Deterra’s (ASX: DRR) first-half adjusted NPAT of $76 million is up 20% year over year, driven by higher iron ore volumes and prices at BHP’s Mining Area C. It declared a fully franked dividend of 12.4 cents per share, up 38% year over year, likely why shares have risen 4% since the announcement.

Why it matters: The result is tracking broadly in line with our full-year estimate, though the dividend is tracking higher given positive one-off items in the half, including the sale of its gold offtake portfolio and some precious metals royalties.

  • While the interim dividend represents a 75% payout in line with its target, it is based on statutory rather than adjusted NPAT. These one-off gains meant statutory NPAT was about 15% higher than adjusted NPAT in the half.
  • Due to its dependence on iron ore prices and volumes via its MAC royalty, which, absent a large acquisition, is likely to be the main driver of earnings for the foreseeable future, we keep our earnings and dividend estimates broadly unchanged for now.

The bottom line: We retain our $4.40 fair value estimate for wide-moat Deterra, with shares close to fairly valued.

Big picture: Given the dramatic recovery in lithium prices, its countercyclical purchase of the Thacker Pass royalty that came with the Trident acquisition appears sound. Thacker Pass is a potentially large, long-life lithium mine with options to extend and expand.

  • It also sensibly sold Trident’s gold offtakes and other precious metals royalties at good prices, given the elevated gold price.

Between the lines: We are willing to overlook corporate costs of around $8 million, up 27% on the first half of fiscal 2025 and higher than they should be, albeit relatively minor in the scheme of things, given the 93% EBITDA margin in the half.

  • We hope it continues to show discipline in considering further acquisitions, which we think are likely. Though its rare wide-moat MAC royalty is likely going to be very difficult for it to replicate.

Solid iron ore price and BHP MAC volumes see Deterra shares close to fairly valued

Deterra Royalties aims to grow into a diversified royalty company with multiple cash flows. The acquisition of Trident Royalties is likely the first of additional royalty and/or streaming purchases.

Despite the Trident acquisition, iron ore is likely to continue to drive earnings over our five-year forecast period. The royalty on BHP’s Mining Area C, or MAC, provides cash flow without exposure to capital or operating costs. The low historical cost for the royalty means returns are enviable. BHP expanded its capacity at MAC from 60 million metric tons of iron ore in 2019 to about 140 million metric tons through the development of its South Flank mine, with this expansion essentially complete by the end of June 2025. This benefits Deterra by increasing the royalty proportionally. It receives 1.232% of the Australian dollar value of iron ore sales revenue from the royalty area, FOB ex-Port Hedland. It also receives AUD 1 million capacity payments for each 1 million metric tons of annualized increase in production above the high-water mark.

The leases and operations supporting the MAC iron ore royalty are 85% owned by BHP, with minority shares owned by Japanese firms Itochu and Mitsui. North Flank has a mine life of about 30 years, and South Flank has 25 years. The royalty area also encompasses most of the Tandanya and Mudlark deposits, which represent future development options. BHP’s long-term strategy is to continue to produce iron ore from the MAC hub for at least 50 years.

It lacks control over exploration, life extensions, or development of new deposits, but BHP has a vested interest to maintain operations. Given North Flank and South Flank’s position around the bottom quartile of the cost curve, it is likely the mines remain operating in almost any likely iron ore price environment.

It is leveraged to China’s fixed-asset investment, with China accounting for about 75% of global traded iron ore demand. Long term, we see demand for steel in China declining as returns on fixed-asset investment worsen, scrap takes a growing share of new steel supply, and the stock of infrastructure and housing matures. We also expect supply to increase, led by Simandou and Vale.

Bulls say

  • Deterra has no exposure to operating or capital costs, which makes for a much lower-risk mining exposure.
  • While the Trident acquisition gives it some diversification, earnings are likely to be driven by the high-quality MAC royalty for the foreseeable future.
  • With the MAC royalty based on sales, Deterra has little to fear from cost inflation. If anything, it will benefit if inflation flows through to higher commodity prices.

Bears say

  • Chinese demand for iron ore is likely to wane as declining returns from fixed-asset investment necessitate a structural shift.
  • Iron ore supply is likely to grow and weigh on prices as Vale recovers and Simandou in Africa is developed.
  • The purchase of Trident Royalties and any additional new royalties or streaming arrangements are likely to dilute overall returns.

Get Morningstar insights in your inbox

Terms used in this article

Star Rating: Our one- to five-star ratings are guideposts to a broad audience and individuals must consider their own specific investment goals, risk tolerance, and several other factors. A five-star rating means our analysts think the current market price likely represents an excessively pessimistic outlook and that beyond fair risk-adjusted returns are likely over a long timeframe. A one-star rating means our analysts think the market is pricing in an excessively optimistic outlook, limiting upside potential and leaving the investor exposed to capital loss.

Fair Value: Morningstar’s Fair Value estimate results from a detailed projection of a company’s future cash flows, resulting from our analysts’ independent primary research. Price To Fair Value measures the current market price against estimated Fair Value. If a company’s stock trades at $100 and our analysts believe it is worth $200, the price to fair value ratio would be 0.5. A Price to Fair Value over 1 suggests the share is overvalued.

Moat Rating: An economic moat is a structural feature that allows a firm to sustain excess profits over a long period. Companies with a narrow moat are those we believe are more likely than not to sustain excess returns for at least a decade. For wide-moat companies, we have high confidence that excess returns will persist for 10 years and are likely to persist at least 20 years. To learn about finding different sources of moat, read this article by Mark LaMonica.