Deterra Royalties Limited (DRR) Earnings Call Transcript & Summary

Hello, and thank you for standing by. Welcome to Deterra Royalties Fiscal Year 2023 Results Conference Call. [Operator Instructions] I would now like to hand the conference over to Julian Andrews, MD and CEO. You may begin.

Thank you. Good morning, and welcome to Deterra Royalties Full Year FY '23 Results Call. I'm Julian Andrews, MD and CEO of Deterra and I'm joined today by Brendon Ryan, our Chief Financial Officer. I'll begin with some introductory remarks touching on the highlights of the year, and then Brendon will provide a review of our financial results. Following that, I'll provide some comments on our approach to growth and the outlook in that regard. And then we'll hand back to the operator and open the line for questions. It's been another year of strong performance for Deterra. Our assets continue to perform well. At BHP's Mining Area C or MAC, production volumes were up once again to a record level of 126 million wet metric tonnes as the South Flank expansion continues to ramp up to its full capacity of 145 million wet tonnes a year. We also saw volume growth from our royalty over Doral’s Yalyalup mine as it reached full capacity of approximately 100,000 tonnes a year of heavy mineral concentrate. Although it's not material in the context of MAC, it is another illustration of the option value of royalties and the ability to participate in extension or expansion of the mine at no additional cost. Full year revenues were just over $229 million, which given the nature of the business model and the high margins that can support flows through to a net profit after tax of $152.5 million. Brendon will talk to these results in more detail shortly. But I will note that although total revenues were down 14% on FY '22, this was largely due to a reduced one-off capacity payment from Mining Area C as South Flank approaches completion. The value of this expansion was once again evident as the growth in volumes, largely offset softer realized iron ore pricing, which, along with an increase in mineral sands royalty revenue, resulted in a net 2% decline in revenue-based royalty revenues. The Board has declared a final year dividend of $0.1685 per share, fully franked, bringing the total dividend paid in decline since listing to over $400 million. And we continue to build the platform for investment and growth. We're seeing an increase in opportunities and have continued to build the capacity and experience of our business development team. Also today, we've announced that we expanded one of our credit facilities by $150 million to bring our total available facilities to $500 million. The year also saw us strengthen our Board with the addition of Jason Neal last November. Jason brings a very deep experience in net books in mining and metals in North America and globally, and we're very pleased to have him join the company. With that, I'll hand over to Brendon, who will take you through the financial results in more detail.

