02-Aug-2024: Develop agrees funding and offtake with Trafigura for Woodlawn copper-zinc mine.PDF
plus: Updated Investor Presentation.PDF
Positives of these announcements (from my POV as a DVP shareholder):
- Woodlawn now fully funded via cash and debt (and mining services cashflows) with no shareholder dillution.
- No hedging entered into, giving DVP full exposure to any metal prices upside.
- Very competitive terms: The interest rate is SOFR 3 month (Secured Overnight Financing Rate) plus 2.0% if drawn in US$, or BBSY 3 month (Bank Bill Swap Bid Rate) plus 2.0% if drawn in A$. This low interest rate reflects the Woodlawn project already being substantially derisked due to the circa A$400m of equity capital that has already been invested into the mine by Develop and the prior owner.
- The facility will give Develop the flexibility to pursue other organic growth opportunities in its portfolio such as Sulphur Springs and Pioneer Dome or any inorganic opportunities (M&A) plus there is no restriction on the payment of dividends, so Develop retain full optionality to manage the business as they want to without any restrictions by the lender.
- The lender is Trafigura who will buy all of Woodlawn’s production under a 5-year term offtake arrangement, and the financing is termed (called) a prepayment/loan facility, which is why the rates are so low (for a mining operation) - as they are underpinned by the sales of the metals produced by the mine to the lender, but not at prices that do not allow upside to rising metal prices, i.e. Develop retain maximum exposure to metal prices.
- The prepayment/loan facility and offtake arrangement pave the way for Develop to progress towards making a FID during this quarter; This would put Woodlawn on track for first production and cashflow in mid CY2025 which is around one year or less from now, the short timeline is also partly because of the substantial infrastructure already in place at Woodlawn.
- As a result of these terms, the pre-tax NPV for Woodlawn increases by 11% from A$658m to A$728m; The increased NPV is based on the same commodity price assumptions used in April and does not take into account the +10% metal price rises which have occurred since then, so if metal prices continue to rise, the NPV does also.
- Forecast pre-tax free cashflow grows to A$1.1b, based on a 10-year mine plan.
- At recent spot prices for copper and zinc, the first 3 years of post-ramp up production yields around A$375m of free cashflow, providing substantial cash generation while repaying all the debt - to be clear all of the debt could be repaid in the first 3 years of a 10-year mine, and the mine life could be extended if and when further zinc and copper is discovered in or near their tenements.
- Woodlawn is a fully developed mine with the first two years of underground production already developed and a near new processing plant and related infrastructure in place - the project is substantially derisked and is completely different to the old Woodlawn (under previous ownership) that relied on cashflow generated from reprocessing old tailings left in tailings ponds by the mine owners before them. Remember that Develop's mining services expertise is as underground miners and underground mine development, which is why Bill is chasing these underground mining opportunities.
- This fully debt-funded restart puts Develop in a strong commercial position should it decide to sell a minority interest in Woodlawn, which, in my opinion, they will seek to do, so that they can start developing their second and/or third project (Suphur Springs, Pioneer Dome).
- It looks like Bill is planning to have a hybrid MinRes model of buying projects at firesale prices then developing them to production, selling off either the entire project or a substantial portion of it, retaining the mining services contract for the life of the mine (LOM) and then taking the cash and doing it all again with another project. It worked for years with MinRes and like Chris Ellison, Bill Beament is no dummy - he's a very smart operator - as he proved with Northern Star Resources.
Only negative:
- The pre-production capital and max cash drawdown has increased by $A11m to A$78m due to increases in processing capital and working capital for the optimised mining sequence.
So, as I expected, DVP has had a decent run up to this announcement, with their share price moving +21.3% from $1.88 close on July 25th to close at $2.28 yesterday (Aug 1st), so their SP has risen +40 cents (or +21.3%) in just 7 trading days. Their trading range so far today (post these two announcements) has been as low as $2.195 and as high as $2.29 - and they are currently $2.26 as I write this, so down a little in line with the market - in fact not down as much as the market - the ASX 200 was down 192 points at midday - and the All Ords is down -175 points right now (at 1:30pm Sydney time).
Once brokers and analysts get their head around this announcement and issue their clients with updates I believe we'll see further upside with DVP's share price - Bill said a couple of weeks ago that he'd deliver the funding package for Woodlawn in the next few weeks, and as usual, he has delivered on what he promised. I don't see the $11m increase in the pre-production capital requirements at Woodlawn as a big negative, in fact most analysts would have been expecting something like that I would have thought, if not a larger number.
So far, so good. Thesis remains on track.
Disclosure: I hold DVP shares in my SMSF and another real money portfolio