and 192%. We take the midway point as a price target of $0.81 per share with a 6 month view, relating this to the publication of the first resource estimation.

We have not added potential tonnes derived from the Los Mantos Project in our valuation at this

stage, given the lack of drill data. However, surface sampling suggests that the copper grades

could be higher than at Productora. Given that HCH have not yet started drilling Los Mantos, it is very hard to say what could likely be included in a resource estimate, but we believe that there is

a reasonable chance that additional resource tonnes will be forthcoming from Los Mantos.


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Investment Thesis

We believe HCH provides an opportunity for investors to obtain exposure in an up and coming

mineral exploration company with some unique attributes that enable it to stand apart from many of its peers.

Very competent technical team: HCH, through their associations with various embedded

consultants and through the considerable experience of the Board, have an exceptionally

competent technical team. The depth of their knowledge of their chosen model and the geology

on the ground, has been instrumental in HCH gaining a very early understanding of their projects and importantly for the future, the ability to very quickly assess new opportunities. This provides

them with the ability to act quickly if need be.

Important Joint Venture Partners: HCH have been very successful in negotiating with, and

entering into a number of JV s, with the large Chilean mining companies, Codelco and CMP.

The value of these relationships can not be understated and we are not sure that the market has fully appreciated their importance. They have been established over a considerable period of

time and it is not easy for new companies to enter Chile and establish these types of

relationships.

Chile is becoming serious about Nuclear: The Government in Chile has made a number of

announcements recently regarding the nuclear industry, one of which involved a strategic alliance with France for training of nuclear scientists. The Government has recognised the

importance of seriously addressing the nuclear industry and Codelco and CCHEN, the Chilean

Nuclear Commission, have been operating a pilot plant in Northern Chile for the extractions of uranium.

Early Exploration Results: Early results from Productora have the hallmarks of a large

mineralised system. The mineralised widths are larger than anticipated and were not expected

when walking the surface outcrop, where a leached zone and small mineralised veins are all that

can be seen. This bodes well for a potential large tonnage resource. The early results have been from the shallow, eastern most holes. Large intersections frequently finished in

mineralisation due to rig constraints, so we have yet to see an intersection penetrate the full

width of the brecciated core zone.

Fully Funded to First Resource Estimate: HCH have recently undertaken a top-up capital

raising of $4.6m, bringing their total cash to around $9.0m. This amount will see HCH through to the production of their first resource estimate, which we expect will be delivered in the 2Q2011.

Cheap on Peer Group Analysis: Given that HCH does not yet have a resource and is only in

the early stages of its drilling campaign at Productora (and has not yet commenced at Los

Mantos), it is hard to come to any conclusions about value. However, our assumption of a

resource at Productora of between 40m and 60m tonnes for the central concession would place the current share price at a large discount to its peers. We deliberately chose copper explorers

who have grades similar to those being encountered in the Productora drilling in-which to make

our comparison, seeing little point in including resources with much higher grades that may result in biased EV / Resource t Cu values to the high side. Mineralised material in the resource

estimate from Los Mantos would be additional to those assumed at Productora for valuation

purposes.

Recommendation

Speculative Buy: After our site visit and the release of the early

exploration results from Productora, we maintain our Speculative Buy recommendation on HCH. We anticipate more results to be announced between now and the end of the year and believe

that if the future results are as we expect, the stock will get re-rated as progress is made towards

18 14 December 2010

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its first resource estimate, where-in the market will be able to make direct comparisons to their peer valuations.

Risks

Exploration Risk: As with all early stage companies in the mineral exploration sector,

exploration risk is by far the biggest risk to the investor. Whilst we believe the prospectivity to be good, as evidenced by the limited amount of work undertaken so far, there is always the

possibility that exploration work will not realise a significant resource, thereby limiting the value of

the company s land holdings.

Sovereign Risk: Whilst we believe Chile to be one of the most stable countries in South

America, changes in the political landscape can never be ruled out. Chile has an enviable track record in providing a stable political environment in which to attract and retain interest in its

mineral resource industry. Changes to taxation laws, royalties, repatriation of profits for foreign

companies and labour relations can all effect the operations of mineral resource companies. Although the Chilean Government have made announcements about its potential nuclear

industry recently, and Codelco and combined with CCHEN to establish a pilot plant for the

extraction of uranium, the future political stance of the country can not be guaranteed.

Commodity Price Risk: Commodities pricing is affected by the outlook for the world s economy

and growth rates. The volatile nature of the commodities markets reflects the uncertain nature of the current world growth outlook in the aftermath of the global financial crisis, and more recently

as a result of the sovereign debt crisis in Europe and the statements made by the Chinese

authorities in relation to the slowing of its over-heated property sector. Fluctuations in the prices of copper and uranium could exert an influence on the price of HCH shares.

Exchange Rate Risk: Fluctuations in the exchange rate will effect the exploration expenditure

programs. Exchange rate fluctuations between the Chilean Peso, US Dollar and the Australian

Dollar will be taken into account by HCH in the application of its exploration funds.

Metallurgical Risk: Given the early stage in exploration of their polymetallic deposits, the

process route of any potential operation has not yet been considered and will only be considered

in our view, post the production of the resource estimate.


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Disclosure Disclaimer RCAN0911

This Research report, accurately expresses the personal view of the Author.

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Recommendation Definitions

SPECULATIVE BUY 10% or more outperformance, high risk BUY 10% or more outperformance HOLD 10% underperformance to 10% over performance SELL 10% or more underperformance Period: During the forthcoming 12 months, at any time during that period and not necessarily just at the end of those 12 months.

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