Thank you. Good morning, welcome to Deterra Royalties' full year FY23 results call. I'm Julian Andrews, MD and CEO of Deterra, and I'm joined today by Brendan Ryan, our Chief Financial Officer. I'll begin with some introductory remarks touching on the highlights of the year, and then Brendan will provide a review of our financial results. Following that, I'll provide some comments on our approach to growth and the outlook in that regard, and then we'll hand back to the operator and open the line for questions. It's been another year of strong performance for Deterra. Our assets continue to perform well.
At BHP's Mining Area C, or MAC, production volumes were up once again to a record level of 126 million wet metric tonnes, as the South Flank expansion continues to ramp up to its stated full capacity of 145 million wet tonnes a year. We also saw volume growth from our royalty at the Doral's Yalyalup mine, as it reached full capacity of approximately 100,000 tonnes a year of heavy mineral concentrate. Although it's not material in the context of MAC, it is another illustration of the optional value of royalties and the ability to participate in extension or expansion of a mine at no additional cost.
Full year revenues were just over AUD 229 million, which, given the nature of the business model and the high margins it can support, flows through to a net profit after tax of AUD 152.5 million. Brendan will talk to these results in more detail shortly, but I will note that although total revenues were down 14% on FY22, this was largely due to a reduced one-off capacity payment from Mining Area C as South Flank approaches completion. The value of this expansion was once again evident, as the growth in volumes largely offset softer realized iron ore pricing. Which, along with an increase in mineral sands royalty revenue, resulted in a net 2% decline in revenue-based royalty revenues.
The board has declared a final year dividend of AUD 0.1685 per share, fully franked, bringing the total dividends paid and declared since listing to over AUD 400 million. We continue to build the platform for investment and growth. We're seeing an increase in opportunities and have continued to build the capacity and experience of our business development team. Also, today, we've announced that we expanded one of our credit facilities by AUD 150 million to bring our total available facilities to AUD 500 million. We also saw us strengthen our board with the addition of Jason Neal last November. Jason brings very deep experience and networks in mining and metals in North America and globally, and we're very pleased to have him join the company.
With that, I'll hand over to Brendan, who will take you through the financial results in more detail.
Thanks, Julian. Good morning, everyone. My task today is yet again, another fairly easy one, given the relatively clean and simple set of results. If we can first turn to slide number 5, so I can address the financial highlights for FY23. As you can see, total group revenue for the period amounts to AUD 229 million. This amount includes MAC royalty revenue of AUD 215 million, the MAC capacity payment of AUD 13 million, plus circa AUD 1.1 million in revenue from our two smaller Western Australian mineral sands royalties. This AUD 229 million in revenue delivered a healthy AUD 219 million in EBITDA for FY23. This represents an EBITDA margin of 96% and clearly demonstrates the low overhead structures of the royalty business model.
Finally, this resulted in both NPAT and dividends for FY23 of AUD 152.5 million. Based on this result, the board have declared a fully franked dividend of AUD 0.1685 per share. In combination with the interim dividend of AUD 0.12 per share, this equates to a full year dividend of AUD 0.2885 per share, fully franked. Moving to slide 6, I would quickly like to discuss the performance of Mining Area C. Overall, you can see from the yellow line on the chart, the continued ramp up of BHP's AUD 3.6 billion South Flank expansion. BHP has recently confirmed that South Flank's ramp up to full capacity remains on schedule, with full run rates expected by the end of FY24.
Despite the improved operating performance across Mining Area C, including a 14% increase in sales volumes to 118 million tons, unfortunately, this has been offset by an almost equal and offset 15% decrease in year-on-year received price. The combined outcome of offsetting volume and price has resulted in royalty receipts being down 2% year-on-year to AUD 215 million. In FY23, this royalty revenue was supplemented with an AUD 13 million annual one-off capacity payment. As a reminder, the capacity payments are paid in increments of AUD 1 million for every 1 million tonnes per annum increase in mine production. The capacity payment is calculated at 30th of June and paid annually at the end of each financial year.
