The Development = Alpha phase of a mining projectRecently we have witnessed a host of ASX developers
[9] undertake capital raisings prior to declaring commercial production. Justifications are aplenty including the need to “accelerate” and derisk developments. Hence it begs the question why invest in the ‘risky’ development phase of a project with the threat of overruns and dilutive equity raisings? The answer lies in the telling image below, essentially a Lassonde Curve
[10].
Source: The Visual Capitalist
What the image illustrates, is that there is actually a material derisking period during development for key mining projects that leads to share price outperformance. Bellevue Gold (BGL) a single, gold mine developer that is <12 months from production has provided an interesting backdrop to this with reference to 5 of the more successful recent single, gold mine developments.
Source: BGL Macquarie Presentation, November 2022
We have tabled the key statistics of these companies below and expanded on the data to also include the share price performance of these companies 3 and 12 months post declaring production.
Sources: Chester Asset Management, BGL presentation material, IRESS
Conscious the BGL list represents a somewhat favourable sample, we have added to it, but focused exclusively on ASX names.
Source: Chester Asset Management, BGL presentation material, IRESS
As a demonstrative example rather than a complete universe this list only includes gold companies (we are supposed to be on holidays). However, we are conscious of biases inherent within this analysis including
survivorship bias. We believe focusing on gold developments is worthwhile as a tried and tested commodity so reflective enough of the value add of developments. For context we have provided a sample of other ASX commodity developments below.
Source: Chester Asset Management, BGL presentation material, IRESS
Notwithstanding the biases it demonstrates to us a few interesting points:
- There is a genuine (alpha) opportunity to invest in companies within the development phase of a project
- For those select names in our sample that didn’t generate alpha the drawdown is actually quite small, even for companies that were later proven to be unsuccessful developments!
- The re-rate potential of development far exceeds that of production, I.e. on average there isn’t necessarily much benefit in holding these companies once into production (Lassonde Curve agrees with this)
- The return from this development phase can actually be greatest in riskier jurisdictions, i.e. WAF, ROX, EMR, TIE
Hence we believe it worth considering factors that may make one company more successful in the development phase than another:
- Management development experience
- Contractors utilised and terms of contracting - fixed price, lump sum, etc.
- Development type - brownfields or greenfields?
- Balance sheet strength
- Portfolio diversification
- Flow sheet complexity
- Preparatory works including resource definition drilling and mine plan
- Pre-development NPV discount
With increased prevalence of single mine companies and the outcome of the samples above it presents as a reminder not to ignore all companies entering the development phase of a mining cycle. Tabled at the end of this article are some of the development opportunities that exist on the ASX (mainly single mine but some multis). We have further highlighted some of the companies within our portfolio and on our watchlist we are watching more closely. In alphabetical order: ADT, AMI, BGL, CHN, COI, DEG, DVP, GMD, INR, JRV, LLL, NXG, PMT, STX/WGO.
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