Description

Here is one for those that believe in junior miner investments, in ESG, and in Santa Claus. Different to losing money in the Marcellus and other gassy adventures though, this is an underground base metal miner in Australia. Yes, I know what you are thinking.

Source: givemesport.com

Develop Global (“DVP”) is a deeply underappreciated mining company that is likely to return 50%+ over the next 24 months as it puts its copper-heavy Woodlawn mine into production. In the medium- to long-run, I believe DVP will make an excellent investment for patient investors as management turns DVP into a major force in underground mining.

Company Overview

DVP started taking its current form when Bill Beament took over in 2021 with the stated goal of focusing on underground mining. In short order, DVP has since picked up development work at the Bellevue gold mine, the Woodlawn underground Cu/Zn mine, and a few other assets. Today, DVP has reached cash flow neutrality thanks to its contract mining work, and has secured funding to put the first phase of Woodlawn into production. In this write-up, I will discuss macro, Woodlawn, and, last but not least, management.

Macro Tailwinds

The arguments for investments in copper are fairly well known: whether it’s grid upgrades due to continued renewables rollout, the rise of BEVs, or datacenters / AI, the world is more likely than not going to need more copper (and other natural resources). For this investment in DVP to work, one needs to believe in current spot pricing ($8.8k/mt for Cu, $2.6k/mt for Zn) to hold, which I personally don’t find particularly conservative per se. Given persistent inflation and cost inflation however, the marginal cost curve particularly for commodities experiencing growing demand like copper are fairly steep.

One immediate question that jumps to mind: why does someone of Mr. Beament’s talents set his sight on underground mining (“UG”)? Compared to open-pit mining, UG is both more dangerous and more expensive. But herein lies the opportunity: underground mining is often (rightfully) neglected by the majors as being difficult, costly, and low volume compared to their large open pits. However, today’s large open pits are low grade and the world is even running out of those low grade large scale open pits. Miners get excited about “good geology”, but often tend to forget that the business of mining requires mining the resource in the most cost effective manner possible. UG mining is a tool that allows for the targeted mining of high grade deposits and I believe Mr. Beament will have a lot of success (and relatively less competition) here as opposed to trying to make money in a copper open-pit mine.

Valuation supported by Woodlawn alone

Woodlawn is a historic VMS-style underground mine in NSW, Australia, that has produced 13Mt at 5% CuEq in the past. Woodlawn’s previous owners had spent >A$300mn to bring Woodlawn back into production, before COVID-19 related restrictions caused delays which ultimately drove them into bankruptcy and into DVP’s arms in 2022. Below a snapshot of its reserves and resources.

The company provides a pre-tax NPV7 of A$700mn, which supports the bulk of DVP’s A$600mn market cap even if one makes some fairly conservative cost and price assumptions. I think successfully bringing Woodlawn into production will further enhance Mr. Beament’s credibility, also with regards to the other projects that he has in the pipeline, e.g. Sulphur Springs. More importantly, there is a lot of expansion potential at Woodlawn, so if well operated, Woodlawn be in production and producing cash flows for decades to come.

Best-in-Class Management

Mr. Beament’s previous tenure at Northern Star Resources (“NST”) has been a tremendous success, turning a penny stock into an ASX100 member within a decade, and I believe he can repeat this feat at DVP. Mr. Beament is a force of nature, who has been relentlessly executing since he taking over DVP. He landed the large Bellevue contract which helped him build an underground mining team while achieving cash flow breakeven, and acquiring and (re-)developing Woodlawn. This has not been an easy ride for him either, requiring to dip into his own pockets repeatedly to reach cash flow breakeven, to receive development funding for Woodlawn, and finally, to get visibility on DVP becoming cash generative. In present conditions, DVP may be doing A$80-100mn fully taxed UFCF thanks to Woodlawn only. Of course, one shouldn’t expect a 20% dividend yield here because mine lives are limited but Woodlawn has expansion potential, and DVP has other projects at hand. Mr. Beament is our kind of manager: hard-working, focused on operations, savvy with regards to capital allocation, and if we’re lucky, he may come across more Woodlawns.

Key Risks

Commodity prices, UG operations related risks, and key man risk. This is a mining investment so naturally one is forced to take a view on commodity prices. UG operations have historically been challenging, but given technological advances particularly re electronics, it will be very interested to see what the DVP will manage to pull off and put into place here. Last but not least, Mr. Beament is key to DVP’s continued success, although he has imbued his team at NST with an excellent culture up and down the entire organization, so this risk will decrease over time.

Catalyst

First ore at Woodlawn in 18 months’ time, potential M&A (sale of a stake in Woodlawn, accretive acquisitions).