This AUD 13 million capacity payment for FY23 is down from the record AUD 46 million reported in FY22. Whilst we anticipate ongoing capacity payments from South Flank as it continues to ramp up to full capacity, we naturally anticipate the size of these annual incremental payments to reduce. On slide 7, I would like to briefly highlight the growth of the MAC asset over the past two decades. From this chart, you can clearly see the original ramp-up of the North Flank from 2004, with a more gradual capacity creep from 30 million-59 million tons post-2008.
Plus, a more recent and rapid ramp-up of the 80 million tons South Flank, South Flank expansion commencing FY22. At full nameplate capacity of 145 million tons, MAC will represent the single largest iron ore hub in the world, accounting for roughly 8% of global seaborne iron ore. Interestingly, MAC has increased output in 17 of the last 20 years, paying out AUD 113 million in capacity payments since 2004. The capacity payment received in FY23 was AUD 13 million, and the capacity payment threshold has now also been rebased from 105 million tons to 118 million tons. On slide 8, we have tried to reflect the simplified illustration of the P&L.
What this slide demonstrates is the lean cost structure and transparency of the cash flows distributed to shareholders. On the revenue side, as discussed earlier, we show the 3 sources of cash that contribute to the AUD 229 million. On the right-hand side of the chart, we show the distribution of these cash flows. Total costs for FY23 were AUD 10.3 million. Of this, AUD 8.5 million relates to the normal ongoing operating expenses, reflecting the inflation-resistant nature of the royalty business model versus producers. We also specifically call out in our accounts, the AUD 1.4 million in one-off BD project related costs. This reflects the changed markets and materially increased BD activity in FY23. The remainder of the AUD 10.3 million in cost relates to the AUD 0.4 million in D&A.
Deterra also incurred AUD 1.2 million in net financing costs associated with our existing AUD 350 million in bilateral credit facilities. Tax expenses of AUD 65.3 million reflect an effective tax rate of close to 30%, and this all results in net profit after tax of AUD 152.5 million for the full year period. Now, turning to slide 9. As you'll see from this chart, in H2, the board declared a final dividend of AUD 89.1 million. This builds on the H1 interim dividend of AUD 63.4 million, giving a full year dividend payout of AUD 152.5 million, or AUD 0.2885 per share, representing 100% of NPAT for full year 2023.
In terms of our capital management, you'll note that we continue to demonstrate discipline in terms of shareholder returns, although recognize the intent to invest in growth. In so, return surplus cash to shareholders if not required for new investments or balance sheet management. We also note today's dividend represents a cumulative AUD 400 million return to shareholders since the merger in FY21. Secondly, we intend to optimize the use of debt. You'll note that we have also announced today, an increase in our credit limits from AUD 350 million to AUD 500 million. We achieved this by upsizing our existing four-year bilateral credit facility due in February 2026, with no change to existing terms or margin.
The increased capacity specifically provides Deterra with increased liquidity as market demand for relative funding improves, plus increased flexibility in managing the existing AUD 175 million coming due in February 2025. We also re- reiterate our intent to maintain target leverage within a range of 0%-15% of enterprise value. This leverage ratio reflects the desire to maintain a strong balance sheet and protect the option to act flexibly when value creative opportunities arise. Hopefully, you'll recognize from these slides, we've worked hard to deliver upon our commitments of, 1, operating a lean corporate structure. Secondly, maintaining conservative and flexible balance sheet. Lastly, maximizing return of available surplus cash flows. The simplicity and scalability of the Deterra business model is unique on the ASX, and our small team will continue to work hard to deliver maximum value to our shareholders.
With that, Julian, I'll pass it back to you.
Thank you, Grantin. Turning to slide 11. As I noted in my introduction, our existing assets continue to provide organic volume growth, and there's still some further growth to come in the short term from South Flank, as it continues to build to its nameplate capacity over the next year. As we've consistently said, we believe there's an opportunity to generate value by adding additional sources of earnings, optionality, and growth to the portfolio. We're well placed to do this. We have a high quality foundational asset in the Mining Area C royalty. We have a level of liquidity that supports our ability to invest and differentiates us from our non-precious peers. We have a focus on what we believe is a less competitive niche, namely higher level investments outside of precious metals.
