Please be advised that today's conference is being recorded. I'd like to hand the conference over to Mr. Jason Neal, Interim Chief Executive Officer and Managing Director. Please go ahead.
Thank you. Good morning, Australia, and good evening, North America. Welcome everyone, especially to our shareholders and prospective new shareholders, to this special Deterra Royalties investor call and webcast. My name is Jason Neal, and I am the Interim Managing Director and CEO of Deterra, speaking to you from Toronto. Joining me on the call from our Perth office is Jason Clifton, our Chief Financial Officer. As you would've seen from our ASX release, I am delighted to announce an agreement for Deterra to acquire a royalty over Ivanhoe Electric's Santa Cruz Copper Project in the U.S. state of Arizona. Santa Cruz is a large-scale, low-cost underground copper project with a long mine life located in a tier one mine jurisdiction, and being developed by an operator with a proven track record of delivering value.
Ivanhoe Electric has done an outstanding job progressing this project, highlighted by the PFS update they announced only last week, which continues to project first production at Santa Cruz in 2029. For Deterra, that will also mark first revenue on this royalty. I am looking forward to taking you through this acquisition, which is one that we have been engaged in for most of the calendar year. While individually it adds a great asset to our portfolio on an accretive basis, we would also like our shareholders to understand this to be a representative transaction in the growth strategy of Deterra. On page two, you will see our customary disclaimers for you to read on your own time. I'll move to page three and take you through the summary points of the deal we are announcing today, and allow me to make a few important points.
We have acquired for $74.15 million, funded from our existing debt facilities, a 1.75% net smelter royalty over Santa Cruz with a further right of first offer on a further 0.25%. This deal is closed. The deal firmly aligns with our strategy to build our portfolio of high-quality royalties in pursuit of long-term sustainable value for all shareholders. It further diversifies Deterra's portfolio of predominantly iron ore revenues, with lithium revenue expected to commence at the end of 2027, and now copper starting in 2029. This is a high-quality copper project poised to enter construction in one of the best addresses globally and arguably what is currently the most coveted commodity. Despite these strong characteristics, we nonetheless acquired this asset at a compelling valuation. We established a unique competitive advantage in the sale process by collaborating with Ivanhoe Electric.
In exchange for due diligence information and the opportunity to modernize the royalty, including additional information, access, and audit rights, we have modestly reduced the royalty rate and will provide a buyback right on 25% of the royalty. What this meant for Deterra is that we were the only company not bidding blind with respect to due diligence information. This is a scenario which has precedent in the royalty sector, including, for example, Franco-Nevada's purchase of a royalty on Côté Gold in Canada in 2025. We are obviously very happy to have had this opportunity. Our effective royalty rate is 1.68% until the sixth anniversary of production and 1.57% thereafter. Based on the footprint of the royalty ground, this is 84% of the PFS reserves.
Research analysts, shareholders, and others will want to assess the value of this acquisition, and fortunately, Ivanhoe Electric published a PFS update for Santa Cruz just last week that incorporated a tunnel boring machine it acquired in May this year. The study also updated other project metrics. Importantly for us, it included a modest increase to reserves and life of mine copper production. In addition to robust public disclosure, Ivanhoe Electric also has extensive research coverage. We see this acquisition as accretive to net asset value per share, and once in production, clearly accretive to earnings per share and cash flow per share. We have lots of shareholders who think about annual yield.
If we look at this acquisition with a lens of annual yield, based on the recent 2026 PFS, we estimate the average annual royalty revenue at a long-term copper price of $5 per pound to be $10.7 million . That is a 14.4% yield against our $74.15 million acquisition price. This is very simple but intuitive math, and if you compared this to other transactions, it would benchmark favorably. Ivanhoe Electric's mineral reserve supports a 24-year life. We are exposed to exploration success beyond this, of course. This is one of the beauties of a royalty interest. We are also exposed to higher copper prices, and the current copper spot price of approximately $6.62 per pound is significantly higher than the long-term broker consensus of $5 per pound.
Moving to page five. We have checked a lot of boxes with this acquisition because it is absolutely aligned with our clearly articulated growth strategy. We have a third core asset added to the portfolio. We are very happy with the operator at Santa Cruz. This royalty will be cash flowing in the near future and has a long life. We acquired this royalty at compelling valuation, in part because of the unique competitive advantage we established in the sale process, and this acquisition is accretive to net asset value per share, expected to be EPS accretive and cash flow per share accretive once in production. This transaction does not, on its own, change our targeted dividend payout ratio of 75% of NPAT, as stated in our recent earnings call.
