Thank you. Good morning, and welcome to Deterra Royalties' financial year 2022 results call. I'm Julian Andrews, MD and CEO of Deterra, and I'm joined today by Brendan Ryan, our chief financial officer, and Matthew Schembri, who heads our investor relations. I'll begin with some introductory remarks, 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. I'll start with an overview of the business highlights. FY 2022 has truly been a year of organic growth for Deterra. We've reported record revenues, AUD 265 million, up 83% on prior comparable period, on the strength of the royalty we hold over BHP's Mining Area C mine, or MAC.
MAC had an outstanding year, producing 111 million wet metric tons, an increase of 80% on the prior year, as the South Flank expansion continued its ramp up to full production. The expansion is now ahead of schedule, and BHP is to be commended for its impressive execution of this $3.6 billion U.S. dollar capital project, which will grow Mining Area C into the world's largest iron ore operation. We benefit from this volume growth, both from our exposure to top-line revenue, our royalty revenue increased 54% to AUD 219 million, notwithstanding some softening in the pricing on the prior period, and from a capacity payment, which this year was AUD 46 million. We have also been positioning the business for further growth through opportunities to add to our portfolio.
We've evaluated a large number of potential acquisitions and investments, although value has been difficult to identify in the market conditions that prevailed for much of the year. However, we do believe the markets are shifting in a direction that will create more opportunities for our business as miners and developers look beyond traditional debt and equity markets for additional sources of capital. The liquidity we have from the AUD 350 million facility we put in place earlier this year provides the flexibility and capacity to act opportunistically.
In keeping with our approach to prioritizing shareholder returns, the directors have declared a fully franked dividend of AUD 0.2208 per share, which, combined with the AUD 0.1168 per share interim dividend paid in March, brings the total dividend for FY2022 to AUD 0.3376 per share, fully franked, which is equal to 100% of net profit after tax. When we listed in 2020, I spoke about bringing a new investment proposition and way to invest in the resources sector to the ASX, one that offers high margins and strong visibility on earnings, cash flow, and dividends without the same exposure to operational margins and capital risk as traditional miners. This remains the case and is very much evident in our results today.
We have what we believe to be one of the highest quality public royalties globally that provides top-line exposure to a world-class iron ore operation. The business model is scalable and can generate very high margins as revenues increase on a fixed cost base, which is illustrated in the EBITDA margins we've reported. We have a focus on returning earnings to shareholders, again evident in the dividend we've announced today. We have substantial organic growth and a focus on value-accretive investment, and we have a focus on ESG, both in our investment processes and our everyday operations, as demonstrated by our achievement of our commitment to net zero direct emissions. Another important element of the model that is becoming more and more relevant is its inflation protection. We've seen increasing commentary on cost pressures in the mining sector, be they in labor or other supply chains.
More recently, we've seen these being factored into cost guidance. It's worth making the point, and it's one that I think bears repeating, that our revenue royalty payments are not impacted by any changes in operating margins driven by cost inflation. In fact, to the extent they are reflected in pricing, we're leveraged to those factors as any increase will be reflected in our royalty receipts. 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 is fairly easy given the clean and simple nature of these results. If you can turn to slide 8 so I can address the financial highlights for FY 2022. As you can see, total group revenue for the period amounts to AUD 265 million. This includes MAC royalty revenue of AUD 219 million, MAC capacity payment of AUD 46 million, plus circa AUD 400 thousand in revenues from our two smaller Western Australian mineral sands royalties. This AUD 265 million in revenue delivered a healthy AUD 257 million in earnings for the period. This represents an EBITDA margin of 97%, driven by the small team and low overhead cost structure of the royalty business model, as discussed by Julian.
Finally, this resulted in both record NPAT and dividends for financial year 2022 of AUD 178 million. Based on this result, the board have declared a fully franked final dividend of AUD 0.2208 per share. In combination with the interim dividend, this equates to a full year dividend of AUD 0.3376 per share, which is equal to 100% of net profit after tax. Moving to slide 9, I'd quickly like to discuss the performance of Mining Area C. Overall, you can see from the yellow line on the chart the significant ramp up at MAC. The ramp up over the past six months result in record sales volumes delivered by MAC in FY 2022, including setting four consecutive quarterly sales records.
Accordingly, BHP recently announced that South Flank's ramp up to a full capacity of 80 million wet metric tons per annum is ahead of schedule with an average rate of 67 million wet metric tons per annum achieved in the June 2022 quarter. Based primarily on these record sales volumes, total MAC royalty revenue for financial year 2022 was AUD 219 million, and this was supplemented with the AUD 46 million annual one-off capacity payment, which is now being rebased from 59 million tons to 105 million tons. On slide 10, we've tried to reflect a simplified illustration of the P&L. What this slide demonstrates is the lean cost structure and transparency of cash flows distributed to shareholders.
On the revenue side, as discussed earlier, we show the three sources of cash that contributed to the AUD 265 million being MAC royalty revenue, MAC capacity payment, plus smaller amounts from the Wonnerup and Yalyalup operations. On the right-hand side of the chart, we show the distribution of these cash flows. Total costs for FY 2022 were AUD 8.8 million. Of this, AUD 7.6 million relates to the normal ongoing operating expenses with a further AUD 0.4 million in D&A. We've also specifically called out in our accounts AUD 0.7 million in one-off BD costs for the period. Net tax of AUD 77.1 million shows an effective tax rate of close to 30%, and this results in net profit after taxes, AUD 178.5 million for the year.
