Deterra Royalties Limited (DRR) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to Deterra Royalties Investor Conference Call and webcast. [Operator Instructions]. Please be advised that today's conference is being recorded. I'd now like to hand the conference over to Mr. Jason Neal, Interim Chief Executive Officer and Managing Director. Please go ahead.

Thank you. Good morning, Australia, and good evening, North America. Welcome, everyone, especially to our shareholders and prospective new shareholders, to the special Deterra Royalties Investor Call and Webcast. My name is Jason Neal, and I am the Interim Managing Director and CEO of Deterra, speaking to you from Toronto. Joining me on the call from our Perth office is Jason Clifton, our Chief Financial Officer. As you would have seen from our ASX release, I am delighted to announce an agreement for Deterra to acquire a royalty over Ivanhoe Electric's Santa Cruz Copper project in the U.S. State of Arizona. Santa Cruz is a large-scale, low-cost underground copper project with a long mine life located in a Tier 1 mining jurisdiction and being developed by an operator with a proven track record of delivering value. Ivanhoe Electric has done an outstanding job progressing this project, highlighted by the PFS update they announced only last week, which continues to project first production at Santa Cruz in 2029 and for Deterra, that will also mark first revenue on this royalty. I am looking forward to taking you through this acquisition, which is one that we have been engaged in for most of the calendar year and while individually, it adds a great asset to our portfolio on an accretive basis, we would also like our shareholders to understand this to be a representative transaction in the growth strategy of Deterra. On Page 2, you will see our customary disclaimers for you to read on your own time. I'll move to Page 3 and take you through the summary points of the deal we are announcing today and allow me to make a few important points. We have acquired for $74.15 million funded from our existing debt facilities, a 1.75% net smelter royalty over Santa Cruz with a further right of first offer on a further 0.25%. This deal is closed. The deal firmly aligns with our strategy to build our portfolio of high-quality royalties in pursuit of long-term sustainable value for all shareholders. It further diversifies Deterra's portfolio of predominantly iron ore revenues with lithium revenue expected to commence at the end of 2027 and now copper starting in 2029. This is a high-quality copper project poised to enter construction in one of the best addresses globally and arguably what is currently the most coveted commodity. And despite these strong characteristics, we nonetheless acquired this asset at a compelling valuation. We established a unique competitive advantage in the sale process by collaborating with Ivanhoe Electric. In exchange for due diligence information and the opportunity to modernize the royalty, including additional information, access and audit rights, we have modestly reduced the royalty rate and will provide a buyback right on 25% of the royalty. What this meant for Deterra is that we are the only company not bidding blind with respect to due diligence information. This is a scenario which has precedent in the royalty sector, including, for example, Franco-Nevada's purchase of a royalty on Cote Gold in Canada in 2025. We are obviously very happy to have had this opportunity. Our effective royalty rate is 1.68% until the sixth anniversary of production and 1.57% thereafter. Based on the footprint of the royalty ground, this is 84% of the PFS reserves. Research analysts, shareholders and others will want to assess the value of this acquisition and fortunately, Ivanhoe Electric published a PFS update for Santa Cruz just last week that incorporated a tunnel boring machine it acquired in May this year. The study also updated other project metrics. Importantly for us, it included a modest increase to reserves and life of mine copper production. In addition to robust public disclosure, Ivanhoe Electric also has extensive research coverage. We see this acquisition as accretive to net asset value per share and once in production, clearly accretive to earnings per share and cash flow per share. We have lots of shareholders who think about annual yield. If we look at this acquisition with a lens of annual yield, based on the recent 2026 PFS, we estimate the average annual royalty revenue at a long-term copper price of USD 5 per pound to be USD 10.7 million, that is a 14.4% yield against our $74.15 million acquisition price. This is very simple but intuitive math and if you compare this to other transactions, it would benchmark favorably. Ivanhoe Electric's mineral reserve supports a 24-year life. We are exposed to exploration success beyond this, of course. This is one of the beauties of a royalty interest. We are also exposed to higher copper prices and the current copper spot price of approximately $6.62 per pound is significantly higher than the long-term broker consensus of $5 per pound. Moving to Page 5. So we have checked a lot of boxes with this acquisition because it is absolutely aligned with our clearly articulated growth strategy. We have a third core asset added to the portfolio. We are very happy with the operator at Santa Cruz. This royalty will be cash flowing in the near future and has a long life. We acquired this royalty at compelling valuation in part because of the unique competitive advantage we established in the sale process and this acquisition is accretive to net asset value per share, expected to be EPS accretive and cash flow per share accretive once in production. And this transaction does not on its own change our targeted dividend payout ratio of 75% of NPAT, as stated in our recent earnings call. Moving to Page 6. Here is a map of our portfolio, which is showing more growth dots in the Americas to complement our foundational Australian asset. Also of note is that Santa Cruz is our second copper asset in Arizona. Page 7 shows key points from each of the 3 core assets. Let me just point out common characteristics. They all have a long operating life. They are all in a Tier 1 mining jurisdiction. They are all low-cost assets. They all have quality operators. We are on our way to creating a greater portfolio diversification and a growth profile. On to Page 8. We will pause a few moments on this page before opening up to questions. This is a page that we introduced after the acquisition of Thacker Pass, and we are now updating it to include Santa Cruz. We currently have one material cash flowing royalty at Mining Area C. It is one of the best royalties on the planet, but we are now able to show real growth on the horizon. Thacker Pass Phase 1 is expected to be ramping up in 2028 and Phase 2 in the early 2030s. By then, Santa Cruz is expected to be ramped up. So at consensus commodity prices, Thacker Pass Phase 1 and 2 and Santa Cruz are expected to generate USD 33 million in royalty revenue combined. That is 19% revenue growth at consensus commodity prices over about 5 years from what MAC would be producing on its own, that is clearly meaningful. Obviously, at spot commodity prices, Thacker Pass Phase 1 and 2 and Santa Cruz make a bigger contribution and revenue growth is materially higher at 22%. I will conclude by saying that this is exactly the type of acquisition that we've been focused on delivering to our shareholders, and this is how we will deliver value. We are really looking forward to engaging with stakeholders on this deal and our strategy to continue delivering growth. And finally, we have also been engaged in our CEO search process to establish the next leader of our business. I am hopeful that this process will be concluded in the near future, but of course, I cannot promise a time line for conclusion. This leader will be focused on delivering with reasonable cadence, further value-enhancing growth and diversification transactions. The Santa Cruz acquisition is a good demonstration of one type of transaction that will define the future of our company. Thank you for your time today on relatively short notice, and we appreciate your interest. We do have a little bit of time for questions from the phone and also from the webcast. So let me hand it back to the operator now.