As you can see from the diagram on the left side of this slide, in our estimation, the precious metals space is well served by a number of existing listed royalty companies and streams. There are also a number of smaller players with a non-precious focus. As a result, we see opportunity in the non-precious metal space at a larger scale, and that's what we're targeting. That being said, this is still a very competitive market, particularly given the presence of other capital providers and forms of capital. There's no change in our focus. It remains on commodities other than precious metals, where we believe we can compete effectively. In particular, bulk metals, including iron ore and fertilizers, and base metals such as copper, nickel, and zinc. We're seeing more opportunities in the energy transition metals like cobalt, lithium, and rare earths. Turning now to slide 12.
At the half year, I referred to the softening we've seen in broader economic and capital market conditions, and our belief that this would lead to an increase in the number and quality of growth opportunities for the company. This has proved to be the case, and although no new investments were made in FY23. Our pipeline is as active as it has ever been, with the number of opportunities under consideration at all stages of review. As we show in this chart, the chart on this slide, the number of opportunities we've seen has doubled over the past year, with almost all of that growth coming in primary opportunities. You can also see from the pie charts on the right, the large majority of opportunities fall within our target investment parameters.
It's worth noting again at this point, that we see discipline as a fundamental part of our investment decision making, and our observations over the past couple of years has reinforced our belief in the importance of investing in the right opportunities at the right time. We believe that our patience and discipline will be rewarded as capital and resource markets move in a direction that is more conducive to royalty and streaming funding. Our ability to act quickly on value-accretive opportunities as they arise is key to our growth strategy, and we continue to strengthen our capacity in that regard, both in terms of access to capital through the expansion of our debt facilities and continuing investment in our team's capability to review and execute on these opportunities, which we expect to continue into FY24.
Brendan touched on our capital management framework earlier. As we move into a more prospective period, it's worth spending a little more time on it and see how it applies with respect to funding potential growth opportunities. Our framework, as with most companies, is built around balancing returns to shareholders with the need to invest in growth. As a provider of capital or investor in secondary royalties, liquidity is critical to the success of our business model. We need to be able to invest as we see good opportunities through the cycle, and particularly when other sources of capital are less available. We've put in place credit facilities that provide us with that liquidity. Today, as Brendan mentioned, we've announced we've increased these facilities to a total of AUD 500 million on existing terms.
We have found this liquidity to be an important differentiator for our business when talking to potential counterparties, particularly about primary royalties. They value our ability to be fund serving. That being said, if we're to retain our ability to continue to invest, we need to recycle that liquidity. Debt can be very important to support investment, and we'd anticipate it'll be used from time to time, as Brendan touched on. The model is not to leverage the business to any great degree for any meaningful length of time. We have a target leverage ratio somewhere between 0% and 15% enterprise value. At present, given we've not drawn on our facilities to fund investment to date, we remain net cash. With respect to cash allocation, to date, we've returned more than AUD 400 million to shareholders.
This approach may evolve in the future as we move into a period of growth. In particular, we highlight the discretion the board has to adjust the payout ratio, and that if we're to grow and minimize dilution to shareholders, some retention of earnings may be required. Moving now to slide 14. With respect to ESG, we've continued our development on a number of fronts. In terms of community involvement, earlier this year, we announced that we had entered into a partnership with the Earbus Foundation of WA, to help provide important healthcare support to the communities of the Central Pilbara. This is a very worthwhile service, and we're very proud to be associated with it. We've also once again achieved a net zero operational emissions footprint. As I noted a bit earlier, we've strengthened our board and committee memberships through the addition of Jason Neal.