Now turning to slide 11. The objective of this slide is to show the organic growth in shareholder returns. As you'll see from the chart, in H2, the board have declared a final dividend of AUD 116.7 million equal to AUD 0.2208 per share. This builds on the H1 interim dividend of AUD 61.7 million, giving a full year dividend payout of AUD 0.3376 per share, which represents a payout of 100% of NPAT of AUD 178.5 million. In terms of capital management framework, you will note that we continue to prioritize shareholder returns, although recognize the intent to invest in growth. We intend to optimize the use of debt for future acquisitions.
Specifically, cash flows from these new royalties will at least in part be utilized to pay down debt. We also intend to maintain target leverage within the range of 0%-15% of enterprise value over time. On slide 12, we describe the capital management framework with respect to funding new acquisitions. You'll remember in February, we announced the refinancing of AUD 350 million in bilateral credit facilities, which increased our total credit limits from AUD 40 million to AUD 350 million, extended existing maturities to three, four, and five years, and were designed to build lending relationships with five major banking groups. We're very pleased with the outcome and timing of these new increased facilities, and these facilities now provide Deterra with the increased flexibility to act on growth opportunities as the market changes.
The framework also aims to demonstrate the intent not to cross-subsidize new growth opportunities with MAC revenues. The expectation being that new investments are capable of providing returns greater than their own cost of capital. Hopefully, you'll recognize from these slides we are working hard to deliver upon our commitments. In terms of corporate structure, we continue to run a small and lean team designed to maximize returns. In terms of capital structure, we retain a conservative balance sheet with AUD 350 million in liquidity to build flexibility for value accretive opportunities. In terms of returns, this result continues our record of maximizing the return of surplus cash flows to shareholders. The simplicity and scalability of the Deterra business model is unique on the ASX, and our small team, small and focused 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, Brendan. In terms of strategy and outlook, on slide 14, we've provided an overview of the royalty and streaming sector to provide some context. We've said before, we're pursuing a well-established business model that has some very successful examples, but there are some important differences in our approach. In particular, many of our peers are focused on precious metals. We are not, which is an important differentiator and enables us to focus on a less well-served niche, one in which we have significant scale. On slide fifteen, we've set out our approach to inorganic growth. We've been consistent in talking about our focus on bulk, base, and battery metals in well-developed jurisdictions that are in production or have clear line of sight to production and a broad investment range of AUD 100 million-AUD 300 million. This remains the case.
We've seen a steady flow of opportunities in the past year, largely in the secondary area, as royalty holders look to monetize assets held in broader portfolios. Many of those have been outside of our target range, but we have maintained our focus on commodities where we believe we can compete effectively. In particular, bulk commodities such as iron ore and fertilizers and base metals, including copper and nickel, in geographies with well-developed mining infrastructures, primarily Australia and the Americas. To date, we've not seen any opportunities that we felt able to execute at a price that would deliver value to our shareholders, but we have a meaningful pipeline of opportunities and remain active in this space.
Turning to primary opportunities, I mentioned earlier that we believe markets are shifting in a direction that will create more opportunities in this space as miners and developers look beyond traditional debt and equity markets for funding, as we've started to see some of these sources tighten up. Debt has become more expensive and more difficult to access, and equity markets are less supportive in recent times.
With the liquidity we have in place, we are well-positioned in these markets to step in and provide the long-term capital that will fund the projects that are needed to meet the substantial growth and supply that many believe is required for some of these commodities. It's also worth noting that royalties or streams can be used for other purposes than developing projects, and in fact, historically approximately half of this type of capital has been applied to other uses such as M&A or deleveraging balance sheets. On the ESG front, we've made solid progress on our framework in FY 2022, having conducted a materiality assessment, which is an important step in framing our ESG governance and reporting going forward. Having implemented and refined our ESG investment policies, and importantly, we've reported on our direct emissions and met our net zero commitment for the year.
We will continue to build on this framework, particularly in the area of our social investment and engagement, and we'll continue to refine our approach to ESG risk management and investment policy. In closing, FY 2022 has been a year of substantial organic growth for the business. It's driven increases in revenue, earnings and dividends, and we're optimistic about the opportunities FY 2023 will bring. It's a simple business model with a compelling investment thesis. We provide investors with a unique exposure to one of the core assets of one of the world's best operations in one of the world's best iron ore provinces. Our revenue-based royalties offer shareholders a distinctly lower risk profile when compared to a mining company and provide significant protection against cost inflation.
By prioritizing returns to shareholders, we provide investors with a unique exposure to income from a high margin investment business with a world-class cornerstone asset. We have growth options, both from the continued ramp-up of the South Flank expansion of Mining Area C and from value focused M&A. With that, we'll close the comments and be happy to take any questions. Thank you.
Thank you. As a reminder, to ask a question, you will need to press star one one on your telephone. Please stand by while we compile the Q&A roster. Once again, that's star one one for questions. Our first question comes from the line of Rahul Anand from Morgan Stanley. Rahul, your line is open. Please go ahead.
