Expansions At MAC And Thacker Pass May Shape Future Prospects Amid Analyst Skepticism

Key Takeaways

• Expansion at Mining Area C and Thacker Pass promises potential revenue growth through increased production and supportive lithium royalty frameworks.
  
• Commencement of material processing at La Preciosa and gold offtake performance could enhance earnings with new and stable revenue streams.
  
• Decreased iron ore prices and high tax rates, coupled with uncertain production timelines, could impact future revenue and limit financial flexibility.

Catalysts

Operates as a royalty investment company in Australia.

• The expansion of Mining Area C (MAC) with production rates having more than doubled presents a catalyst for potential volume growth despite reaching nameplate capacity. This could lead to increased revenue if production volumes are maintained or exceeded.
  
• The progress at Thacker Pass, including the closing of a U.S. Department of Energy loan and investment by General Motors, largely secures CapEx for Phase 1. The anticipated doubling of production capacity and increased life of mine support potential future revenue and earnings growth from lithium royalties.
  
• The commencement of material processing at the La Preciosa silver mine this year presents a new revenue stream, which can positively impact earnings once the production starts.
  
• Integration of the Trident portfolio and delivering synergies at the top end of the guidance range position Deterra to enhance net margins through cost efficiencies, contributing to improved earnings.
  
• The gold offtake contracts are currently outperforming expectations and generating significant cash flows. If retained, they provide a stable revenue stream to support the company's debt servicing, thereby potentially enhancing net earnings and strengthening the balance sheet.

Deterra Royalties Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Deterra Royalties's revenue will decrease by 1.1% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 59.9% today to 58.6% in 3 years time.
• Analysts expect earnings to reach A$132.6 million (and earnings per share of A$0.26) by about February 2028, down from A$140.1 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting A$177.7 million in earnings, and the most bearish expecting A$113 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 22.6x on those 2028 earnings, up from 15.2x today. This future PE is greater than the current PE for the AU Metals and Mining industry at 13.6x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.7%, as per the Simply Wall St company report.

Deterra Royalties Future Earnings Per Share Growth

Risks

• The decrease in iron ore pricing, which led to a 12% drop in MAC royalty revenue, could negatively impact future revenue if prices do not recover.
  
• The effective tax rate is higher due to one-off non-tax deductible costs, potentially affecting net margins and profitability.
  
• There is uncertainty around Thacker Pass production timelines and investment returns, which could impact future earnings if delays occur.
  
• The decision to divest gold offtake contracts could reduce revenue sources if suitable buyers are not found or if the assets are undervalued.
  
• The company is nearing the upper end of its target leverage range, which may limit its ability to fund new investments and could pressure future financial flexibility.

Valuation

• The analysts have a consensus price target of A$4.544 for Deterra Royalties based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of A$4.9, and the most bearish reporting a price target of just A$3.95.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be A$226.3 million, earnings will come to A$132.6 million, and it would be trading on a PE ratio of 22.6x, assuming you use a discount rate of 7.7%.
  
• Given the current share price of A$4.02, the analyst price target of A$4.54 is 11.5% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.