The Investment Case For Deterra Royalties

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This story features DETERRA ROYALTIES LIMITED, and other companies.
For more info SHARE ANALYSIS: DRR
The company is included in ASX200, ASX300 and ALL-ORDS

Morgans has initiated coverage of Deterra Royalties, highlighting the company’s defensive, reliable iron ore royalty stream and lithium upside.

• Deterra Royalties derives 95% of revenue from iron ore production
• Recently acquired Thacker Pass offers diversification and lithium upside
• Royalty streams are cost-free for Thacker
• Iron ore little impacted by Middle East conflict

By Greg Peel

Back in 1994, what we now know as BHP Group ((BHP)) owed deferred payments to a company called Consolidated Gold Fields Australia.

BHP decided to cover those payment obligations by restructuring into a deal whereby Consolidated Gold Fields would receive 1.232% of Australian denominated revenue as a royalty from BHP’s Mining Area C (MAC) in the Pilbara, plus a series of one-off payments of $1m per million tonne increase in the annual iron ore production level from the MAC Royalty Area during any 12 month period ending 30 June above the previous highest annual production level.

Consolidated Gold Fields would later morph into a company called Iluka Resources ((ILU)) which, in 2020, was a producer of mineral sands suffering from a weak period of global demand.

To raise funds, Iluka decided to spin off its MAC royalty stream into a separately listed entity called Deterra Royalties ((DRR)), of which Iluka retains 20% ownership.

Deterra would go on to pursue additional mining revenue streams across bulk, base and battery minerals, building a portfolio spanning 14 global assets across seven countries and five commodities.

The company also held a gold offtake asset but divested of that in September last year.

Despite a diversified portfolio, Deterra still derives around 95% of its revenue from MAC. Deterra collects its royalties from MAC without having to lift a finger or open its wallet.

BHP does the hard work and Deterra sits back and enjoys the spoils.

In 2024, Deterra acquired US-based Trident Royalties, which will collect a 1.05% royalty from the Thacker Pass lithium project in Nevada – North America’s largest lithium deposit, with an 85-year mine life and backing from General Motors.

That acquisition provides Deterra with genuine battery metals optionality, diversifying its revenue base beyond iron ore.

Defensive Shareholder Returns

Deterra reported its first half FY26 results in mid-February, which featured a -5-7% miss on consensus revenue and earnings. Macquarie nonetheless put the miss down as likely reflecting accounting of revenue from the aforementioned gold offtake asset divested in September.

The good news was Deterra announced an interim dividend of 12.4c that exceeded consensus expectation by 24% and represented a 75% payout ratio of profit, in line with the company’s policy.

At the result release, management suggested the payout ratio is likely to remain at 75%, rather than reverting to the 100% level previously paid.

Deterra’s gearing ratio came in at only 6%, within a target range of 0-15%, but the interim CEO hinted asset-level acquisitions within the next 12-18 months, with at least $300m of liquidity being kept as “dry powder”.

Meanwhile, MAC, notes Morgans, is a” generational asset”, with nameplate production capacity of 145m tonnes per annum and a 45-plus year mine life, operated by BHP, the world’s lowest-cost iron ore producer.

MAC’s record first half FY26 production of 72.6mt, up 6% year on year, is underpinning stable royalty cash flows regardless of commodity cycles.

Morgans notes Deterra remains profitable even if the price of iron ore were well below US$50/t (about half of where the price is currently).

The Middle East and Iron Ore

Deterra’s result release was followed at the end of February by Trump’s war on Iran.

In late March, UBS weighed up the ongoing impact on global commodities, noting mined commodities have also been impacted materially by the Middle East conflict, not just oil, gas and fertiliser which receive all the attention.

Copper pricing has weakened on growth concerns, UBS noted, while prices for gold and silver are weaker due to the stronger US dollar and higher interest rate expectations, while aluminium, thermal coal and iron ore have lifted due to Middle East disruption, potential gas-to-coal switching, and higher freight rates.