Hi, Juli and Brendan. Good morning. Thanks for the opportunity. Look, first one is around volumes at South Flank, obviously ramping up really well, and ahead of schedule. I was wondering whether you can provide any color on whether, in your knowledge or understanding, there is potential to push the system beyond nameplates, if perhaps you've had any conversations with BHP. Then in terms of slide 21, I mean, the west part of the South Flank and North Flank area, which is Mudlark and Tandania seems to be, you know, underexplored. Any sort of idea on what type of iron ore that is, whether it's similar and continuous to South Flank?
Yeah, sure. Thanks, Rahul. Thanks for the question. On the first, look, we, as you say, we're certainly, you know, very pleased with the ramp-up profile at Mining Area C. You know, I think there's still some further to go there. You know, South Flank is ramping up quickly, but there's still some substantial volumes to come. Obviously, we saw, as everybody else did, some of the commentary that BHP had earlier this week around potential growth options in their broader iron ore systems in the Pilbara. Look, you know, we haven't had any sort of discussions with BHP beyond what has been said in the public domain, and it's worth just reiterating the point.
I know we make it every time, but we don't, you know, have access to any non-public information on BHP's plans in that regard. You know, certainly I think, you know, you mentioned the slide, the chart on slide 21. You know, what that does show is that we hold a royalty over an area, not over a particular deposit. You know, to the extent there are other deposits in that royalty area that the BHP chooses to develop at some point in the future, you know, we would benefit from that to the extent it falls within the royalty area.
In terms of, you know, options to extend further beyond the 100 and, you know, the 80 South Flank and the original North Flank operation at Mining Area C, look, you know, it's a new operation. I noticed that, you know, BHP did talk about opportunities to debottleneck some of it. They've got a range of those opportunities. They'll look at it from a system-wide perspective, I'm sure. Yeah. Yeah. Listen, no, we, you know, we do talk to BHP and sort of try to find out as much as we can. You know, in this case, you know, their the company line is that they are investigating. They have studies in place to get to that 300 million tons.
They have not divulged how they will get there. Whether South Flank goes beyond nameplate capacity is not known at this point in time. You know, one would think there's potential for that, but there's also obviously using up the existing Yandi infrastructure capacity as well as potentially you know some more from the western ranges sort of development that they've recently done. We know the area pretty well. We've worked closely with people who know the assets very well and have a good feel for what might happen. You know, we can't go beyond what's in the public because we can't sort of say that for sure. We're not in control of that.
Yeah. No, that makes sense. Thanks for that. Look, second question, just around opportunities, rising interest rates, obviously perhaps a better environment in terms of, you know, availability of opportunities, and we've seen that in terms of M&A activity from some of the majors. But for you guys, I mean, have you seen a rise in terms of the number of, I guess, opportunities that are hitting your desk at the moment? And are you seeing any sort of trend in terms of-
Where they're coming from, whether it's bulk, base, anything you can provide there?
Yeah, look, as I sort of alluded to in some of the comments, I think we're starting to see and we're expecting to see, as going forward, that there is a bit of a shift in the nature of the opportunities we're seeing. Over much of the past year, we saw a lot of secondary opportunities where, you know, we had people looking to sell existing royalties or streams. We're now seeing and expecting to see even furthermore of those opportunities to be a, you know, source of funding. As you say, I know, you know, as those debt markets become more difficult, you know, we believe that our offer becomes even more compelling.
You know, we in particular are able to provide sort of patient and long-term view on some of these projects and look through sort of short-term issues. We certainly expect to see more of those. We have started to see more of those. I think, you know, the other point to make in that regard is that it's not just about funding projects, it's also about supporting M&A activity, as you say, which we've certainly seen an uptick in that, as well as potential addressing balance sheet issues.
Yeah. I think opportunities, you know, across bulks and base, you know, there's a lot of projects out there that we're getting close to FID that are now where the equity markets were abundantly available in recent times, but now sort of a little bit harder to access. We think that we form, you know, part of that debt, equity and royalty funding package and, you know, we think that we are a lot more competitive and a lot more sort of compelling offer for the market at the moment.
It's not just about interest rates either. It's you know, cost inflation on capital cost is also a factor that we expect is gonna start to drive opportunities for us as well. As the cost of these projects increases, you know, developers may be looking for additional capital. You know, there may be projects out there that were potentially funded but are now looking at increases in CapEx and looking for a bit of top-up funding, which is where we think a royalty or stream can be particularly powerful.
Yep. No, that makes sense. Thank you very much for that. That's my two. I'll pass it on. Thanks.
Thanks, Rahul Anand.
Thanks, Rahul.
Thank you. Once again, ladies and gentlemen, to ask a question, please press star one one on your telephone. Our next question comes from the line of Glyn Lawcock from Barrenjoey. Please go ahead.
Who was it?
Oh, hi. Sorry. I didn't actually say it was me. Apologies. Sorry. Julian. A couple of questions. Just if you look back at the opportunities you've missed, I wonder if you've taken the opportunity to say, you know, should we maybe have been less conservative in your assumptions? Have you spent any time looking back at what maybe you've missed? You know, just curious if you sort of tried to benchmark anything against or, you know, test anything, back test it. Thanks.
Yeah. Glyn, you know, thanks for the question. Yeah, absolutely, we do, as you'd expect of anybody, we do a bit of a, you know, we do look back and look at opportunities and think, are we comfortable with where we ended up knowing the outcome? You know, I think, you know, when we've looked back at the opportunities that we've seen in the, you know, give or take 18 months that, you know, we've been looking at these. Yeah, I think there's probably a couple of points to make in that regard. The first one is, you know, there haven't, you know, the focus has been very much in that secondary space. Although we've seen quite a number of opportunities, many of them have actually been in the precious space.