In closing, it's a very straightforward set of results once again, as you'd expect from a very simple and transparent business. The assets are performing well, generating volume growth and cash flow, and we're very active in assessing opportunities to build growth and the capacity to execute on them. We believe we're entering into a prospective period and have invested in the capacity to execute on these opportunities as they arise. Thank you. With that, we will be happy to take any questions.
Thank you. Ladies and gentlemen, as a reminder, to ask the question, please press star 11 on your telephone and then wait to hear your name announced. To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Robert Stein with CLSA. Your line is open.
Hi, Julian. Hi, team. Just a quick, couple of quick ones from me. Looking at the comments, you know, the board will exercise discretion. In previous sort of presentations, that's been a footnote size eight text. Now it's sort of making its way into the main pack. Just wanted to get an understanding of how, how robust that process is to assess whether that royalty doesn't just get passed straight through to investors, given that that's a key attraction to invest in the stock. I've got a follow-up, please. Thank you.
Sure. Thanks. Thanks, Rob. As you say, I think, you know, that, that discretion obviously is a consistent point. In terms of the process that, you know, as, as you'd expect, it's obviously a very robust process that the board goes through in terms of assessing the position of the company, the, the balance sheet, and the, the outlook in the, the short to medium terms in, with respect to requirements for that cash. Clearly, over the period since listing, we've been in a, in a position where the, you know, we, we weren't able to provide those, those funds back to shareholders, as we weren't actively, you know, we weren't using those funds for investments at the time.
Effectively, it's, it's just, as we move into a period of growth, it's, it's just opportune, I think, to, to, to note once again, that, you know, we will be making that or the board will be making that decision on the allocation of, of cash on its merits, as appropriate each, each period.
Sorry, a bit of a follow-up then, you know, just on growth. We've, we've sort of had the same conversation 2 years running, and I understand markets are volatile, and, you know, you're looking for particular points of entry. In terms of, you know, how that relates to the cycle, are you, you know, is it too soon to strike for distressed assets? Are we, you know? Similarly, how, how do, how do you sort of balance that with trying to justify, you know, what is a, a quite a large corporate overhead, considering it's a pretty simple business model? How do you, how do you, how do you balance that tension?
Yeah, sure. I mean, I guess I would note that, you know, we do have. We think it's a relatively lean business model. I think that, yeah, we are, in terms of the investment we have in the team, we're, you know, there are elements associated with the listing, and clearly, you know, we have quite a focus on the growth opportunities as well. In terms of sort of where we are in the cycle, I think, you know, it's pretty clear that for the first couple of years since listing, it was a very lean environment in terms of opportunities.
Debt was, was very cheap, and, and equity was, was very abundant, so there wasn't a lot of room or, or demand for other forms of financing, such as streams and, and royalties. We have seen, certainly over the past sort of 9 to 12 months, a, a material increase in the level of interest in the funding that we can offer. You know, we are, you know, we are prepared. You know, we have been actively reviewing those, and we've been investing in our capacity to be able to review those opportunities and to, to execute on them as, as we see the appropriate opportunities.
Yep. No, Robert Stein, listen, I think, I think, you know, I'd like to think that we are pretty frugal here at Deterra. We don't sort of waste money. Particularly in the early years, you know, there weren't that many opportunities, and we kept our overhead low, in, you know, incredibly low. As we've-- as the market has turned, particularly since last October, where debt finally had a price versus, you know, debt being free and equity readily available, we have, we have ramped up our capacity internally to sort of, to match the market conditions, you know, and, we think that we're probably the more stable sort of point now. You know, understand your point about we do actively manage our operating costs, and, we try to match them very much to the opportunity set that's out there.
Yeah, sorry. It's not really a comment on the sort of cost level of the business, but it's more so, you know, if I, I think about this as an alternative investment, as a passive royalty stream, you know, the alternative is you run it like an ETF and there's 0 cost versus, you know, what is the cost that investors are bearing to grow and when we're not seeing an outcome of that. That was more so the point that I was trying to make. You know, obviously, we're entering a period in the cycle where potentially it may be finite, a small window that might present itself, but I'm just sort of wondering, you know, if we are unsuccessful during that period, you know, how long do we have to wait for the next period to emerge?
