Deterra Royalties Limited (DRR) Earnings Call Transcript

Hello, and welcome to Deterra Royalties Half Year 2025 Results Conference Call. [Operator Instructions] I would now like to turn the conference over to Julian Andrews, Managing Director and Chief Executive Officer. You may begin.

Thank you. Good morning, and welcome to Deterra Royalties First Half 2025 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 today with some introductory remarks, and then Jason will give an overview of our financial results. Following that, I'll provide some brief comments on our approach to investment, and then we'll hand back to the operator and open the line for questions. Starting on Slide 4. I'm pleased to be reporting that the company is in good shape with record volumes from our key producing assets underpinning strong revenues and significant progress in some of our major development assets, highlighting the option value within our portfolio. Our producing assets continue to perform. Mining Area C once again reported record production and sales tonnes following BHP's announcement at the end of last financial year that the South Flank expansion had reached nameplate capacity on a run rate basis. We're also reporting for the first time revenue from the gold offtake contracts and other assets acquired during the half. These contracts produced a record number of ounces, noting we consolidated from the 2nd of September. And with record gold price and increased volatility, they provided an important source of revenue, more than covering the incremental cost of debt to fund investment in the period. Since our last report, we've also seen significant progress in some of our key development assets. At Thacker Pass, we saw further derisking of funding with the U.S. Department of Energy loan closing and additional investment and support from General Motors largely securing CapEx for Phase 1. Further, the updated NI 43-101 report from Lithium Americas last month outlined a significant increase in reserves and resources, supporting a doubling of planned production capacity and a life of mine of up to 85 years. There's been progress at a number of other development projects as well over which we hold royalties. Most notably, the La Preciosa silver mine, where the operator Avino Silver and Gold Mines has announced it expects to begin processing material later this year. Net profit for the period was $63.9 million, and the directors have declared a fully franked interim dividend of $0.09 per share, which is approximately 75% reported net profit after tax. Integration of the Trident portfolio is now complete. At the time we announced the offer, we said that we saw it as an opportunity to capitalize on a countercyclical investment in high-quality assets with substantial optionality. Since acquisition, these assets have exceeded our expectations in that regard, both in terms of financial contribution and progress on assets in development, particularly the Thacker Pass project. We continue to evaluate opportunities to add to the company's portfolio through value-accretive investment. And with our long-term outlook and short-term liquidity, we're positioned well to execute on these opportunities as they arise over time. With that, I'll hand over to Jason.

Thanks, Julian, and good morning, everyone. Today, we've released our 1 half '25 results, which for the first time reflect our acquisition of Trident. If you move to Page 5, you'll see the underlying EBITDA for the period is $106 million, down 7% on 1 half '24. That decrease comes mainly from lower iron ore pricing, which is offset by both stronger MAC volumes and the contribution of new revenue sources, particularly $7 million from the gold offtakes commencing September 2024. As Julian mentioned, the integration of Trident is complete, and we will deliver synergies at the top end of our guidance range. At an operating level, so that's excluding one-off transaction costs, Trident has been cash flow positive in the period. We have a strong balance sheet, well within all of our banking covenants and within our net debt to the EV target range. On Page 6, you can see the revenue line and the contribution of gold offtakes and other royalties that are offsetting lower MAC revenue. There are a number of new one-off items, and I'll take you through those in detail shortly. However, important to note on this page, the effective tax rate is a bit higher due to one-off nontax deductible Trident transaction costs, and that gives a statutory NPAT for the half of $63.9 million. Adjusting for those one-offs and the tax affected amount gives an underlying NPAT of $68.5 million. And at the top right, you can see the $0.09 per share dividend declared, which is fully franked and equates to 74.5% payout ratio. On Page 7, you can see MAC royalty revenue was down 12% on 1 half '24, which came from a 22% decrease in realized iron ore prices. On the right hand of the chart, you can see that this was offset by growth in sales volumes as MAC moves towards its 145 million wet metric tonne per annum capacity. Page 8 shows the gold offtake revenue. The top left shows the 6-month activity to 31 December, and the bottom left shows what Deterra has consolidated from the period of acquisition being the September 2, 2024. The gold offtakes are treated as a financial asset and so are revalued each period. On the right-hand side of the chart, you can see historical information on the offtakes during Trident's ownership. The increase in ounces delivered in 1 half '25 came from Los Filos resuming normal operations following the mine disruption and Greenstone commencing deliveries in June 2024. On Page 9, I've separated recurring and nonrecurring P&L line items. Operating costs were up during the half as we implemented efficiency measures following the Trident acquisition. These were offset by lower BD costs. The gold offtake depreciation is a function of the AUD 86 million opening book value multiplied by ounces delivered in the period over ounces in the book on the 2nd of September. Net finance costs are mainly driven by debt levels and net debt was $308 million at the end of December '24. And we had an interest rate -- a weighted average interest rate throughout the period of about 5.84%. And so for 4 months, that's where the majority of that driver for the net finance costs comes from. One-off Trident costs are within guidance at $12 million and no further Trident integration costs will be incurred going forward. And we've also had $10 million in noncash gains, which result from 2 items: firstly, a $3.9 million revaluation gain on the offtakes; and secondly, a one-off $6.2 million noncash gain on closing of the hedge that we took out to hedge the Trident purchase price. Moving to Page 10, you can see the balance sheet is strong. We are well within all of our banking covenants and have a debt -- a net debt to EV of 12.1% and maturities are spread across future periods. Finally, on Page 11, we've outlined our capital management framework. We advised in June last year a dividend policy with a minimum payout of 50% of NPAT and our declared fully franked dividend of $0.09 per share is consistent with that policy. With that, I'll pass back to you, Julian.