There haven't been as many in the outside of precious as there have been in precious. You know, there's been a number that we've seen that haven't transacted, and there have obviously been some that have. When we look back, you know, to the sort of the core of your question. You know, I think we're comfortable with where we ended up in terms of our evaluation of those opportunities. I don't think there's any regret in terms of having missed opportunities. It'd be nice to, you know, obviously it would be nice to find some opportunities, but I don't think there's a real sense that we were being too conservative.
Okay. Has all the opportunities so far been maybe Australia-based? Have you been thinking of opportunities maybe across the rest of the globe, and would you look at something like iron ore in Sweden?
We certainly have been looking at opportunities in other parts of the world. You know, as I alluded to, we've certainly seen opportunities in Australia, but we've seen opportunities in the Americas as well, both North and South America, and we've taken a very close look at some of those. You know, I think that the specific question, I mean, where our focus is on jurisdictions that have sort of a well-established mining infrastructure, well-established sort of legal framework, because, you know, as you appreciate, our interest is ultimately a contractual interest rather than operating interest. Yeah, certainly we do look globally at opportunities.
Yeah. For Glyn, for context, there's only been half a dozen, you know, royalty assets for sale in the non-precious space over the period that we have been a public company, of which, as you know, Julian said, we have no regrets in terms of what, where we were at in some of those processes and where the assets sort of traded at.
Overall, we do look back, you know, we keep a close eye on making sure that we're sort of both not too conservative nor too aggressive. You know, we try to be very balanced in the way we think about these things. Yeah, no regrets at this point in time. The bid-ask, you know, some of the assets have not closed that we've been looking at, and that's because the bid-ask spread is just too high. That may change now, the world's changing a little bit. During that period from, you know, November 2020 when we de-merged from Iluka, the market went, you know, almost doubled from the time that we sort of de-merged.
You know, it's finally coming back to somewhere that's sort of more normal, where we think that we can be more competitive.
Yep. Okay. Just a quick final one. Have you received the money now from BHP to be able to pay the dividend?
Yes, we received the money 30 days after the year end. We received it and rang our bell in our office on the 30th or 29th, Friday the 29th, I think it was, of July.
All right. Good to know. Thanks.
Thank you. Our next question comes from the line of Robert Stein from CLSA. Robert, your line is open. Please go ahead.
Hi, guys. Thanks for the opportunity to ask a question. First one, just on commodity exposure. There's a whole host of sort of iron ore royalties in private hands up in the Pilbara. You know, Hancock Prospecting, Wright Prospecting, Rhodes Ridge royalties and the like. Are you averse to trying to sort of centralize all those up into one vehicle so investors can get, you know, exposure to that lower operational leverage iron ore exposure?
Yeah, absolutely. I mean, you know, clearly we have the iron ore exposure. We like the iron ore exposure, which certainly if we still got good opportunities to add to that, certainly we would do so. Yeah, we're a natural vehicle for that, but it requires multiple parties, you know, and requires sort of a simplification of some of the structures up there as well, I would expect.
Given that's the case, then that and given that AUD 350 is the undrawn facility and the investment size that you guys are looking to target, that would obviously require a significant amount more capital. What would be the mechanism by which you'd employ to try to enact that? Is it a, you know, would you go back and tap capital markets? Would it be debt raised? Like how would you, just conceptually, how would you go about executing something like that?
Yeah. Look, Robert, it's difficult to sort of give a specific answer to a hypothetical. You know, we clearly have some debt capacity in place at AUD 350 million, which was really sized, I think, relative to our targets. To be clear, you know, we believe that the business has additional debt service capacity if it's needed. Particularly, you know, if we were to bring in new assets for cash generating that also provides a couple of extra degrees of freedom in terms of how they could be funded. Look, you know, it would depend very much on the size and where the markets are at the time. You know, large investments, you know, equity is always an option.
Additional debt is an option. It may be that for those type of opportunities, it may be that scrip is an attractive currency for the vendor. You know, it's really, you know, it's difficult to say. There's almost too many variables to give you a hypothetical answer. Yeah, all options are open, I suppose.
Cool. Just the last one on the sort of M&A front. 350 is quite, I guess, limiting in respect of the types of size of royalty transactions that are out there, given, you know, some of the recent data points that are out there in the market. Are you flexible on that sort of 350 size? If you saw something, you know, I'm just trying to get a conceptualization around scale and capacity of potential additional royalties, given the MAC royalty is so big and is the prime reason why investors invest in the stock.
If you were going to add or dilute that exposure in some respects, you know, what sort of size investment should people be sort of conceptualizing that would take?
Yeah. Look, you know, there's probably a couple of elements to that, Rob. The first one, you know, the 100-300 target range that we've spoken about for a while now is, you know, it is exactly that. It's a sweet spot or a target range. It's indicative. You know, to be clear, we would certainly have looked at opportunities below that. I think, you know, there's naturally a lower limit to that in terms of wanting to be sure we're getting something meaningful for the investment of time and effort. You know, we would certainly go beyond that as well.