Thanks, Julian. Good morning, everyone. My task today is yet again another fairly easy one given the relatively clean and simple set of results. If we can first turn to Slide #5, so I can address the financial highlights of FY '23. As you can see, total group revenue for the period amounts to $229 million. This amount includes MAC royalty revenue of $215 million. The MAC capacity payment of $13 million plus circa $1.1 million in revenue from our 2 small Western Australian mineral sands royalties. This $229 million in revenue delivered a healthy $219 million in EBITDA for FY '23. This represents an EBITDA margin of 96% and clearly demonstrates the low overhead structures of the royalty business model. Finally, this resulted in both NPAT and dividends for FY '23 of $152.5 million. Based on this result, the Board has declared a fully franked dividend of $0.1685 per share. In combination with the interim dividend of $0.12 per share, this equates to a full year dividend of $0.2885 per share fully franked. Moving to Slide 6. I would quickly like to discuss the performance of Mining Area C. Overall, you can see from the yellow line on the chart, the continued ramp-up of BHP's $3.6 billion South Flank expansion. BHP has recently confirmed that South Flank's ramp-up to full capacity remains on schedule with full run rate expected by the end of FY '24. Despite the improved operating performance across Mining Area C, including a 14% increase in sales volumes to 118 million tonnes, unfortunately, this has been offset by an almost equal and opposite 15% decrease in the year-on-year received price. The combined outcome of offsetting volume and price has resulted in royalty receipts being down 2% year-on-year to $215 million. Again, in FY '23, this royalty revenue was supplemented with a $13 million annual one-off capacity payment. As a reminder, the capacity payments are paid in increments of $1 million for every 1 million tonnes per annum increase in mine production. The capacity payment is calculated at 30th of June and paid annually at the end of each financial year. This $30 million capacity payment for FY '23 is down from a record $46 million reported in FY '22. Whilst we anticipate ongoing capacity payments from South Flank as it continues to ramp up the full capacity, we actually anticipate the size of the annual incremental payments to reduce. On Slide 7, I would like to briefly highlight the growth of the MAC asset over the past 2 decades. From this chart, you can clearly see the original ramp-up of the North flank from 2004 with a more gradual capacity creep from 30 million tonnes to 59 million tonnes post 2008, plus a more recent and rapid ramp-up of the 80 million tonnes South Flank expansion commencing FY '22. At full mine Flank capacity of 145 million tonnes, MAC will represent the single largest iron ore hub in the world, accounting for roughly 8% of global seaborne iron ore. Interestingly, MAC has increased output in 17 over the last 20 years, paying out $113 million in capacity payments since 2004. Again, the capacity payment received in FY '23 was $13 million and the capacity payment threshold has now also been rebased from 105 million tonnes to 118 million tonnes. on Slide 8, we have tried to reflect the simplified illustration of the P&L. What this slide demonstrates is a lean cost structure and transparency of the cash flows distributed to shareholders. On the revenue side, as discussed earlier, we showed the 3 sources of cash to contribute to the $229 million. Whilst on the right-hand side of the chart, we show the distribution of these cash flows. Total costs for FY '23 were $10.3 million. Of this $8.5 million relates to the normal ongoing operating expenses, reflecting the inflation resistant nature of the royalty business model versus producers. Plus, we also specifically called out in our account the $1.4 million in one-off BD project-related costs. This reflects the changed markets and materially into BD activity in FY '23. The remainder of the $10.3 million in costs related to the $0.4 million in D&A. Deterra also incurred $1.2 million in net financing costs associated with our existing $350 million in bilateral credit facilities. Tax expenses of $65.3 million reflects an effective tax rate of close to 30%, and this all results in net profit after tax of $152.5 million for the full year period. Now turning to Slide 9. As you'll see from this chart, in H2, the Board declared a final dividend of $89.1 million. This builds on the H1 interim dividend of $63.4 million, giving a full year dividend payout of $152.5 million or $0.2885 per share, representing 100% of NPAT for full year '23. In terms of our capital management, you'll note that we continue to demonstrate discipline in terms of shareholder returns, although recognize the intent to invest in growth. And so to return surplus cash to shareholders, if not required for new investments or balance sheet management. We also note today's dividend represents a cumulative $400 million returned to shareholders since demerger in FY '21. Secondly, we intend to optimize the use of debt. You'll note that we have also announced today an increase in our credit limits from $350 million to $500 million. We achieved this by upsizing our existing full year bilateral credit facility due in February '26, with no change to existing terms or margins. The increased capacity specifically provides Deterra with increased liquidity as market demand for royalty funding improves, plus increased flexibility in managing the existing $175 million coming due in February '25. We also reiterate our intent to maintain target leverage within a range of 0% to 15% of the enterprise value. This leverage ratio reflects the desire to maintain a strong balance sheet and protect the option to act flexibly when value-accretive opportunities arise. Hopefully, you'll recognize from these slides, we have worked hard to deliver upon our commitments of: One, operating a lean corporate structure. Secondly, maintaining a conservative and flexible balance sheet. And lastly, maximizing return of available service cash flows. The simplicity and scalability of Deterra business model is unique on the ASX, and our small team will continue to work hard to deliver maximum value to our shareholders. With that, Julian, I'll pass it back to you.