How do you, how do you keep things ticking on in, in that process?
Yeah, look, certainly we, you know, your, your point is absolutely right. As we, as we, look at the cycle, we see that we are moving into a period where, you know, we are seeing more and better quality opportunities, and we're certainly focused on, on pursuing those. I think, you know, clearly, we've talked, I think, right from the beginning about being patient and being disciplined, and, you know, that's the case. That, you know, we, we recognize that, you know, making the right investment is, is much about making the right investment at the right time. We, you know, we believe that we're facing into that now. We have, we've invested in our capacity to, to execute on those as, as we see those coming.
I think, you know, it's sort of, you know, people are looking for a proof of concept. You know, I think one of the proof concepts is we have deliberately not done a bad deal when the markets weren't there for us. You know, we've been patient. It's, it's fairly easy to do a bad deal, and we could probably do that one tomorrow if we wanted to, but we don't want to do that. We actually. It's a lot harder to do a good deal, and we're very focused on sort of making sure that the opportunities that we see and the way that we assess them, sort of create value for our shareholders.
You know, you need to, you need to make sure that there is a good deal, a good asset with a good deal, at play to make sure we can execute.
No problems. I'll pass it on. Thank you very much.
Thanks, Rob.
Thank you. Please stand by for our next question. Our next question comes from the line of Glenn Lackock with Barrenjoey. Your line is open.
Good morning, Julian. Maybe you could just add a little bit more meat on the bone to the question before. Can you give us any feedback on why you've missed out, perhaps? Or have you not even gone to a final round bid and missed out? Curious how far you've actually gone down the pipe and whether or not the vendor has actually given you feedback on why perhaps you missed out, if you got that far.
... Yeah, certainly, Glenn. To, you know, we have, we have looked at a lot of opportunities, and some of them, you know, clearly we, we've been able to, to pass on relatively quickly. But, you know, to be clear, we, we have taken a number of opportunities to, to quite a, quite an advanced level. Yeah, I think, the, I, I, I'm always cautious about talking about missing out. I think that, you know, it's important. We've seen some good opportunities, but, you know, an important part of the opportunities is the price at which you're able to, to access them. When we look back, as we do, you know, we, we do look back on, on opportunities that, that have completed in the market that, that obviously we weren't part of.
You know, there are, there are, you know, a number where we've seen good opportunities, but we just haven't, we haven't been able to support the level of value that perhaps others had to to get a deal done. I think, you know, there's a number of factors behind that. I think that we, you know, we're in a slightly different position to some of our competitors in the sense that, you know, we have, we have some, we have some good organic growth, and we have some good cash flows. We're not in a position where we feel we need to invest for strategic reasons. We, we remain focused on, on value. You know, we, we certainly learn. You know, we're a new company. We, we were listed three years ago, a little sorry, a little under three years ago.
You know, we've, we've been, we've been active, and we've also been very active at, at, at learning from our experiences we have.
Yeah. No, look, I think, Glenn, I think, you know, our first sort of, our first sort of, lens is, you know, is quality and size. We need to make sure the assets we're looking at are quality and size. There's not a lot of, you know, great assets that come by, you know, in the size that we talk about. When we see those, we, we are active in those processes, and that can be either quality, size of an individual asset or more maybe a portfolio. We've been active in, in several processes, you know, through to, through to sort of, you know, the, the latter round. You know, the, the other, obviously, the other one comes down to value. It's easy to do a bad deal than it is to do a good deal.
We've, we've, we obviously sort of, do a lot of work on where we see the value in terms of both the underlying value and the optionality of the asset. And, you know, there's obviously difference in views, potentially in some of these assets of, of what we think versus what some of our competitors think.
No, I appreciate that. I guess I was just curious to understand, if you got through to the very end of the process on anything at all, where, you know, you were maybe shortlisted down to the last couple or three and you'd missed out? Because I'm just curious how far we're actually getting down the-
Yes.
pipeline of the path.