You know, there aren't, notwithstanding a couple of recent data points, as you point out, there aren't a lot of opportunities that much larger than that. You know, clearly we would pursue those if we thought that, you know, they could be value accretive. In terms of the AUD 350 million facility, you know, to be clear, we saw an opportunity early this year to extend the credit facilities we had in place and to do it on terms that lowered our overall margin and pushed out the tenor. And you know, we're very pleased we took that opportunity.
In terms of sizing that, you know, as I said, we certainly, you know, we landed on AUD 350 as being a number that would give us, we thought, sufficient liquidity to act on opportunities. At the same time, you know, balance, obviously, the investment that goes into holding that facility. To be clear, you know, that AUD 350 is not a limiting factor on our activity.
We were materially oversubscribed and, you know, we picked five banks. We had more than that available to pick from on the basis that we wanted to sort of build those relationships to be able to expand those quickly and easily if necessary. You know, it depends on the opportunity and it depends on the sort of structure that we think is optimal for the organization at the time of acquisition. We believe we have more available should we need it at short notice. The intent was deliberate in February, sort of an opportune time to be raising debt as well as sort of building those longer-term relationships.
Thanks, guys. That's great color and congrats on the great result. Appreciate it.
Thanks, Robert Stein.
Thank you. As a reminder, to ask question, you need to press star one one on your telephone. Our next question comes from Chen Jiang from Bank of America. Chen, your line is open. Please go ahead.
Good morning, Julian and Brendan. Thank you. Just a follow-up question to that secondary royalty space. Given the competitiveness of that space, I know you can't, you know, tell us your hurdle rate, your internal rate of return, but are you willing to pay a premium to compete with your peers if the asset is, you know, very attractive? I have another one after this. Thank you.
I think, you know, that we have seen, there's no question we've seen some transactions that have priced at fairly aggressive pricing levels and ones that, you know, we didn't feel we could support in a way that it delivered value. Yeah, it is a competitive space. To be clear, we've, I think right from the beginning, talked about, you know, discipline and to us, that discipline means we need to stay focused on that value. We won't be overpaying for assets simply to get a deal done.
I think the other thing, Chen, to think about though is that, you know, a lot of the difference in valuation can sometimes be the technical side of conversion of reserves and resources and how that impacts value, you know, and depending on how you're, if you're just including reserves or a conversion factor of reserves and resources or even beyond that. Valuation is based on sort of the underlying asset and the optionality of the underlying asset. While some assets may well have lower cost of capital, it may also be a factor people are factoring in greater expansion potential or extension potential from those assets. It may not always just be the cost of capital.
Right. Thanks for that. You mentioned value and variables. What are the key variables when you are assessing opportunities in the secondary market? You mentioned the resources and the reserves, and I guess every company will have their own, you know, commodity price assumptions. I'm just trying to understand what are the key variables that drive your valuation, that you think the value is for versus paying a premium to acquire the asset? Thanks.
Yeah.
You pick the main three. You know, cost of capital, commodity price, and reserve resource are the main three on a sort of top-line revenue type royalty. You know, they are the key variables.
To Brendan's point, I think of those three, probably the one in which you'd see the greatest variation is around the view of the deposit and that conversion and the potential for extension and expansion. That's probably the greatest variable when you look across, or at least when you look across different views on value.
There may also just people with different commodity views as well, you know.
Yeah.
Some people taking position on commodity prices as well. Yeah, they're definitely the sort of the three big variables in a revenue type royalty.
Thanks for that. I have a last one, if that's okay. Secondary-
Sure, yeah.
space is very competitive. How about primary royalty? How open are you know, talk to or approach any junior miners in the early stage and to create primary royalties if secondary-
Yeah, look, we
Is more competitive? Thanks for that. Yeah.
Yeah, exactly. I think, you know, to be clear, you know, we certainly see that opportunity to create new royalties and streams as being a really key part of the growth story. As I mentioned in sort of the prepared remarks, we, you know, we see. We're seeing that market shift a bit in a way that we think is gonna drive more opportunities for us, and particularly, you know, how our ability to provide patient long-term capital will become more and more compelling, I think for miners. That's right across the sort of the spectrum from juniors who are looking for development capital early on in the phase right through to, you know, larger, more established companies that might be looking for additional funding.
It may be to support M&A, it may be to just address some balance sheet issues, or it may be just to provide some additional capital for projects that are a bit more advanced. In terms of where our focus is, you know, we have talked about focusing on production or projects that have a clear line of sight to production. That, you know, that is still our focus. However, you know, we do look across the spectrum a bit further. You know, we are aware that there may be opportunities earlier in the phase and over time it may be that we look to act on some of those. I think at the moment much of our focus is on, you know, somewhat more advanced projects.
Right. More focused on the advanced project. Okay. Just the last one, just to follow up. You mentioned the opportunity has shift. Do you mean shift to the secondary or you think more opportunities in the primary space?
I think you know we are beginning to see and we expect to see more opportunities in the primary space. I think that when you look back, certainly since you know late 2020 when we were first established, you know, debt markets have been pretty strong as has equity support for the resources sector. It's been very competitive from a source of capital perspective.
During that period, over the last couple of years, we've seen a lot of people bring projects sort of through the natural phase of drilling through sort of early, you know, pre-FS, FS, DFS sort of stages, and now are approaching their FID sort of decision. You know, the good news for us, well, you know, in terms of we think that we form a natural part of that, you know, that debt equity and royalty sort of financing package, particularly now that, you know, debt is a little bit more expensive, equity is a little bit harder to access than it has been over the last sort of 24 months. You know, we think that we form a natural part of that sort of, you know, a hybrid of debt equity that form a natural part of that financing package.
