As soon as Western Australia’s borders re-opened post COVID, Perth-based Deterra Royalties’ management team hit the road educating the market about the different exposure it offers mining investors. The business was demerged from Iluka Resources and floated at the pandemic’s height in November 2020. So early 2022 was the first opportunity managing director Julian Andrews and his team had to talk to investors and analysts face-to-face.
The first royalty company with scale to list on ASX, Deterra’s investment model is well known to US and Canadian investors. It has become commonplace for investors in these markets to take royalties or revenue streams over various minerals and metals. But until now it has not been a well-known concept in Australia.
“Our challenge over the past few years has been talking to our investors about our new investment model. Our fundamental premise is about giving investors exposure to the resources and mining sector, with a qualitatively different risk profile than they can get through either taking equity in miners or investing directly in the underlying commodity,” says Andrews.
“Our business model is about building a portfolio of royalties and revenue streams. Investors effectively receive a financial interest in a mining operation, to which we provide funds for a purpose, such as the development of a mine. In exchange, investors are entitled to receive a percentage of revenues or a form of adjusted revenues,” he explains.
Deterra Royalties was spun out of Iluka Resources after the latter collected a small portfolio of royalty interests over time, not so much as a conscious strategy, but as a biproduct of its mining activities.
In particular, Iluka held a large royalty over one of BHP's iron ore operations in the Pilbara, Mining Area C, for which it was entitled to 1.232 per cent of revenues. The royalty generated substantial funds and BHP was in the process of expanding the operation, only increasing the royalty’s value. It’s also worth noting a royalty investment comes with a significant option. This is because if a mining operation is expanded or has its life extended, investors participate without needing to contribute extra capital.
Presently, the Deterra management team is pursuing opportunities to further build the business by adding investments to the existing portfolio, of which the Mining Area C royalty is by far and away the largest asset.
“We are focused on adding additional earnings and diversification to the portfolio. For instance, we can act as a funding source for miners for expansion of a mine or for M&A activity, in exchange for a future royalty over the operation,” says Andrews.
There's also a relatively active market for trading existing royalties, another opportunity for the business.
“We have a broad mandate in terms of commodities, and although our current exposure is more to bulk given our iron ore royalty, we are also focused on base metals and increasingly, we are seeing opportunities in battery metals,” he adds.
Financial instruments attached to a royalty stream can be highly tailored to the needs of the counterparty. So the business spends quite a bit of time thinking about ways to develop its offer.
“Australia’s capital markets, both debt and equity, have always been very supportive of the mining sector. But as capital market conditions change, the level of investor support and appetite can wax and wane,” says Andrews.
“We’re developing a niche, a brand and, more broadly, royalties and streams that may be a useful part of a funding stack. So, our focus is around market understanding and making sure we're able to offer a funding product that meets the mining community’s needs,” he adds.
Deterra inherited a very large shareholder base as part of the demerger from Iluka. But, over time the register has evolved, in part as a result of the post-pandemic focus on investor relations.
“When travel opened up, we took every opportunity to talk to local and global investors, the industry and analysts. This built the brand’s profile, from an investor and business development perspective, in terms of identifying opportunities. Now, our Investor Relations (IR) program is starting to normalise,” says Andrews.
As a relatively young company, Deterra – which has a history of paying dividends – always looks to improve its IR program. “We have worked hard to get good engagement with the investment community,” he says.
Ultimately, Andrews says what’s most exciting is the ability to bring a new investment model to Australia. “It has been very successful in other parts of the world. Some Canadian companies have built very successful businesses from what is a fairly simple concept, which is to provide funding to miners in a way that offers a qualitatively-different risk profile achieved through equities. It's an opportunity to really add some growth without adding too much by way of complexity.”