Yeah. To be clear, Glenn, we certainly have. We've taken some processes, you know, as I said, to pretty advanced stage. As you'd expect, you know, given, given the way the business is set up and the mandate that we have. I think the other point I'd make is, you know, there are situations where we've seen deals close at prices that we, you know, we won't at, frankly. We've also seen a couple of examples where we've looked closely at assets, and those processes haven't closed because there's been a, you know, bid-ask spread with the vendor, I think, and the broader marketplace as well.
Generally speaking, the larger, the better quality asset, the better, you know, more competitive we are because we have the, sort of, the financial sort of capacity to do some of the bigger deals and there's less competition. We're generally sort of in the final, you know, we're close to be in the final round for the best quality assets than we are in the smaller ones. There's a lot of smaller players who are actually actively sort of bidding for the sake of growth as opposed to the sake of value.
All right. Look, I don't want to nitpick, but just on the increased cost of the increased facility, is that gonna cost the shareholders more than the AUD 2.5 million it cost us last year?
Yes, it will. Money's not free. Listen, we have a highly competitive rate. I think the total increasing maximum, sorry, the minimum increase in costs will be AUD 0.9 million, of which, you know, there, there's some cash and non-cash costs in that in terms of sort of the commitment fee and establishment fee. Annually, you know, you add AUD 0.9 more.
AUD 0.9 more. Then just the 12% increase in operating expenses, which included a 20% increase in employee benefits, and that's excluding your BD spend, was AUD 8.5 in 2022. With your comments in the presentation, that you're, you're staffing up your team, where does that now sit for 2024?
As, as we, as we spoke to, we, you know, we, we have, we have invested more in the team, particularly in the business development side of the business, in improving our sort of technical capacity to, to improve deals and, to also our ability to execute. You know, we would expect to see some further, some further investment over the course of next year as well.
Yeah. We, we run a very lean team, Glenn, with, you know, a handful of people. What we're trying to balance out is, you know, we deliberately have small fixed costs and, you know, and larger, variable costs. What we're trying to balance is the optimal mix between that fixed and variable, because, you know, the external costs can be quite expensive. We use them where they're appropriate, but we need to get the right balance so that we're, you know, optimizing that cost spend.
Yeah, but the BD was external.
Correct.
addition to the 8.5. Does the 8.5 gap up another, what, 10, 10+% again in 2024?
Yeah.
Look, I, I'm not sure we, we give guidance, but certainly, you know, I think that we would, as I said, we'd expect to increase our investment in, in the team. As you say, that, that business development cost is more a variable cost and is driven by activity. As, as we get busier, we would, we would expect to incur more of that, that variable cost as well.
slide 12.
Okay.
highlights, it highlights the sort of, the increase in activity that we're seeing and, and the, and the fact that sort of activity has increased by, you know, it's doubled, but we've actually only increased our, our cost by a little bit, is sort of testament to the type of model we're trying to run.
Yeah. Hey, look, Julian, just if I could just steal one more question in. I know you've avoided coal in the past, but I mean, I think it's becoming more and more, I guess, accepted that coal is needed for the energy transition, particularly met coal into steelmaking for, for a number of years and maybe even thermal, you know, good quality, but they're finding it harder to get funding now. You know, is that something you, you're reconsidering as a company or still coal very much off the table?
No, Glenn, quickly, coal is, is still off the table for us. You know, I think in our, in terms of our, ESG and investing guidelines, you know, we, we certainly are not looking to target coal investments. We don't, you know, We, we, we don't make a distinction between met and thermal coal in that regard. No, we're certainly not looking to, to target coal.
Okay. Thanks very much.
Thank you. Thank you. That's a really ladies and gentlemen, that's our well on time. I'm showing no further questions in the queue. I will now like to turn the call back to Julian for closing remarks.
Great. Well, thank you. Thank you very much for, for joining us this morning, and, we, we look forward to your continued interest in the company. Thank you.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.