You know, quite compelling for operators because, yeah, we are very aligned with the operator in terms of, you know, they only pay us when their project sort of goes well. We're only very expensive if they go very, very well.
Great. Thanks, Julian. Thanks, Brendan. I'll pass it on. Thank you.
Thank you.
Great. Thank you. Our next question comes from the line of Peter O'Connor from Shaw and Partners. Peter, please ask your question.
Julian, Brendan, Matt, I think that's me. Yes?
Yep.
Yeah.
Hi, how are you?
Okay, great. Sorry. You didn't introduce me. I didn't hear it. Same as Glyn. Hey, I just want to explore the notion of your patience and your pragmatism and your judiciousness, and I applaud all of the above, so what you've done. Congrats. Where does it leave you going forward? Dialing back to the early 2000s, you saw a case of companies like yourself talking about exactly the same factors and missing deal after deal and other companies coming in and doing deals around them. With that in mind, that backdrop, just wanna ask about valuation metrics. You're in a data room, you're putting forward a bid. I know you're gonna tell me you look at all the obvious stuff like IRR and NPV and sensitivity analysis, et cetera.
Is free cash flow yield part of this process and forward curves and the shape of commodity price as opposed to one locked-in anchor price? How do you think about the profile of the cash flows. You talk about commodity price, everybody has a different view, but how do you think about the profile of the commodity deck, not just the anchor price, perhaps in the forward curve that feeds into that?
Yeah. Look, we, you know, so we won't run through all the obvious ones, as you say, because I think, you know, we've talked to those before. Yeah, the direct question. Yeah, we do think about shapes of profile, and I think we do try to spend quite a bit of time thinking about how the optionality that's inherent in potential price curves can drive value. You know, I think that, you know, we do spend quite a bit of time looking at that, and then that really factors into our view on the type of returns we would seek.
You know, we don't go out and anchor on a requirement of a return for a you know, without understanding the optionality inherent within an opportunity, whether that's around the deposit or whether it's around the price curve or whether it's about you know, development profiles or what it might be.
I think also, Peter, there's a symbiosis between sort of what price that you're using and what optionality you believe and the different scenarios that we run. We run multiple scenarios. Some, you know, like in a world that sort of where prices go high, what does that mean for the reserve resource conversion and what might that look like in terms of expansion extension? We run those adverse cases where the price sort of goes down, and we try to sort of think about those cases quite systematically and thoughtfully about actually what are the possible scenarios, knowing that there is no one central, like, no one central case captures the true value of these assets.
It's going to, you know, the bigger, the better the optionality in the asset, the more of these, you know, upside cases you can sort of potentially run, and the better they, the better the sort of expected value would be in terms of the outcome of a multiple scenario analysis.
It is, you know, as Brendan said, it's important to note that often, you know, that optionality is asymmetric. It's not a symmetric distribution of potential outcomes.
Yeah.
As part of your lessons learned process, which I think Glyn Lawcock asked about, you must try and back solve what the winning bid did and try and get where you missed. On that basis, first question is, have you participated, Brendan Ryan, in half a dozen or so non-paying royalties that you mentioned since you've listed? Have you been in those data rooms actively? And then secondly, when you've back solved, where do you think that back solved to the gap between your view and what the winning bid was?
Two firsts. I mean, we're not gonna comment on specific projects, but yeah, I think it's fair to assume that, you know, given what we do and you know, sort of our focus on growth opportunities, it's fair to assume that we've
You know, be actively looking at most opportunities that come to market.
Yeah.
In terms of sort of when we go back and, you know, we do go through a process of when we, you know, transactions close. We do go through a process of sort of assessing where we saw value and what sort of implied in some of those deals that have closed. You know, as we touched on earlier, you know, there's a number of different factors, but often it comes down to what we think is perhaps a different view on what the future of this asset might be. Whether that's reflected ultimately in sort of a cost to capital that's applied to it or whether it's just reflected in the modeling. Yeah, I think that's probably the key element for much of this.
Yeah. I think, you know, to your point, you know, when you try to back solve as in the question earlier, it comes down to, you know, cost of capital, which is probably, you know. But no, I'd probably, there's less variation in there is my guess. But there's obviously the price deck, again, probably not as much variability, the reserve resource conversion, very important. For undeveloped projects where there's been some progress for undeveloped, it's also when it will start and how it will ramp up are also important sort of additional sort of assumptions that we sort of add in. You know, and that's potentially where there might be some differentiation between prices paid as well.
Okay. Lastly, to Rob's question about the Pilbara and the private royalties, have you initiated any discussions with any of the Pilbara royalties or WA royalties in iron ore that were mentioned?
Yeah. Look, as I said, I don't think we're gonna comment on any specific opportunities in that space.
Okay. Would you initiate or are you a passive player in this regard? Are you waiting for them to come to you?
I think, you know, looking more broadly, just across the opportunity set sort of more broadly, you know, clearly there are opportunities that come to us. You know, there are processes or vendors who are looking to sell. But we're also active in terms of identifying, you know, projects or counterparties where we think we could be a, you know, a good partner for them, and we are active in approaching those where we think, you know, there's an opportunity that's sort of mutually attractive.
