Deterra Royalties Limited (DRR) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to Deterra Royalties' FY Results 2024 Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. It is now my pleasure to hand you over to the Chief Executive Officer and Managing Director, Mr. Julian Andrews. Please go ahead.

Thank you. Good morning, and welcome to Deterra Royalties Full Year FY 2024 Results Call. I'm Julian Andrews, MD and CEO of Deterra, and I'm joined today by Jason Clifton, our Chief Financial Officer. I'll begin with some introductory remarks touching on the highlights of the year, and then Jason 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. Starting with Page 3. Once again, I'm pleased to be reporting another period of strong financial performance, with revenues for the year up 5% to $241 million, as stronger pricing more than offset marginally lower sales volume and the absence of a capacity payment for Mining Area C. The high-margin nature of the business model is evident again in the 95% EBITDA margin and the full year net profit after tax of $155 million. Our core asset, the Mining Area C or MAC royalty was again the major contributor to the business with revenue of $239 million, the balance being revenue from our 2 royalties over mineral sands operations in the Southwest WA. There's no doubt that the MAC royalty is a world-class asset, and during the year, it achieved an important milestone with BHP announcing that the South Flank mine had reached its nameplate capacity of 80 million wet tonnes per year on a run rate basis during the fourth quarter of FY '24. This USD 3.6 billion investment in South Flank by BHP and its partners has delivered significant volume growth to our business having more than doubled production tonnes subject to the royalty since commissioning began in May 2021. The directors have declared a final dividend for FY '24 of $0.144 per share fully franked, which corresponds to 100% of our net profit after tax for the period and brings the total dividends for FY '24 to $0.2929 per share, again, fully franked and equal to 100% of our NPAT. I'm also very pleased to note that in FY '24, we announced an offer to acquire Trident Royalties. This investment is a first step in our strategy to grow and diversify our portfolio, providing immediate cash flow from currently producing operations as well as multiple sources of near- and medium-term growth from assets in construction and longer-term optionality from development stage assets. Whilst the Trident offer is an important investment in its own right, we continue to evaluate opportunities to add to our portfolio through value-accretive investment in bulk, base and battery commodities. With the increasing costs and reduced risk appetite we've seen in broader capital markets as well as greater volatility in commodity markets, we believe that our long-term outlook and short-term liquidity position us well to execute on these growth ambitions over time. I will talk further to this and growth more generally after Jason takes you through the financial results in more detail. With that, I'll hand over to Jason.

Thanks, Julian, and good morning, everyone. Today, we've released another strong financial result. And if you turn to Page 5, as mentioned, total group revenue for the year is $241 million, up 5% on FY '23. Revenue relate mainly to our quarterly MAC revenues, which were $239 million in FY '24, which is an 11% increase on FY '23. This more than offset the lack of the Mining Area C capacity payment, which was $13 million in FY '23. We also received $1.2 million from ongoing operations at the Yalyalup and Wonnerup mineral sands assets. After cost, our EBITDA margin was 95%, which shows the low overhead structure of our royalties business model. NPAT for the year was $155 million, and the Board has declared a fully franked final dividend of $0.144 per share, which represents 100% of NPAT. Turning to Page 6. You can see on the left-hand side the 11% increase in MAC royalty revenue was driven by a realized price of AUD 167 per dry metric tonnes, which was a 13% increase on FY '23. This was offset by lower sales volumes, which were down 2% on the year, to $116 million dry metric tonnes. On the chart on the right, you can see that while sales volumes increased in the June quarter of 2024 and noting that BHP South Flank ramped up a full production capacity of 80 million wet metric tonnes per annum on a run rate basis in FY '24, sales volumes of 116 million dry metric tonnes in FY '24 were less than the current capacity payment threshold of 118 million dry metric tonnes in a 12-month period. And so no capacity payment was received in FY '24. Moving to Page 7. We've shown a simplified illustration of our P&L. And on the revenue side, as discussed earlier, you can see revenue from MAC and our smaller mineral sands assets; and on the right-hand side of the chart, we show the distribution of these cash flows. Firstly, total cost in FY '24 was $13.1 million. And of this, $9.1 million relates to ongoing employee and other operating expenses, which were up 6.5% in FY '23, which reflected general wage and cost inflation and also 1 extra executive role as Brendan Ryan moved full time, the Head of Corporate Development, and I started as CFO. Business development costs were $3.5 million in FY '24, which was up on the $1.4 million in FY '23, and that reflects a material increase in activity relating to our offer for Trident as well as [ DD ] on other opportunities during the period. Net financing costs in FY '24 were $1.7 million, which was up from $1.2 million in FY '23, and that was mainly due to the fees associated with increasing our credit facilities from $350 million to $500 million back in August 2023. Finally, in relation to the cash consideration of GBP 144 million sterling for Trident, we were exposed to foreign exchange risk when the offer was made on 13th of June. So we entered into a forward FX contract to manage that risk, and at 30 June, the noncash fair value adjustment of that derivative was negative $4.2 million. So after tax net profit for FY '24 was $154.9 million, which with the $0.1440 per share full year dividend declared represents a 100% dividend payout ratio. Wrapping up with capital management on Page 8, we have $500 million of liquidity to fund Trident and any future acquisitions. We also have a GBP 150 million bridge facility we put in place as part of the U.K. requirements for the Trident acquisition. However, we anticipate drawing the $500 million credit facilities to fund Trident as these have a much lower interest rate than the bridge. We maintain our target leverage over time with a range of 0% to 15% of enterprise value. And finally, I'll just make a few points regarding our dividend payout ratio. So as you're aware, the payout ratio for FY '24 is 100% of NPAT, and going forward, as previously disclosed, the payout ratio will be a minimum of 50% of NPAT. Ultimately, the payout ratio will be a decision the Board makes come February next year and then going forward at each half. However, a few points worth noting at this stage. The payout ratio is just one of the levers that gives us options in how we fund investments should we see good value opportunities. It allows us to reduce leverage and recycle liquidity quickly and what we see as a prospective environment for further investment. Maintaining liquidity through our revolving credit facilities is important to our business model as we need to access that capital to invest in growth, especially at those times when other capital sources such as traditional debt and equity markets are less available as this is when we will see good value opportunity. So over time, we expect to continue to pay attractive dividends. We're also committed to creating shareholder value through targeted and disciplined investment. And so the payout ratio will be considered alongside our investment pipeline and balance sheet needs going forward. And with that, Julian, I'll pass back to you.

