ASX:DRR
Deterra Royalties Ltd
Investment Summary
The fund managers believe that the recent acquisition of Trident Royalties by Deterra Royalties Ltd, although met with a 14% decline in share price, represents a strategic move. In their opinion, acquiring Trident for A$276m adds diversification beyond iron ore and enhances growth potential through exposure to a variety of metals, including lithium and gold. The acquisition, which comprises 21 royalty agreements, could see Trident's revenues grow from US$11m to more than US$40m in the medium term, significantly impacting Deterra's financial profile. While Deterra has cut its payout ratio to 50% of NPAT from 100% to safeguard the balance sheet, this decision, alongside currently weakened iron ore prices, may have led to excessive negative sentiment around the stock. Thus, they see the current share price of $4.01 as a favorable entry point, with the company trading at 9x EBIT.
Commentary From The Managers
Spheria Asset Management
30 June 2024
$4.01
- Deterra Royalties (DRR.ASX) share price fell 14% in June after announcing the acquisition of Trident Royalties.
- Deterra has agreed to acquire 100% of Trident Royalties for 49p per share, totaling ~£144m (A$276m).
- Trident operates as a diversified mining royalty and streaming company based in the UK.
- Trident's portfolio includes 21 royalty agreements across various metals, including lithium, gold, silver, copper, zinc, mineral sands, and iron ore.
- 60% of Trident’s assets are located in Canada, the US, or Australia.
- Trident generated US$11m in royalty and offtake revenues in FY23, with growth potential exceeding US$40m.
- The key growth asset is a 1.05% revenue royalty over the Thacker Pass lithium project.
- The acquisition diversifies Deterra's royalties away from iron ore, enhancing growth potential beyond BHP's Mining Area C (MAC) asset.
- To protect the balance sheet, Deterra has cut its payout ratio to a minimum of 50% of NPAT, down from 100%.
- This conservative approach, coupled with the cut in dividend yield and recent weakness in iron ore prices, is seen as resulting in an overreaction in share price.
- According to Spheria Asset Management, this creates a favorable buying opportunity with the business trading at 9x EBIT.
Please note: The completeness, accuracy or current status of the investments referenced are not guaranteed.