Thinking about a private royalty, they're looking for a liquidity event, and is that where Deterra would use paper as part of the funding, and you'd welcome a major shareholder to do that?
Yeah. Look, you know, I think again, it's difficult to talk sort of hypotheticals, but, you know, that certainly is something that we can offer to counterparties if they are looking to that liquidity, but retaining exposure to similar assets is certainly something we can offer that we think our competitors can't.
It depends how much is, you know, the seller's structuring as well, as much as ours as well.
Okay. Thanks, guys. Congratulations on that record result.
Thank you.
Thank you.
Thank you. Our next question comes from the line of Matthew Green from Credit Suisse. Matt, your line is open. Please go ahead.
Hi. Good morning, gents. You've answered a lot of the call, but I just keen to dial in a bit on your comments on pursuing streams. I think if we look at your large North American peers, clearly there's a lot of value in streams. On a relative sense, you know, a royalty, I guess, is quite a simple contract. I mean, your peers have, you know, small trading arms that are domiciled in usually favorable tax jurisdictions. If Deterra were to pursue a streaming model, what does that look like for you guys?
Yeah. To be clear, certainly we do, you know, when we talk about royalties more broadly, we include streams in that. We are quite, you know, we would certainly look at stream opportunities and, you know. I think, you know, at the end of the day, the structure that works will depend on the, you know, the counterparty, where the project's located, where the counterparty's domiciled. You know, that's one of the benefits I think of royalties or streams in particular as a source of capital is they do have that flexibility in a way that perhaps, you know, debt, for example, doesn't necessarily. We are, you know, we certainly do look at those, do look at streams as a source of, yeah, as opportunities for us. Yeah.
Yeah, we pitch streams and royalties to parties depending on what we think is best suited to that sort of opportunity.
Sure. Okay. In terms of the construction of Deterra as a company, do you have the people in place to be able to put a stream in, or would you have to expand your personnel and I guess domicile a trading arm into a more favorable tax jurisdiction? Like, how does Deterra as a company change if you were to bring a stream into the portfolio?
To be clear, we could write a stream tomorrow. It would, you know, clearly we're domiciled in Australia, and that would come with certain, you know, that comes with certain tax implications of being domiciled in Australia. Look, I think it's difficult to speculate on, you know, what works, because ultimately, you know, the tax outcome is really gonna be a function of, you know, where the project's located, where the counterparty's located, you know, where we're located, you know. We're aware of those, and certainly we think about those when we think about how to pitch the opportunity.
If you look at our annual report, you know, to your point, we are not structured sort of with overseas sort of entities, you know, at present. That doesn't mean. That may not happen in the future, but that will depend on the circumstance and the opportunity.
Okay. That's helpful. Thanks.
Thank you. Our next follow-up question comes from the line of Rahul Anand from Morgan Stanley. Rahul, your line is open. Please go ahead.
Thanks for the opportunity again. Perhaps one for Brendan. I was going through the other expenses line, and I noticed the increase from AUD 4.6 million to AUD 7.6 million. Now, you do mention that 4.6 was on an eight-month basis. If I do annualize the number, the underlying inflation in the other line is about 17% and the employee benefits is about 6%. Could we perhaps touch a bit upon the other expenses, the 17% inflation? What's driving that, and how sticky is that going forward? Thanks.
Yeah. Listen, I think you know we're a new organization. We were probably understaffed the first year, you know, on a relative basis. There is some you know as you said some to do with the employee base. D&O insurances have inflated across the industry. Generally speaking, the biggest sort of increases are predominantly in our BD base cost, which includes subscriptions and you know and a few other things where we're sort of getting you know getting all of. We don't have the team to sort of have our own economic department, so we rely on third-party sort of information to help get informed on certain commodities.
As we look at more commodity sets, we sort of get some more information. Likewise, I think there's just some normalization of our FS as we sort of work out what we need and what we didn't need. I wouldn't say that was inflation. I'd say that was more right-sizing the business and getting it up and running. Don't read too much into that. You know, don't expect it to be, you know, going that, you know, increasing at that level year on year. I think that was more of an actual, you know, eight months getting ourselves sort of in place versus sort of a more steady state, where we're at now. Does that help, Rahul?
Yes, it does. Yeah. I guess inflation type growth going forward, yeah, from here?
Well, we don't suffer from inflation much at all. You know, I think, you know, the biggest salary is Julian and I's and the board's, and they've all stayed sort of flat. You know, so inflationary pressure, you know, we're at the head of the market with D&O insurance, which, sort of in Australia, has been quite, you know, has been escalating. In saying that, we're fairly sort of solid there. Otherwise, the fees that we've incurred are more around sort of that right-sizing as opposed to the inflationary pressures on those fees.
That's another point just to make there, is we Yeah, we have, you know, intentionally called out those variable business development-
Yeah.
costs separately.
Yeah.
Those are, you know, those will fluctuate more with the level of business development activity.
Yeah.
No, that's perfect. Thank you very much for the color. Appreciate that. I'll pass it on.
Thanks, Rahul.
Thank you. Our next follow-up question comes from Peter O'Connor from Shaw and Partners. Peter, your line is open. Please ask your question.
Peter? Hi, Peter.
Sorry, guys. Yeah, got it. Hey, you mentioned a really key comment before, Brendan. You said, you used the word pitch. What proportion of the time you spend on BD work is pitching? What proportion of your time is spent on inbound deals coming towards you or data-
Yeah.
coming towards you?