Moving to page six. Here is a map of our portfolio, which is showing more growth dots in the Americas to complement our foundational Australian asset. Also of note is that Santa Cruz is our second copper asset in Arizona. Page seven shows key points from each of the three core assets. Let me just point out common characteristics. They all have a long operating life. They are all in a tier one mining jurisdiction. They are all low-cost assets. They all have quality operators. We are on our way to creating a greater portfolio diversification and a growth profile. On to page eight. We will pause a few moments on this page before opening up to questions. This is a page that we introduced after the acquisition of Thacker Pass, and we are now updating it to include Santa Cruz.
We currently have one material cash flowing royalty at Mining Area C. It is one of the best royalties on the planet, but we are now able to show real growth on the horizon. Thacker Pass phase one is expected to be ramping up in 2028, and phase two in the early 2030s. By then, Santa Cruz is expected to be ramped up. So at consensus commodity prices, Thacker Pass phase one and two and Santa Cruz are expected to generate $33 million in royalty revenue combined. That is 19% revenue growth at consensus commodity prices over about five years from what MAC would be producing on its own. That is clearly meaningful. Obviously, at spot commodity prices, Thacker Pass phase one and two and Santa Cruz make a bigger contribution, and revenue growth is materially higher at 22%.
I will conclude by saying that this is exactly the type of acquisition that we have been focused on delivering to our shareholders, and this is how we will deliver value. We are really looking forward to engaging with stakeholders on this deal and our strategy to continue delivering growth. Finally, we have also been engaged in our CEO search process to establish the next leader of our business. I am hopeful that this process will be concluded in the near future, but of course, I cannot promise a timeline for conclusion. This leader will be focused on delivering, with reasonable cadence, further value-enhancing growth and diversification transactions. The Santa Cruz acquisition is a good demonstration of one type of transaction that will define the future of our company. Thank you for your time today on relatively short notice, and we appreciate your interest.
We do have a little bit of time for questions from the phone and also from the webcast, so let me hand it back to the operator now.
Thank you. To ask a question now, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. There may be a short pause as we compile the Q&A roster. Once again, that's star one one for questions. We will now proceed to take our first question, and our first question comes from the line of Lyndon Fagan from JP Morgan. Please ask your question. Lyndon, your line is open.
Thanks for the presentation, and good morning. The first one is just how do we model the 84% coverage in terms of the royalty? I guess, is that a haircut over a certain amount of years, or is there an easy way to cater for that?
Yeah. So, if you were to take a look at the royalty footprint against the mine plan, it averages out to 84%. It is variable year to year, and obviously, Ivanhoe Electric may not exactly follow the plan because it'll opportunistically exploit the ore body. If I was in your shoes, what I would do is I would just use the 84% every year and see how experience takes us. Unfortunately, I don't think we can do much better than that.
Okay, great. And I guess if this asset were to expand in any meaningful way, does that 84% carry over? How does it work in terms of, is it over a certain area of the reserves? Or is it-
Yeah.
Yeah, I'm just a bit confused how to think about it.
Yeah. Think about the royalty area as sort of a surface expression. As long as we're within that subterranean projection, it's in the royalty area, and if it's out, it's out. Certainly expansion at depth is probably going to be very good for us. Expansion laterally, probably less so. It really would depend on where they convert the resources. We're hopeful that a fair bit of the upside in the asset would be in our land. One thing you often see with underground deposits is they continue at depth. I'm not saying it's specific to this deposit, but a lot of underground deposits, they continue at depth because the operators typically don't drill them out, because it's not economic to, from surface, do all that exploration work. That's exploration work that the operator would probably do once they get into the ore body.
When you're modeling how much resource you want to add to it, I'm not sure I can give you any guidance better than kind of using that 84% number on resource expansion.
No, that's helpful color.
Yeah.
The last one I had was just how do we think about that buyback option for AUD 20 million? I'm assuming at a higher copper price, it's probably quite attractive for Ivanhoe to exercise that option. Would you recommend assuming that that happens, or how do we frame that one?
Yeah. So obviously, there's a higher price on the buyback than the price that we paid. At higher copper prices, they would have a greater incentive. The other thing is the way that it works, we think that their incentive would be, if they're going to do the buyback, it's more likely to happen before production starts or very early in production rather than beyond that. I think it would probably be conservative, if you wanted to be conservative in your modeling, to assume that there would be that buyback at that level. But it's really going to be in Ivanhoe's hands.