[Operator Instructions] We will now proceed to take our first question and our first question comes from the line of Lyndon Fagan from JPMorgan.

Look, the first one is just how do we model the 84% coverage in terms of the royalty? I guess, is that a haircut over a certain amount of years? Or is there an easy way to kind of cater for that?

Yes. So if you were to take a look at the royalty footprint against the mine plan, it averages out to 84%. It is variable year-to-year and obviously, Ivanhoe Electric may not exactly follow the plan because it will opportunistically exploit the ore body. If I was in your shoes, what I would do is I would just use the 84% every year and see how experience takes us. So unfortunately, I don't think we can do much better than that.

Okay. Great. And I guess if this asset were to expand in any meaningful way, does that 84% sort of carry over? Or is it over -- how does it work in terms of -- is it over a certain area of the reserves? Or is it yes, I'm just a bit confused how to think about it.

Yes. So think about the royalty area as sort of a surface expression and so as long as we're within that subterranean projection, it's in the royalty area and if it's out. So certainly, expansion at depth is probably going to be very good for us. Expansion laterally, probably less so. So it really would depend on where they convert the resources. We're hopeful that a fair bit of the upside in the asset would be in our land. I mean one thing you often see with underground deposits is they continue at depth. I'm not saying it's specific to this deposit, but a lot of underground deposits, they continue at depth, because the operators typically don't drill them out, because it's not economic to from surface, do all that exploration work. So that's exploration work that the operator would probably do once they get into the ore body. So when you're modeling how much resource you want to add to it, I'm not sure I can give you any guidance better than kind of using that 84% number on resource expansion.

That's helpful color. The last one I had was just how do we think about that buyback option for $20 million? I mean, I'm assuming at a higher copper price, it's probably quite attractive for Ivanhoe to exercise that option. Would you recommend assuming that, that happens? Or how do we frame that one?

Yes. So I mean, obviously, there's a higher price on the buyback than the price that we paid. At higher copper prices, they would have a greater incentive. The other thing is the way that it works we think that their incentive would be, if they're going to do the buyback, it's more likely to happen before production starts or very early in production rather than beyond that. I think it would probably be conservative, if you want to be conservative in your modeling to assume that there would be that buyback at that level, but it's really going to be in Ivanhoe's hands.

And sorry, is there a price where that is in the money in terms of like if copper is at today's levels, is it sort of a no-brainer for them to buy that back?