No, that's a good question, Peter. Listen, you know, as we know, we've started from scratch, you know, a year and a half ago thereabout, and we've been building our coveted asset list. We build a list of the assets that we would like to get involved in, and we try to find opportunities when we think that there might be a market opportunity where we can offer a financing solution that is sort of bespoke to that sort of group that is actually valuable to them and to us. We pitch. We're increasingly pitching.
You know, I think as we've developed that list of assets that we like, as we sort of get to understand them and do the background work on those, so we can offer a meaningful pitch to the people more than just sort of, you know, more than a hypothetical, we go to them and we sort of pitch sort of increasingly, you know, on that asset list. You know, as it happens with the market changing, we are seeing more opportunities. We've, you know, earlier on in our, you know, when we came out of the gate, the market sort of, you know, equity was so. We, you know, was very competitive as a proposition for funding.
We believe that we're actually a lot more competitive now. We're pitching a lot more often. I won't tell you what. Well, proportion wise, it sort of changes over time. It depends month on month. A lot more, you know, a lot more of late with the changing market conditions.
Hypothetical again, but you've seen the market change, and you've not been successful yet in either deals coming in or pitching. Going forward, it feels like from your answer that pitching is the more likely outcome.
Yeah, listen, I think the secondary market was quite hot for the last period because people were trying to, you know, monetize at the top of the cycle. You know, what, that's what people were trying to do, and we saw a lot of processes around on secondary markets based on that sort of dynamic. You know, I think now, you know, we will probably as we become a more natural part of that debt equity sort of royalty funding package, and we think that we are a natural part of those solutions. I think that we will see more coming, you know, more work in that primary sector, which in some ways we like quite a lot because we can sort of get access to the primary information.
It actually de-risks some of what you do as well.
Thanks, Brendan.
Thank you. Our next follow-up question comes from the line of Chen Jiang from Bank of America. Chen, your line is open. Please ask your follow-up question.
No, no, sorry. I'm good. My question has been asked. Thank you.
Thanks.
Great. Thank you.
Thank you. Once again, to ask a question, please press star one one. No further questions.
Okay. Well, look,
All right, we have final question from Reg Spencer from Canaccord Genuity. Please go ahead. Reg, your line is open. Please ask your question.
For some reason, it wasn't registering my question, but just a broader one on new investment opportunities. If you look at the commodity markets that arguably offer the best growth opportunities and/or where significant capital investment is required and current run rates are inadequate, can you provide a bit more of a comment on which of those markets that you guys are focusing on are of more interest than others?
Yeah. Look, you know, as you say, there's certainly a lot of focus on some of the sort of electrification-driven commodities, you know, certainly in some of the base metals and some of the battery metals. Yeah, that falls within our ambit, there's no question. You know, copper, nickel, those type of metals certainly of interest to us. Yeah, some of the battery metals as well, I think, you know, when we think about those, often those are earlier stage opportunities, so that introduces a level of complexity as well.
As well as, you know, the just sort of an understanding of how that, you know, how we can participate in the value creation around some of those commodities. You know, because there is quite a significant degree of processing associated with some of them. There's some extra complexity around those. Certainly, you know, longer term, they there are some, you know, some of those commodities have pretty attractive fundamentals.
Just so I understand, you know, there's not one commodity market that you're most interested in more than others. You have a set of criteria and subject to, you know, those opportunities meeting that criteria. You're relatively ambiguous about which part of those focus markets that, you know, you'd be looking at.
Yeah. I think that's, you know, that's probably fair to say. I mean, within that broader range, obviously there is an element of focus around. You know, we certainly spend a bit of time looking at in the bulk space as well. Yeah, in that base and battery sector, you know, particularly in the base, there are, you know, a couple of yeah, that's an area where we see some attractive opportunities as well.
In some of the EV related, you know, the sort of battery metals, it is, you know, as Julian said, it's harder to price because you don't necessarily know what product that they're producing and where that fits in the sort of value chain and what price they will receive. That just makes it a little bit harder. As that matures, as the market matures in some of those commodities, that should become more transparent. Until that point, it gets a little bit harder to price some of those. Not impossible, but, you know, you have to do your homework.
It's certainly harder than some of the traditional bulk and base where they have a you know a exchange traded sort of commodity price and you know and a number of analysts sort of helping to sort of think about the long-term sort of price dynamics. I suppose given that you would be looking to fund any new opportunities at least initially through your debt facilities you know you'd want a commodity market where you do have transparent pricing and where pricing may be less volatile. I presume that comes into the consideration as well.
Yeah. Yeah, volatility is not a bad thing, but it certainly, you know, it's particularly if it's a symmetric sort of volatility, you know, in the upside. Yeah, no, definitely we sort of do like to get a firm handle on our internal view of sort of the commodity dynamics and, you know, the cost curve and the supply side sort of the supply side and demand side of the situation.
Right. Thanks very much, guys.
Thank you.
Thank you. We have our next follow-up from Peter O'Connor from Shaw and Partners. Peter, your line is open. Please go ahead.
Sorry, guys. Original, but I'm all good.
Okay, thanks.
All good?
Peter. Yep. Okay.
All right. Thank you all very much for your questions. I'd like to turn the call back to Julian for closing remarks.
All right. Well, look, thank you very much. I think we're out of time, so appreciate your interest. Thank you very much again for your time this morning.