Thank you, Brendon. Turning to Slide 11. As I noted in my introduction, our existing assets continue to provide organic volume growth, and there's still some further growth to come in the short term from South Flank as we continue to expand South Flank capacity over the next year. However, as we've consistently said, we believe there's an opportunity to generate value by adding additional sources of earnings optionality gross to portfolio. We're well placed to do this. We have a high-quality foundational asset in the Mining Area C royalty. We have a level of liquidity that supports our ability to invest and differentiate us from our nonprecious peers. And we have a focus on what we believe is in late competitive niche and with higher level of investments outside of precious metals. As you can see from the diagram on the left side of this slide, in our estimation, the precious metals space is well served by a number of existing listed royalty companies and streamers. There are also a number of smaller players with a nonprecious focus. As a result, we see opportunity in the non-precious metals space at a larger scale, and that's what we're targeting. That being said, this is still a very competitive market, particularly given the presence of other capital providers and forms of capital. There's no change in our focus. It remains on commodities other than precious metals, where we believe we can compete effectively. In particular, bulk metals, including iron ore and fertilizers and base metals such as copper, nickel, and zinc, and we're seeing more opportunities in the energy transition metals like cobalt, lithium and [ rare earth elements ]. Turning now to Slide 12. At the half year, I refer to the softening we've seen in broader economic and capital market conditions and our belief that this would lead to an increase in the number and quality of growth opportunities for the company. This has proved to be the case. And although no new investments were made in FY '23, our pipeline is as active as it has ever been with the number of opportunities under consideration at all stages of review. As we show in this chart -- a chart on this slide, the number of opportunities we've seen has doubled over the past year with almost all of that growth coming in primary opportunities. You can also see from the pie charts on the right. The large majority of opportunities fall within our target investment parameters. It's worth noting again at this point that we see discipline as a fundamental part of our investment decision-making and our observations over the past couple of years has reinforced our belief in the importance of investing in the right opportunities at the right time. We believe that our patience and discipline will be rewarded as capital and resource markets within a direction which is more conducive to royalty and streaming funding. Our ability to act quickly on value accretive opportunities as they arise is key to our growth strategy, and we continue to strengthen our capacity in that regard, both in terms of access to capital through the expansion of our debt facilities and continuing investment in our team's capability to review and execute on these opportunities, which we expect to continue into FY '24. Brendon touched on our capital management framework earlier. But as we move into a more prospective period, it's worth spending a little more time on it, let's see, and how it applies with respect to funding potential growth opportunities. Our framework as with most companies is built around balancing returns to shareholders with the need to invest in growth. However, as a provider of capital or investor and secondary royalties, liquidity is critical to the success of our business model. We need to be able to invest as we see good opportunities through the cycle and particularly when other sources of capital are less available. Hence, we've put in place credit facilities provides -- that provide us with that liquidity. And today, as Brendon mentioned, we've announced increase these facilities to a total of $500 million on existing terms. We have found this liquidity to be an important differentiator for our business when talking to potential counterparties, particularly of our primary royalties. They value our ability to be fund so. That being said, if we're to retain our ability to continue to invest, we need to recycle that liquidity that can be very important to support investment, and we've anticipated we use from time to time, as Brendon touched on. But the model is not to leverage the business to any great degree for any meaningful length of time. We have a target leverage ratio of somewhere between 0 and 15% of enterprise value. At present, given we've not drawn on our facilities to fund investment to date, we remain net cash. With respect to cash allocation, to date, we've returned more than $400 million to shareholders. However, this approach may evolve in the future as we move into a period of growth. In particular, we highlight the discretion the Board has to adjust the payout ratio and that for to grow and minimize dilution to shareholders, some retention of earnings may be required. Moving now to Slide 14. With respect to ESG, we've continued our development on a number of fronts. In terms of community involvement, earlier this year, we announced that we had entered into a partnership with Earbus Foundation of WA to help provide important healthcare support to the communities of the central Pilbara. This is a very worthwhile service and we're very proud to be associated with them. We've also once again achieved a net 0 operational emissions footprint. And as I noted earlier, we strengthened our Board and committee membership through the addition of Jason Neal. So in closing, it's a very straightforward set of results, once again, as you'd expect from a very simple and transparent business. The assets are performing well, generating volume growth and cash flow and we're very active in assessing opportunities to build growth and the capacity to execute on them. We believe we're entering into a prospective period and have invested in the capacity to execute on these opportunities as they arise. Thank you. And with that, we will be happy to take any questions.

[Operator Instructions] Our first question comes from the line of Robert Stein with CLSA.

Just a quick -- a couple of quick ones for me. So looking at the comments, the Board will exercise discretion. In previous sort of presentations, that's been a footnote size text. Now it's sort of making its way into the main pack. Just wanted to get an understanding of how robust that process is to assess whether that royalty doesn't just get passed straight through to investors, given that that's a key attraction to invest in the stock? And I've got a follow-up, please.

Sure. Thanks, Rob. So as you say, I think that discretion obviously, is a consistent point. In terms of the process, as you'd expect, it's obviously a very robust process that the Board goes through in terms of assessing the position of the company, the balance sheet, the -- and the outlook in the short to medium term with respect to requirements for that cash. Clearly, over the period since listing, we've been in a position where the -- we were able to provide those funds back to shareholders as we work actively here -- we were not using those funds and investments at the time. And effectively, it's just as we move into a period of growth, it's just opportunity, I think, to know once again that we will be making that or the Board will be making that decision on the allocation of the cash on its merits as appropriate each period.

