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Date : 23/02/2022

Deterra Royalties

ASX :

DRR

Market Cap : $2.37 Billion

Dividend Per Share : $0.232

Dividend Yield : 5.23 %

Buy

52 Week Range : $3.52 - $4.88

Share Price : $4.43

Deterra is a low-risk dividend stock that pays 100% of NPAT as dividends. We recommend a Buy.

Company Analysis

Deterra Royalties (ASX: DRR) is literally an investment that pays. Deterra was listed on the ASX in October 2020 after its demerger from Iluka Resources (ASX: ILU) and is now Australia’s largest public company that deals purely with mining royalties.

What’s special about royalties, you may ask? Well, they pay 100% of their Net Profits after Tax as dividends to shareholders! Today, Deterra announced that it has nearly doubled its profit for the 1H22 period – meaning a significant dividend uplift!

The underlying asset is what ensures stability for Deterra’s profits and revenues. BHP’s Mining Area C is the biggest asset that Deterra is linked to for operations, and it has delivered outstanding results during the period. The highlights of which are:

  • Revenue of $92.8 million – up 72% on pcp.
  • EBITDA of $88.7 million at a sector-leading margin of 96%.
  • NPAT of $61.7 million.
  • Fully franked interim dividend of 11.68 cents per share declared representing 100% of NPAT.
  • Strong operating performance at Mining Area C as production volumes increase to 49.2 million wet metric tonnes, up 45% HoH through the ramp-up of South Flank, which remains on track.
  • Credit facility refinanced and expanded to $350 million at lower average margins and longer tenor.
  • Increased liquidity provides flexibility to act on growth opportunities within a capital management framework that prioritises shareholder returns.

This first half result reflects a strong start to FY2022 that reinforces the quality of Deterra’s assets and business model, providing investors with the ability to invest in the resources sector without exposure to cost inflation, operational or capital risk.

Mining Area C royalties continue to comprise the majority of revenue with $92.7 million and $0.2 million from the Yoongarillup and Wonnerup assets.

Revenues generated from Mining Area C was underpinned by favourable iron ore pricing and the commissioning of the South Flank. In the half-year, Mining Area C production volumes were up 78% on the previous corresponding period and up 45% half on half as incremental production from the South Flank contributed to the overall production.

The South Flank project remains on track to increase Mining Area C (MAC) production volumes from 61.6 Mwt in 2021 to 145 Mwtpa over three years. Iron ore prices have recovered and come with a stable long-term outlook. This, coupled with the fact that MAC productions will more than double, makes Deterra an outstanding dividend stock for long-term investors.

Health Increased

On 21 February 2022, Deterra refinanced its existing credit facility, increasing total credit limits from $40 million to $350 million. The bilateral credit facilities comprise maturities of three, four, and five years and have been implemented on an unsecured basis.

The refinancing was materially oversubscribed, resulting in competitive terms and conditions and pricing. As a result of the refinancing, the company has increased its weighted average maturity profile whilst concurrently reducing its weighted average margin.

The credit facility will provide Deterra with the option to act flexibly in the acquisition of value accretive royalties. The facility’s minimum annual costs will be $2.4 million, consisting of $1.8 million in undrawn commitment fees and the remainder in amortised annual establishment costs. This tells that Deterra will not take on the cost and hold on to the cash but actively look for growth investments right away.

Deterra will prioritise opportunities where it considers it has a competitive advantage, targeting investments in commodities such as bulks, base and battery metals that are at or near production in developed mining jurisdictions.

Dividends

The Board has determined to pay a fully franked, interim dividend to eligible Deterra Shareholders of $61.7 million or 11.68 cents per share. This amounts to 100% of NPAT. The dividend is expected to be paid on 31 March 2022 to shareholders of record on 14 March 2022.

Following the introduction of the new credit facility, Deterra confirms that its capital management framework remains to prioritise returns to shareholders whilst acknowledging the opportunity to invest in growth.

Deterra intends to return all surplus cash, franked, to the maximum extent possible, to shareholders from its royalty portfolio, emphasising the Mining Area C royalty payments. The framework sees an intent to optimise the use of debt funding for future acquisitions with an expectation that cash flow from these future royalties would, at least in part, be utilised to maintain leverage within a targeted range of 0-15% of enterprise value over time.

Our detailed earlier report can be viewed by clicking here.

Recommendation

Deterra has an extremely simple yet lucrative investment case. Their current MAC iron ore asset delivers exceptional returns and is forecasted to more than double its production capacity over the next few years. Deterra has also increased its credit facility as the firm gears up for growth investments – further boosting Net Profits and dividends in the long term. The investment in Deterra mitigates the risk of cost inflation and operational risk. DRR shares currently trade with a fully franked dividend yield of over 5%. We continue to recommend Deterra as a “Buy” for its stellar dividend profile.

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