A 10% dividend in two years? No risk revenue from BHP? How can such a thing exist?
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There is an ASX-listed business that generates returns while hardly spending a cent.
Two fund managers this week pointed out how the remarkable revenue model of Deterra Royalties Ltd (ASX: DRR) is worth considering as a long-term investment.
Although the ASX has always been very resources-heavy, it has surprisingly not encountered many mining royalties companies like Deterra.
In fact, according to TMS Capital portfolio manager Ben Clark, it is “the first pure play mining royalties company” to trade in Australia.
“Deterra’s cornerstone asset is 80% of a royalty stream owned since 1994 over Mining Area C (MAC) — an enormous block of land in WA that contains the MAC iron ore mine being mined by BHP Group Ltd (ASX: BHP),” he posted on Livewire.
Clark said Deterra earns money from two sources: 1.232% of revenue from the royalty area and a one-off $1 million payment for each 1 million tonne increase in annual production.
BHP is set to expand production at this site in the next few years, which would appear to bode well for Deterra.
Perpetual head of equities Paul Skamvougeras reckons it’s “the best royalty that you can own globally and one of the highest quality“.
“Reasons being, its mine life is probably 50 years — if not more,” he told a Livewire video.
“In terms of counterparty risk — your counterparty is BHP, that’s who you’re hoping will pay you. We think that they can meet those obligations.”
But here’s the extraordinary thing. Deterra doesn’t need to put in any capital to keep receiving this recurring revenue.
‘This is unheard of’: 500% return on equity
Deterra’s financials are “unique”, according to Clark.
“In the first half of the financial year, the company reported underlying EBITDA of $47.8m at a phenomenal EBITDA margin of 97%,” he said.
“This is unheard of and reflects the fact that there is virtually no cost to the company in earning this revenue, BHP takes on all the risk and capital spend required. The company’s ROE is over 500%.”
In Skamvougeras’ opinion, the money would keep flowing in regardless of the iron ore price.
“It doesn’t matter whether iron ore is US$220 or US$25, the production from BHP is going to keep coming out because they’re very, very low on the cost curve,” he said.
“And there’s no capital to spend, so the royalty owner doesn’t have to spend any capital, increasing production.”
After analysing other royalty companies around the world, Clark’s convinced Deterra is one of the best.
“Using a relatively conservative 2023 iron ore price assumption, the company could pay a dividend well in excess of 10%,” he said.
“Quality royalty streams are tightly held, and few come to market.”
The Deterra share price has actually sunk by around 10% since the start of the year. It lost 4.64% on Friday to stop trade at $4.32.
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Tony Yoo as no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.