Thank you, Jason. Turning now to the strategy and outlook on Slide 10. Our growth strategy and rationale for the strategy is simple and has not changed. To put it as is most simple, we're looking to create value by building a globally diversified royalty portfolio with strong and resilient cash flows, multiple sources of earnings growth over time and one that's leveraged to our scalable operating cost structure. As we noted back when we were first listed in 2020, there are a number of companies that have built successful businesses through developing portfolios of royalties and streams built around the key elements of high-quality core assets, diversification, scale and a track record of value accretive investment, and we're looking to follow a similar path. There's no doubt that the MAC royalty is a world-class cornerstone for our portfolio, and the strength of this asset provides us with the platform and the opportunity to make value-accretive investments. We firmly believe that sensible additions to the portfolio that will provide attractive returns to our shareholders and ultimately grow our earnings over time will add more value for our shareholders over the long term than a simple passive strategy based on a single asset by introducing additional earnings diversification and multiple sources of growth and optionality. In particular, we're looking to build on our position as a leading listed royalty company outside precious metals. As Slide 11 shows, the listed royalty and streaming space is overwhelmingly focused on precious metals in terms of capital. However, the bulk, base and battery space is less crowded, and there's an opportunity for leadership in that space. We believe we have a strong relative competitive position. Our investment criteria and target parameters remain the same as shown on Page 12. We're focused on opportunities where we think we are better positioned. That is projects in established mining jurisdictions in bulk commodities, including iron ore and fertilizers, and base metals such as copper, nickel and zinc as well as battery and energy transition metals. This remains very much an active space, and our business development team continues to evaluate many new investment opportunities. Our investment pipeline continues to grow, reflecting the groundwork that has been put in place today in building our brand and networks. It's also supported by the current challenging costs and access to traditional global debt and equity capital, which is making our royalty offer a more attractive source of funding. As Jason noted, our access to capital and liquidity at scale remain an important differentiator for us in these conversations. In June, we announced our first step in our growth strategy and offered to acquire Trident Royalties for GBP 144 million by way of a scheme of arrangement. The transaction has since been approved by Trident shareholders, although it remains subject to U.K. court approval but is expected to receive that and complete in the current quarter. Trident represents an attractive opportunity to achieve our strategy at an opportune time in the commodity cycle by adding a balanced portfolio of royalties and royalty-like offtake assets that are aligned with our target investment criteria in terms of commodity, jurisdiction and development stage. Trident's flagship royalty over Lithium Americas Corp.'s large-scale, long-life Thacker Pass lithium project in Nevada in the U.S. provides significant exposure to future battery metals demand. The project is well advanced with Lithium Americas announcing significant conditional funding commitments from the U.S. Department of Energy amongst others. Lithium Americas has completed all early works constructions for Phase 1 with earthworks continuing to advance in preparation for major construction in the second half of the calendar '24 and expects to achieve commissioning and first production in '27 or '28. In addition, along with the 3 producing royalties across copper, iron ore and mineral sands, Trident holds cash flow producing gold offtakes, which can provide immediate revenue contribution to our portfolio. As I noted, gold is not core to our strategy, and we will refer how these assets fit in our portfolio of this -- after the transaction completes. As noted, we're expecting a second court hearing in the coming weeks and look forward to completing the transaction and speaking further about the business and our plans at that time. So in closing, it's been an important year in the development of the company with continued strong financial performance and the first steps in our growth strategy. We remain focused on our core principles of creating value for shareholders and growing the business in a patient and disciplined way. So with that, I'll close and open the line for any questions.

