Deterra Royalties Earnings: Down With Lower Capacity Payments From BHP

Wide-moat Deterra Royalties’ DRR fiscal 2023 result met our expectations. Net profit after tax was roughly AUD 150 million or AUD 0.29 per share, 15% below fiscal 2022. Adjusted EBITDA of about AUD 220 million was also 15% lower, driven by lower capacity payments from BHP. The benefit of higher sales volumes from Mining Area C, or MAC, offset the lower average iron ore price. Deterra will pay a fully franked final dividend of AUD 16.85 cents per share in September, bringing fiscal 2023 dividend to AUD 28.85 cents fully franked, down 15% on last year given lower earnings, but with the 100% payout ratio retained. We forecast a similar payout for fiscal 2024 for a fully franked yield of about 6.3%. The balance sheet is pristine, with no net debt at end-June 2023.

Our fair value estimate remains AUD 3.90 per share. The shares trade at around a 17% premium, which we think is likely due to high near-term iron ore prices. Some investors may also apply a lower discount rate than our 7% to future earnings, given the relatively defensive royalty income stream. Deterra earns essentially all its income from MAC, which we think is positive. The MAC royalty is a rare wide-moat mining asset. BHP’s South Flank and North Flank mines underpinning the MAC royalty are large, low-cost, and long-life, and are likely to remain in production in virtually all likely price scenarios, in our view. As such, the dependence on MAC also doesn’t concern us—we like the exposure to the underlying high-quality asset.

The absence of acquisitions shows discipline, given the MAC royalty’s high quality and generally elevated mining royalty asset prices since listing in October 2020. Commodity prices are still elevated relative to cost support and historical levels, and capital markets open to miners and would-be miners—conditions not conducive to buying royalties well. Any acquisition risks diluting returns and asset quality, so we encourage continued management discipline around potential acquisitions.