And then sorry, a bit of a follow-up then, just on growth. We've sort of had the same conversation a couple of years running and understand markets are volatile, and you're looking for a particular point of entry. In terms of how that relates to the cycle, is it too soon to strike for distressed assets? Are we -- similarly, how do you sort of balance that with trying to justify what is quite a large corporate overhead considering it's a pretty simple business model? How do you balance that tension?

Yes, sure. I mean I guess I would note that we do have -- we think it's a relatively lean business model. I think that we are in terms of the investment we have in the team with -- there are elements associated with the listing, and clearly, we have quite a focus on the growth opportunities as well. But in terms of sort of where we are in the size, I think it's pretty clear that for the first couple of years since listing, it was a very lean environment in terms of opportunities. Debt was very cheap and equity was very abundant. So there wasn't a lot of room or demand for other forms of financing such as streams and royalties. We have seen, certainly, over the past sort of 9 to 12 months, a material increase in the level of interest in the funding that we can offer. And we are prepared -- we have been actively reviewing those, and we've been investing in our capacity to be able to review those opportunities and to execute on them as we see the appropriate opportunities.

Yes. Rob, listen, I think -- I'd like to think that we are pretty frugal here. At Deterra, we don't sort of waste money. Particularly in the early years, there weren't that many opportunities and we kept our overhead low, incredibly low. As we -- as the market has turned, particularly since last October, our debt finally had a price versus debt being free and equity readily available. We have ramped up our capacity internally to sort of to match the market conditions. And we think that we're probably a more stable sort of point out. But I understand your point about we do actively manage our operating costs. And we try to match them very much to the opportunity set that's out there.

Yes. Sorry. I'm not -- it's not really a comment on the sort of cost level of the business, but it's more so -- if I think about this as an alternative investment as a passive royalty stream, the alternative is you run it like an ETF and there's 0 cost versus what is the cost that investors are bearing to grow and we're not seeing an outcome of that. So that was more so the point that I was trying to make. Obviously, we're entering a period in the cycle where potentially it may be finite, a small window that might present itself. But I'm just sort of wondering if we are unsuccessful during that period, how long do we have to wait for the next period to emerge? And how do you keep things kicking on in that process?

Yes. Look, certainly, your point is absolutely right. As we look at the cycle, we see that we are moving into a period where we are seeing more and better quality opportunities. And we're certainly focused on pursuing those. I think clearly, we've talked, I think, right from the beginning about being patient and being disciplined. And that's the case that we recognize that making the right investment is much about making the right investment at the right time. And we believe that we're facing into that now. So we have invested in our capacity to execute on those as we see those coming.

I think it's sort of people are looking for a proof of concept. I think one of the proof concept is we have delivered not done a bad deal when the markets weren't there for us. We have been patient. It's fairly easy to do a bad deal, and we can probably do that on tomorrow if we wanted to, but we don't want to do that. We actually -- it's a lot harder to build a good deal, and we're very focused on sort of making sure that the opportunities that we see and the way that we assess them sort of create value for our shareholders. So you need to make sure that there is a good deal, a good asset with a good deal at play to make sure that we can execute.

Our next question comes from the line of Glyn Lawcock with Barrenjoey.

Maybe you could just add a little bit more meat on the bone to the question before. Just can you give us any feedback on why you've missed out perhaps like or have you not even gone to like a final round bid and missed out. Just curious how far you've actually gotten down the pipe and whether or not the vendor has actually given you feedback on why perhaps you missed out if you got that far.

Yes. Certainly, Glyn. So we have looked at a lot of opportunities and some of them, clearly, we've been able to pass on relatively quickly. But to be clear, we have taken a number of opportunities to quite an advanced level. I think I'm always cautious about talking about missing out. I think that it's important we've seen some good opportunities, but an important part of the opportunity is the price at which you're able to access. So when we look back, as we do, we do look back on opportunities that have completed in the market that obviously we weren't part of. Yes, there are a number where we've seen good opportunities, but we just haven't -- we haven't been able to support the level of value that perhaps others had to get the deal done. I think there's a number of factors behind that. I think that we're in a slightly different position to some of our competitors in the sense that we have some good organic growth, and we have some good cash flows. We're not in a position where we feel we need to invest for strategic reasons. We remain focused on value. But we certainly learn. We're a new company. We were listed 3 years ago, it -- sorry, a little under 3 years ago. And we've been we've been active and we've also been very active at learning from our experience as we go.