Were there to be a de-escalation of the war –-a ceasefire and the reopening of the Strait of Hormuz-– copper would rebound and aluminium and thermal coal prices would decline.

Iron ore is a more China-centric trade, UBS noted, with supply/demand less impacted by the conflict, albeit mining costs and freight are lifting with oil and gas. UBS did nevertheless expect iron ore and the diversified miners to have positive correlation to de-escalation and “risk-on”.

In a scenario of extended conflict –-more than two months— and higher energy prices, UBS saw more downside for copper pricing and copper equities versus further upside for aluminium/coal prices, though noted supply could be disrupted by physical shortages (eg diesel, acid, explosives).

UBS was optimistic, assuming de-escalation as its base case while admitting the situation remained “dynamic”. On that basis, UBS upgraded various miners to Buy from Neutral or Neutral from Sell. Deterra Royalties was included in the latter group.

We know now a ceasefire never really happened given Israel’s ongoing attacks on Lebanon, the Strait of Hormuz remains closed, peace talks between the US and Iran failed to reach any agreement, and Trump has now ordered a naval blockade of the Strait.

As to what the blockade entails is as yet unclear. China buys some 90% of Iran’s oil exports, and Iran has been allowing its own tankers to pass through the Strait unimpeded.

Will the US now block China’s oil supply?

Deterra Risks

Morgans calculates every US$10/t movement in the iron ore price affects around a 6% swing in Deterra’s earnings per share, given its heavy weighting to MAC. 

Morgans’  long term iron ore price assumption of US$85/t (spot currently above US$100/t) reflects maturing Chinese steel production and supply additions from Rio Tinto’s ((RIO)) massive Simandou project, partly offset by global cost inflation.

Deterra is currently trading at a -32-46% valuation discount to global mining royalty peers, which Morgans declares excessive.

Deterra’s current 93% earnings margin is 8-13 percentage points above these peers. Morgans sees scope for the discount to narrow from around -40% to -25-30% as Thacker Pass milestones are achieved (first production expected late 2027) and a permanent CEO is appointed.

Permanent CEO appointment is expected in the first half of this year. An M&A-focused hire could trigger PE multiple re-rating, Morgans suggests.

Morgans believes Deterra’s asymmetric risk/reward favours the long side. Downside is cushioned by near-zero opex, contracted BHP volumes, and a path to net cash by early FY29.

Upside crystallises via multiple re-rating as the peer discount narrows, Thacker Pass de-risks, and capital returns emerge. The royalty model offers a defensive iron ore exposure without individual mine/hub or cost risk.

Reaching net cash unlocks capital return optionality (buybacks/special dividends). Morgans also cites iron ore price resilience above US$100/t with supply disruptions, stronger-than expected Chinese demand, and rising cost support as upside risks.

Iron ore remains the greatest downside risk, given MAC provides 95% of Deterra’s revenue. Iron ore prices could decline as Simandou comes on line or if Chinese demand has peaked.

Thacker Pass offers execution risk, given it will deploy first-of-a-kind acid leach technology and is dependent on a loan from the US Department of Energy. Prolonged CEO vacancy could stall any M&A strategy and compress multiples.

Weighing up all of the above, Morgans has initiated coverage of Deterra Royalties with a Buy rating and $4.85 target price.

In the wake of Deterra’s result in February, Macquarie retained an Outperform rating with a target of $4.70.

A more circumspect UBS set a target of $3.95 when it upgraded to Neutral in March.

Also covering Deterra, but providing no update since late January/early February, are Morgan Stanley (Overweight; $4.75 target) and Ord Minnett (Hold; $4.60).

On current consensus forecasts, derived from the brokers mentioned, the shares are offering a forward-looking full-year dividend of 23c and 22.2c respectively for FY26 (final payout later in the year) and FY27.

These forecast payouts translate into yields of respectively 5.6% and 5.4% on yesterday’s closing share price of $4.12.

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