Company Reports

Commodity prices generally fell in the September-ending quarter, except for gold. Concerns about weak China end-user steel demand affected iron ore and other steelmaking commodities, while base metals prices fell on worries over slower economic growth in China and elsewhere.

Deterra Royalties aims to grow into a diversified royalty company with multiple cash flows. The acquisition of Trident Royalties (due to close in the third quarter of 2024) is likely the first of additional royalty and/or streaming purchases.

Deterra Royalties’ fiscal 2024 result was lower than we expected. The net profit after tax was about AUD 155 million or AUD 0.29 per share, which is similar to last year. EBITDA of around AUD 228 million increased 4% on fiscal 2023, with higher iron ore prices more than offsetting modestly lower sales volumes from Mining Area C, the lack of MAC capacity payments from no-moat BHP, and higher corporate and finance costs. Deterra will pay a fully franked final dividend of AUD 14.4 cents per share in September, bringing total fiscal 2024 dividends to AUD 29.29 cents fully franked, a 100% payout ratio and similar to last year.

Deterra Royalties aims to grow into a diversified royalty company with multiple cash flows. The acquisition of Trident Royalties (due to close in the third quarter of 2024) is likely the first of additional royalty and/or streaming purchases.

Shares of most of our global mining coverage fell during the quarter, and the average price/fair value estimate has fallen modestly to 1.05 at July 8, 2024 from 1.07 last quarter. While our coverage is close to fairly valued on average, there is a wide dispersion, with no-moat mineral sands miner Iluka the cheapest, trading 30% below fair value at that date. Mineral sands prices are lower, on reduced demand from China’s property sector. Rising interest rates and slowing housing markets in the West are also a near-term headwind. However, longer-term, maturing mines and a lack of large, high-grade, undeveloped resources are likely to support mineral sands prices. Its proposed rare earths refinery in Eneabba is an option, on elevated rare earths prices and potential Western tariffs on Chinese production.

Base metals prices surged earlier in the June quarter of 2024 before partially reversing due to concerns over China’s economy. Iron ore prices are broadly stable despite China's struggling property market and weak infrastructure spending, leading to questions over China's steel demand. After updating our commodity price assumptions, no-moat Iluka is the cheapest miner we cover, trading 31% below its unchanged fair value estimate of AUD 9.50.

Wide-moat Deterra Royalties has offered to buy London-listed Trident Royalties via a scheme of arrangement for GBP 0.49 cash per share—around GBP 144 million or AUD 276 million. Trident also had about USD 22 million (AUD 33 million) in net debt as of May 3, 2024. The acquisition is subject to Trident shareholder approval, court approval, and other conditions. While there is the possibility of a higher bid from a third party, we think the offer is highly likely to succeed as Trident directors intend to recommend it to shareholders.

Commodity prices diverged in the quarter. Despite solid China steel production, iron ore and metallurgical coal prices are down, while copper rose on supply issues and hopes of faster global growth. However, prices are elevated compared with history and cost-curve support.

Iron ore prices are lower on concerns over China steel demand due to its struggling property market and weak infrastructure spending. However, gold prices are up on optimism over peak interest rates, driving a 2% rise in our estimate for no-moat Newmont, to USD 51. It remains the cheapest miner we cover, trading 27% below fair value.

Deterra Royalties aims to grow into a diversified royalty company with multiple cash flows. New royalties are likely to be added in time, but we believe disciplined investment is likely, given the managing director's background at Iluka Resources and the discipline shown since Deterra listed on the Australian Securities Exchange.

Demand growth from China has been the main driver of rising commodity prices in the past two decades. More recently, though, most commodity prices have fallen from highs set with Russia’s invasion of Ukraine, the subsequent sanctions on Russia, and the rerouting of supply chains. Prices, nevertheless, are generally elevated versus the 20-year average, as well as relative to cost support.

We retain our fair value estimate of AUD 4.40 per share for wide-moat Deterra Royalties with first-half fiscal 2024 earnings broadly in line with expectations. Adjusted EBITDA of about AUD 113 million was 24% higher than last year, driven by stronger average iron ore prices offsetting modestly lower sales volumes from Mining Area C, or MAC. Net profit after tax of AUD 79 million or AUD 0.15 per share, also rose 24%. The fully franked interim dividend of AUD 14.89 cents per share to be paid in March represents a 100% payout ratio consistent with its policy. We forecast a similar payout for fiscal 2024 for a fully franked yield of about 7%. With no debt as of the end of December 2023, Deterra’s balance sheet is pristine.