[Operator Instructions] We'll take our first question from the line of Glyn Lawcock from Barrenjoey.

Julian, just a couple for me. Firstly, just when you look at the operating expenses, I know you said 6.5% up year-on-year, but the second half was up 12% on the first half. Is that just again the reflection of the increase in headcount? And how do we think about that in the light of bringing across the Trident Royalties SG&A line as well? Anything you can sort of point out there?

Yes. Thanks, Glyn. So as you said -- as Jason pointed out, the operating expenses are up a little bit on this year, and that really reflects 2 -- I guess, 2 factors. One is the expenditure relating to the Trident offer that was incurred in the second half of the year. And the second is, as you pointed to, that we did have the increase in headcount in terms of Jason joining at -- towards the end of the first half. So we had full impact of that increase in the second half.

So how does that -- how do I think about the SG&A coming across from Trident? I think they're about a $10 million SG&A business. Are you looking at -- should we expect redundancies? Or do you expect to hang on to all the staff? I mean how should I think about cost into '25 once you take over in a few weeks' time?

Yes. So look, I think, clearly, there are some significant overlaps in the business. It's a listed business, so there's a lot of costs associated with that element, which won't need to continue to be duplicated. I think that there's -- essentially, we would expect that there will be some additional complexity brought into our business. But certainly, we would not anticipate all of those costs coming in across by any means. It's something that we can talk in a bit more detail, too, I think, once we're sort of sitting in the chair.

All right. And then maybe if I could just reflect on your comments about you want to do more acquisitions. You want to still look at more opportunities. And you did talk a little bit about once you get control, you'll look at gold. I mean it's pretty obvious from Slide 10 that you're trading at less than 1x NAV, been sold off quite a lot since you announced the Trident deal. The precious metals companies trade at 1.5x NAV. So I mean can I infer from your comments and from that observation that it's pretty much you will look to exit the gold royalty portion of your acquisition?

Yes, Glyn, we haven't made any firm decisions in that regard. But clearly, gold assets and particularly cash flowing gold assets do tend to trade on high valuations. And we think that in acquiring a portfolio, we've been able to acquire some gold assets at a portfolio valuation rather than a gold valuation. So we like the cash flow that they bring. But that being said, if they have a higher value to somebody else, and clearly, we would be exploring that.

Yes. Okay. I mean it just seems like a reasonable arbitrage to exploit given...

I agree, Glyn. I think it's something we just need to do a bit more work on once we're, as I said, in control of the business.

And then just finally, sorry, I mean, I was a bit disappointed when you did the transaction and used cash, not paper given you're premium to their company. Looking at the next lot of opportunities, can we -- how should we think about that now? Are we going to start trying to use the premium in our paper? Or are they going to be more cash based as well?

Yes. I think perhaps just to address the first point in terms of using paper for the Trident acquisition, to be clear, this was a -- they are a U.K.-listed firm. I think the complexity associated with a scrip offer cross-border is significant. And I think at that scale, it's questionable how efficient a scrip offer would have been. That being said, going forward, as Jason said, when he spoke about capital management, we have a number of levers we can pull. I think that we make that decision having regard to our overall balance sheet position. And clearly, we look at what we think is the most cost-efficient source of capital that would be available for future investments.

Yes. Okay. I mean I guess I just looked at Trident's register and realize most of them are sitting in Australia anyway, so those shareholders would have been happy with your paper.

Our next question comes from the line of Tom Prendiville from Canaccord Genuity.

Maybe just a quick question on capital management. Obviously, the change in dividend payout has been a key point of focus for investors. I think I'm just looking for a little bit more color on how we should be thinking about the interplay between growth, dividends and debt repayments going forward. I guess, Jason, you did touch on this a little bit in your presentation, but would it be fair to say now that you've got the ball rolling with growth with Trident that further near-term growth is on the cards as you continue to diversify. And then by implication, the dividend is likely going to be closer to, say, about minimum payout of 50% NPAT rather than something higher than 70% or 80% over the near term. I'm just, I guess, trying to get a better feel of the near-term payout ratio profile.

Yes. Thanks for that, Tom. It's Jason here. So as I mentioned, we are seeing a fairly prospective environment at the moment in terms of value-added opportunities. So that's one factor that we contemplate. The cost of debt for Deterra is actually pretty competitive as well. So between that 0 and 15% of longer-term debt of enterprise value is an option for us if we decided to maintain a bit more debt on the balance sheet for a period of time. That would also be informed by what the cash flow that's being generated from the assets is looking like at any point in time as well. And then obviously we want to replenish our liquidity availability to the extent we do see those value-accretive opportunities. So all of that goes Tom, to say that I can't guide in terms of where we'll be in terms of the payout ratio, obviously, above 50% is what we've said, and that will be a consideration that the board spent some time thinking about as we get into the half or actually paying the dividend.

[Operator Instructions] I am showing no further questions. I'll now turn the conference back to Julian for closing comments.

Thank you. Well, thank you, everybody, for joining us this morning, and we look forward to further conversations. Thank you.

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.