Thank you, Jason. Turning now to our strategy and outlook, and I'll turn to Page 14. Our strategy remains focused on building shareholder value through both development of the projects within our portfolio and on further value-accretive investment. Our portfolio now contains a number of short-term catalysts and longer-term optionality. Clearly, we're coming to an end of a period of significant growth at Mining Area C with production rates having more than doubled in the last 3.5 years. Although nameplate has been reached on a run rate basis, to the extent that these rates are maintained over a full period, we may still see some volume growth on an annual basis and associated capacity payment. Other short-term catalysts to note include a full notice to proceed on Thacker Pass, which LAC has indicated they expect early this year, noting that the buyers have already begun work in order to derisk the planned production start date in 2027, and Avino's announcement regarded expected processing material later this year. In terms of investment, we're focused on adding high-quality long-life assets with significant option value at the right price and in doing so, growing the net asset value of our portfolio on a per share basis. By doing that on a consistent and disciplined basis over time, we believe we can also build scale and diversification benefits that provide additional value at a portfolio level. To be clear, each potential investment will be evaluated on its own merits and must be value accretive in its own right. Any portfolio level benefits are an outcome of our disciplined investment approach, not a driver and will take time to accrue. Turning to Page 15, our investment criteria and target parameters remain the same. We're focused on opportunities where we think we are better positioned. That is projects in established mining jurisdictions in bulk commodities, base metals and battery and energy transition materials. In summary, it's been a busy period with new assets, adding new sources of revenue and optionality to the portfolio. We remain focused on our core principles of creating value for shareholders in a patient and disciplined way. With that, I'll hand back to the operator, and we'd be happy to take any questions.

[Operator Instructions] Our first question comes from the line of Tom Prendiville with Canaccord.

Maybe just a question on the restructure of the BD team you announced earlier this year. Just curious, what's the expectation of how this team is going to look going forward? I mean, is it growing? Is it shrinking, staying the same? First part of the question. And then just as part of that same announcement, I mean, you mentioned an increase in focus on offshore opportunities, particularly in North America. I mean, is there any particular reason for this? Does this imply that the number of attractive opportunities you're seeing in Australia and other developed countries is limited relative to North America? Just some comments on that, please.

Sure. Thanks, Tom. Yes, in terms of the restructure of the business development team, and I think it just reflects -- those 2 parts of the question probably go together to an extent. Certainly, we see a number of opportunities here in Australia, and we do be having our base here, we have a natural focus on some of those opportunities. But the reality is that the royalty and streaming sector is more mature in other parts of the world and North America, particularly. So we feel it's important that we have a presence in that part of the world -- sort of a presence in that time zone that enables us to both access some of those business development opportunities as well as be a bit closer to some of the capital markets in that part of the world. Hence, we now have Adam Davidson based out of Denver, and he's focused on leading our opportunities there. In terms of where this might go, I think there's always a little bit of tweaking potentially around the edges. But I think structurally, we're pretty close to where we'd like to be.

All right. Yes. No, that's clear. And then maybe just a quick follow-up. So just on the gold offtakes, they seem to be outperforming expectations. I think previously, you've mentioned you may consider divesting these. I mean what's the updated thinking there given the performance of those gold offtakes?

Yes. Obviously, we're very happy with how they've been performing since we own them. But as you say, we said at the time that we made the acquisition, they're not core. We're not a precious metals-focused business. So we'd certainly consider opportunities to divest those. We'd consider all options. And we're still very much in that state. If we find somebody or somebody approaches us who is prepared to pay more for them than we think they're worth to us, then clearly, we would be happy to divest those. That's another lever we would have from a capital management perspective. But to be clear, as we've spoken about this morning, they are generating good cash flows. And so we're not uncomfortable retaining those if that turns out to be the best option for us.

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

Can you maybe just explore that little -- the gold offtake comment a little bit more? I mean, actually, have you begun a process at all? Or you -- is it really more a case of you're just going to sit back and wait? Just trying to understand, is your intention to run a process or just if someone approaches you?

So we're exploring all options. We're not -- so we will certainly -- as I said, we're exploring all options in that regard.

Okay. But then, there's no process underway that's what you're saying at the moment.

Look, we'll certainly consider if it makes sense to run a process, we would do that. But at the moment, we're just exploring all options.

And then just the payout ratio, you picked the midpoint between 50% and 100%, which was good to see. And you gave a lot of explanation around how you came to that conclusion on the payout ratio. What about the thoughts around deleveraging the balance sheet a little bit more as well through equity, perhaps now that the transaction is behind us, so we can get back to a more elevated fulsome payout ratio? Or how are you thinking about the capital structure?

So as you say, we took a number of factors into account. The Board took a number of factors into account when making that decision, both looking to balance returns to shareholders with the strength of the balance sheet and the liquidity available to us. So in that regard, we're very comfortable with where the balance sheet is. As Jason said out in his comments, we don't feel under any kind of pressure with respect to the level of debt we have on the balance sheet. But we are keen to recycle that liquidity that we used in the Trident transaction. But the rate and the form in which we do that will really be driven by the opportunities that we see and the need for that liquidity. And as I said, always balanced with a desire to support returns to shareholders.