The royalty over BHP Mining Area C provides cash flow without exposure to capital or operating costs. The low historical cost for the royalty means returns are enviable. BHP is expanding output from 60 million metric tons of iron ore in 2019 to about 145 million metric tons by 2024 through the development of its South Flank mine. This benefits Deterra through a proportionally increased royalty. Deterra receives 1.232% of the Australian dollar value of iron ore sales revenue from the royalty area, free on-board price ex-Port Hedland. Deterra also receives AUD 1 million capacity payments for each 1 million metric tons annualized increase in production above the high-water mark.

Near-term iron ore prices are higher on strong China steel production. Gold prices are up on optimism over peak interest rates, driving a 2% rise in our estimate for no-moat Newmont, to USD 54. It is the cheapest we cover, trading 30% below fair value.

The royalty over BHP Mining Area C provides cash flow without exposure to capital or operating costs. The low historical cost for the royalty means returns are enviable. BHP is expanding output from 60 million metric tons of iron ore in 2019 to about 145 million metric tons by 2024 through the development of its South Flank mine. This benefits Deterra through a proportionally increased royalty. Iluka receives 1.232% of the Australian dollar value of iron ore sales revenue from the royalty area, free on-board price ex-Port Hedland. Deterra also receives AUD 1 million capacity payments for each 1 million metric tons annualized increase in production above the high-water mark.

Commodity prices diverged in the quarter with strong China steel production driving iron ore and metallurgical coal prices up, while base metals prices dropped on worries of a Western recession. Even so, prices are elevated versus history and cost-curve support.

Strong China steel production is supporting prices for steel inputs despite recession concerns. Otherwise, changes to our commodity price assumptions are mixed, led by higher near-term iron ore prices and lower near-term thermal coal prices. We think thermal coal miner Whitehaven Coal and minerals sands miner Iluka are the cheapest we cover. Both trade at 29% discounts to our AUD 9.50 and AUD 10.50 per share fair value estimates, respectively, with Whitehaven’s down 3% on lower near-term thermal coal prices, partially offset by a weaker Australian dollar. Peer New Hope is also down 3% to AUD 6.10 per share. Iluka’s estimate is unchanged, with a weaker Australian dollar offsetting lower synthetic rutile prices.

The royalty over BHP Mining Area C provides cash flow without exposure to capital or operating costs. The low historical cost for the royalty means returns are enviable. BHP is expanding output from 60 million metric tons of iron ore in 2019 to about 145 million metric tons by 2024 through the development of its South Flank mine. This benefits Deterra through a proportionally increased royalty. Iluka receives 1.232% of the Australian dollar value of iron ore sales revenue from the royalty area, free on-board price ex-Port Hedland. Deterra also receives AUD 1 million capacity payments for each 1 million metric tons annualized increase in production above the high-water mark.

Commodity prices have generally stabilized after falling on concerns that China’s reopening would underwhelm, along with worries over a recession in the West. Even so, they remain elevated versus history and cost-curve support. The Russian invasion of Ukraine and subsequent sanctions on Russia support energy prices and reinforce the importance of energy security.

Wide-moat Deterra Royalties’ fiscal 2023 result met our expectations. Net profit after tax was roughly AUD 150 million or AUD 0.29 per share, 15% below fiscal 2022. Adjusted EBITDA of about AUD 220 million was also 15% lower, driven by lower capacity payments from BHP. The benefit of higher sales volumes from Mining Area C, or MAC, offset the lower average iron ore price. Deterra will pay a fully franked final dividend of AUD 16.85 cents per share in September, bringing fiscal 2023 dividend to AUD 28.85 cents fully franked, down 15% on last year given lower earnings, but with the 100% payout ratio retained. We forecast a similar payout for fiscal 2024 for a fully franked yield of about 6.3%. The balance sheet is pristine, with no net debt at end-June 2023.