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Date : 16/08/2023

Deterra Royalties

ASX :

DRR

Market Cap : $2.36 Billion

Dividend Per Share : $0.29

Dividend Yield : 6.31 %

Buy

52 Week Range : $3.910 - $4.990

Share Price : $4.57

Deterra continues to pay attractive dividends. Forecast is for more of the same. We retain a 'Buy.'

Company Analysis

Deterra Royalties (ASX: DRR) delivered an FY23 result in line with expectations. We have always regarded Deterra as a high-quality dividend stock because of its 5-star asset (BHP’s Mining Area C) and dividend payout ratio (100% of NPAT). If you are new to the stock, our past coverage can be found here, and it should give you an overview of Deterra’s assets and the royalties it generates.

Financially, Deterra reported another strong set of results, with total revenue of $229.3 million. Total revenues were down 14% compared to FY22, largely due to reduced one-off capacity payments from Mining Area C as the South Flank expansion approaches completion. The value of this expansion was once again evident as the growth in volumes largely offset softer realised iron ore pricing.

Revenue royalties from MAC were $215.2 million, down 1.6% on FY22, as a 14% increase in sales volumes largely offset a 15% decline in iron ore pricing. An additional $1.1 million was received from ongoing operations at the Yalyalup and Wonnerup mineral sands assets. Total operating expenses for the period were $10.3 million. The increase on the prior year reflects an increase in business development activity as the company continues to invest in its growth capability and assess investment opportunities.

As a result, full-year EBITDA was $219.3 million, a decrease of 15% from the prior year. EBITDA margins lowered to 96% from 97%. During the year, capacity payments reduced from $46 million to $13 million, and operating expenses increased from $7.6 million to $8.5 million, reflecting greater activity in business development.


Source: DRR

Deterra declared a final dividend of 16.85 cents per share which, together with the interim dividend of 12.00 cents per share, brings the total FY23 dividend to 28.85 cents per share, fully franked, equal to 100% of NPAT. DRR trades with a healthy dividend yield of around 6.3% at current prices.

DRR will trade ex-dividend on the 23rd of August, and the dividend payout date is the 19th of September, 2023.


Source: DRR

MAC approaching full capacity

Deterra’s portfolio of producing assets continues to perform well and deliver growth. In particular, the major asset, the MAC Royalty, once again reported record production volumes of 126 million wet tonnes (mwmt) as the South Flank operations continued to ramp up. This US$3.6 billion expansion remains on schedule to reach full run-rate production by mid-2024, at which point the combined Mining Area C capacity of 145mwtpa will make it the world’s largest iron ore production hub.

As iron ore prices normalised back to sustainable levels, the increasing capacity allowed Deterra to offset the decline in revenue from lower realised commodity prices. With iron ore prices more or less stable at around US$100 a tonne, and production now ramping up from 126 mwmt to 145 mwmt, a 15% growth, we can expect it to boost Deterra’s top line.

The firm’s mineral sands royalties also recorded a strong performance, with Doral’s Yalyalup mine reaching a full production capacity of approximately 100,000 tonnes of heavy mineral concentrate and an extension of Tronox’s Wonnerup operations approved.

Outlook

At this point, Deterra’s assets other than Mining Area C are irrelevant. They contribute 0.48% of total revenues and, therefore, do not drive the share price. Regarding MAC, it has been sticking to the ramp-up timeline, and consequently, we can estimate with greater clarity just how much it can produce. This leaves one variable to forecast future earnings – iron ore prices.

Iron ore prices have been under pressure for a while now. Following a slump to around US$80 a tonne in November 2022, prices recovered to US$135 a tonne in hopes that the Chinese economy will recover quickly. However, weakened global demand and China’s stuttering economy have piled on the pressure in recent months. Iron Ore prices now hover around US$100 a tonne, weighed by China’s unexpected interest rate cut with another slew of data that underscored their sputtering recovery.

Expectations are for current prices to continue for the remainder of 2023. Goldman Sachs revised this year’s iron ore demand forecast to “flat” due to an estimated volume cut of 30 metric tonnes and said it saw 2023 as the first full year of global surplus in iron ore since 2018, which would then be followed by an even larger surplus in 2024.

The iron ore story is two-fold. On the supply side, there is continued expansion of iron ore production in Australia and Brazil. On the demand side, Chinese steel producers have slowed, and recovery is taking longer than expected – putting a lid on iron ore prices in the short and medium term.

Despite the largely flat outlook for iron ore prices, Deterra shares continue to trade in the ~$4.6 range. This is due to the increasing output of MAC, which should offset the iron ore price decrease and support profits and dividends.

For FY24, consensus expects Deterra to generate revenues of around $241 million and NPAT of $160 million, translating into an EPS of 30.30 cents per share. This represents a revenue growth of 5.2% and an NPAT growth of 4.9%. A 100% payout ratio means DRR is expected to pay 30.30 cps in dividends – higher than FY23. Deterra has an implied dividend yield of 6.63% at current prices – once again, a very healthy yield.

The Case for additional Royalty Assets

Deterra has been talking up its decision to add to its royalty portfolio for some time now. However, it has not transpired yet. The Board maintains that they continue looking for high-quality assets to boost and complement their portfolio. On the one hand, it is hard to find an asset matching the efficiency and production profile of BHP’s Mining Area C. On the other hand, an asset with a more bullish commodity price profile can bring with it a sizeable increase in revenues and profits.

As things stand, the number of assessed targets in FY23 has doubled compared to FY22 numbers and tripled compared to FY211. Deterra says that the material increase in the number of targets assessed in FY23 comes from the base, battery / critical metals sectors. These sectors can have a much more robust profile from a commodity price standpoint.

Deterra has increased its existing bilateral facilities from $350 million to $500 million during FY23. Currently, they have a net cash position of $29.5 million and no drawn debt. It’s fairly obvious that the facility has been increased for any potential acquisition.

Recommendation

Deterra’s flagship MAC asset has seen its production grow, which has helped offset the impact of lower iron ore prices. The company delivered a result in line with expectations, and with a 100% payout ratio, the dividend is once again highly attractive. FY24 will see further expansion of MAC’s production profile towards its maximum capacity of 145 mwmt – supporting Deterra’s earnings and dividends. Based on consensus expectations, Deterra has an implied dividend yield of 6.63% at current prices. DRR offers this very attractive yield without taking on the operational risk that is associated with miners. These numbers are based on a muted iron ore commodity price forecast, and any better than expected iron ore prices would be a catalyst for share price appreciation. We recommend investors to ‘Buy.


Source: Tradingview.com

 

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