Yes. No, I think, Glyn, I think our first sort of lens is quality and size. We need to make some of the assets we're looking at quality and size. And there's not a lot of great assets to come by in the size that we talk about. So -- but when we see those, we are active in those processes, and that can be either quality side of an individual asset or more menu portfolio. We've been active in several processes through to sort of the latter around. The other -- obviously, the other one comes down to value as it's easy to do a bad deal when it a good deal. We obviously sort of do a lot of work on where we see the value in terms of both the underlying value and the optionality of the asset, and there's obviously a difference in views potentially in some of these assets or what we think versus what some of our competitors.

I appreciate that. I guess I was just curious to understand if you got through to the very end of the process on anything at all where you were maybe shortlisted down to the last couple or 3 and you missed out. Because I was just curious how far we're actually getting down the pipeline of the path?

Yes. So to be clear, we certainly have we've taken some processes to, as I said, a pretty advanced stage. So as you'd expect, given the way the business is set up and the mandate that we have. I think the other point I'd make is there are situations where we've seen deals close at prices that we won't have, frankly. But we've also seen a couple of examples where we've looked closely at assets and those processes haven't closed because there's been a bit as spread with the vendor, I think, and the broader marketplace as well.

Generally speaking at large, better quality assets, the better -- the more competitive we are because we have the sort of the financial sort of capacity to do some of the bigger deals and there's less competition. So we're generally sort of in the final -- we're closely in the final round for the best quality assets and we are in the small ones where there's a lot of smaller players who are actually actively sort of bidding for the sake of growth as opposed to the second value.

All right. And look, I don't want to nitpick but just on the increased cost of -- the increased facility, is that going to cost the shareholders more than the $2.5 million it cost as last year?

Yes, it will. Money is not free. So we have a highly competitive rate. I think the total increasing maximum -- sorry, the minimum increase in costs will be $0.9 million, of which there's some cash and noncash costs in that in terms of sort of the commitment fee and establishment annually about $0.9 million more.

$0.9 million more. And then just the 12% increase in operating expenses, which included 20% increase in employee benefits, and that's excluding your BD spend, was 8.5% in '22. With your comments in the presentation that you're staffing up your team. Where does that then sit for '24?

So as we spoke to, we have invested more in the team, particularly in the business development side of the business, in improving our sort of technical capacity to improve deals and to also our ability to execute and we would expect to see some further investment over the course of next year as well.

Yes. We run a very lean team leading with a handful of people. What we're trying to balance out is -- we believe we have small fixed costs and a larger variable costs, what we're trying to balance is the optimal mix between that fixed and variable because the external cost can be quite expensive. We use them where they're appropriate, but we need to get the right balance, so that we're optimizing that cost spend.

Yes. But the BD was external in addition to the $8.5 million So does the $8.5 million gap up another, what, 10-plus percent again in '24?

Look, I'm not sure we keep guidance. But certainly, I think that we would -- as I said, we'd expect to increase our investment in the team. As we said, that business development cost is variable cost and it's driven by activity. So as we get this year, we would expect to incur more of that variable cost as well.

That Slide 12 highlights the sort of the increase in activity that we're seeing and the fact that sort of the activity is increased by -- it's doubled, but we've actually increased our cost by a little bit is sort of testament to the type of model we're trying to run.

Yes. Julian, just if I could just steal one more question in. I know you've avoided coal in the past. But I mean, I think it's becoming more and more I guess, except that the coal is needed for the energy transition, particularly met coal in the steel making for a net number of years and maybe even thermal good quality, but they're finding it harder to get funding now. Is that something you're reconsidering as a company or still coal very much off the table?

No. Glyn, coal is still off the table for us. I think in terms of our ESG and investing guidelines, we certainly are not looking to target coal investments and we don't make a distinction between met and thermal coal in that regard. So no, we're certainly not looking to target coal.

I'm showing no further questions in the queue. I would now like to turn the call back to Julian for closing remarks.

Great. Well, thank you very much for joining us this morning, and we look forward to your continued interest in the company. Thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.