Deterra’s Strong First-Half Fiscal 2023 Result Driven by Higher Sales at BHP’s Mining Area C

Wide-moat Deterra’s DRR first-half fiscal 2023 was strong, driven by increased iron ore sales volumes at BHP’s Mining Area C, or MAC, and a weaker AUD/USD rate, partially offset by a lower average iron ore price. Net profit after tax was AUD 64 million, or AUD 0.12 per share, up nearly 3% on first-half fiscal 2022. Adjusted EBITDA was around AUD 92 million, also up about 3%. MAC production of about 63 million metric tons was up 27% for the half as BHP’s new South Flank mine continues to ramp up to full capacity of about 80 million metric tons per year, likely in 2024. Production more than offset the 19% fall in average realized iron ore prices to around AUD 133 per metric ton, down from around AUD 164. Under the terms of its MAC royalty, Deterra receives AUD 1 million for every 1 million metric ton increase in annual production at MAC. This is determined every fiscal year and so Deterra didn’t receive any one-off capacity payments from BHP in the half. However, we expect about AUD 30 million in additional capacity payments once South Flank ramps to full capacity. Capacity payments are nonrecurring and stop once production plateaus.

We retain our fair value estimate of AUD 3.90 per share, with the shares trading at about a 23% premium to fair value. We think this may be due to investors focusing on higher near-term iron ore prices, which are likely being driven by investor optimism over increased demand from China as it reopens after abandoning its zero-COVID-19 policy. While the shares currently reflect our bull-case midcycle iron ore price assumption of USD 75 per metric ton from 2026, we continue to think the iron ore price will fall to our base-case assumption of about USD 60. Other investors could also potentially be applying a lower discount rate than our 7% to future earnings. Deterra will pay an AUD 0.12 fully franked interim dividend in March, up 3% and representing a 100% payout ratio. The balance sheet is very strong with no debt as at end-December 2022.