And sorry, is there a price where that is in the money, in terms of if copper's at today's levels, is it sort of a no-brainer for them to buy that back?
I wouldn't say it's a no-brainer. I think we got very good value at the price that we paid. And obviously we look at long-term commodity price. $5 is the current long-term copper price. Long-term copper price was lower when we were originally negotiating the deal. I think if I were Ivanhoe Electric, I would think about that long-term price in addition to the spot price. They would probably also have a view on how much exploration upside that they saw. So yeah, I'm not sure additional guidance. It's definitely not a no-brainer for them, but there's a calculation of value that sits with Ivanhoe Electric and not with us.
Got it. Yeah, I'll pass it on. Thanks for all that color.
Yeah. Well, thank you for joining us today.
Thank you. As a reminder, to ask a question now, please press star one one on your telephone keypad. We will now take our next question. Our next question comes from the line of Michael Slack from ClearBridge. Please ask your question. Michael, your line is open.
Thank you. Hi, guys. Thank you for the call and the detail on this deal. Just the effective royalty rate, I assume you bought this from a third party, not from Ivanhoe, and that was part of the deal was in terms of getting Ivanhoe's consent was around dropping the headline royalty rate. Can you just give us some idea of whether we should be using the sort of, I guess, effective rates on that 84%, or whether the effective rate includes the 84% dilution at the 1.75%?
Sure. So when we use the 84%, that is referring to how much of the reserves are within the royalty area. If that 84% was the same every year, essentially think about 84% of the production is what a royalty gets paid off. The royalty rate we get paid on is not 1.75%, it is the reduced rates. The first six years of production from the sixth anniversary of initial commercial production, 1.68%, and after that, 1.57%. The reason that this was a good deal for us to collaborate with Ivanhoe is that this royalty document is very old, 50-plus years old, and it was written to the standard of what it would be 50 years ago. In fact, we bought it from private individuals.
If we were to participate in this process without having any information, then we would be bidding pretty blind, right? We would not know whether it covered 100% of the reserves or 84% of the reserves or 55% of the reserves or whatever it may be. The other thing is, in successfully acquiring the royalty, being able to get information, being able to get access to the site, being able to audit the royalty payments, all that. That is how royalty agreements are written now. It is not how they were written that long ago. So we wanted to modernize it for that. We certainly got a benefit in this deal with Ivanhoe . The way that I would think about it is that when you're looking at making an acquisition, you have a portfolio of risks that you have to deal with.
Some of those risks, you may invest in mitigating them. In some of those risks, you may invest in information to give you a better decision. In some of those risks, you may say, "Okay, well, that is what I am going to take as my calculated risk as a manager." Think about the deal with Ivanhoe for us, was us investing in the information risks and some of the ongoing operating risks, audit, et cetera. When we did the calculus on that, we said, "Okay, this is absolutely a deal that we would want to do." Ivanhoe Electric was very good to work with in all of this, and so absolutely zero regrets in the way that we approached this.
Okay. That's great. Just one other question on your confidence around the resource outside of the reserves that is captured by the royalty. You have got a large indicated number here as a resource, but some of that says it includes outside the royalty area. How should we think about how much of that could convert to the royalty?
Yeah. We did technical work on our side. We had engagement with Ivanhoe Electric. The 84% number is a number that comes from due diligence and seeing where mining happens and where it happens versus the royalty boundaries. We feel pretty good about that. As far as what we will convert in the future from resources to reserves, that is upside for us. And we have done our diligence and feel pretty good about the upside that we're exposed to. But it is one of those things where we run various scenarios around that.
Okay. All right. Thanks, guys.
Thank you.
Thank you. Once again, that is star one one if you wish to ask a question. And star one one if you wish to ask a question now. No further questions, so now I will turn the conference back to Mr. Jason Neal for closing comments.
Great. Thank you very much, operator. We know that a press release came out not too long before this call, and there is probably a few people that we would have missed and loved to have joined us. The recording is going to be uploaded to our website, the webcast will be, and so it will be available for replay. I am in North America. Jason Clifton is sitting in our Perth office. Very available to have a dialogue with any of our stakeholders, shareholders, research analysts that want to engage with us and talk more about this deal. We are obviously very happy with it and would love to spend time going through it. For those who were able to make it, thank you very much for adjusting your day to join us today, and really look forward to connecting with people again in the future.
We thank you for your participation in today's conference. This does conclude the program. You may now disconnect your line.