Replicating Rinehart. How A New Company Could Also Build A $16 Billion Fortune

Australia’s richest person and 85th richest in the world, Gina Rinehart, started building her $16 billion fortune on a tiny 1.25% iron ore royalty which is why investors should be closely watching a new company with a remarkably similar asset.

Deterra Royalties is not yet listed on the Australian stock exchange, but it soon will be, as legal formalities are finalised and the business spun-out of minerals sands miner, Iluka Resources.

Shareholders in Iluka will receive 80% of the shares in Deterra which has a single asset, a 1.232% iron ore royalty.

The only major difference in the royalties, which are pure cash streams paid on the value of iron ore sold, is that Rinehart’s is paid by the world’s second biggest mining company, Rio Tinto, Deterra’s will be be paid by the biggest, BHP Group.

The two miners have adjoining iron ore projects in the Pilbara region of Australia’s north-west.

Small But About To Grow

Deterra has been trapped inside Iluka for more than 30 years as a very modest profit contributor because the royalty payments it got from BHP only covered a relatively small portion of its mining activity in a region known as Mining Area C, or MAC.

In the six months to June 30 the MAC royalty was worth $34 million to Iluka, up $5 million on the $29 million contribution in the previous corresponding period six months last year — numbers which are very much in the small beer category.

But, from next year everything changes because BHP is putting the finishing touches to a major new iron ore mine which will be one of the biggest in the world and it’s all in the MAC royalty area.

As the new South Flank mine cranks up towards a target of 140 million tonnes of iron ore a year worth around $17.5 billion at the current iron ore price of $125 a ton the royalty stream paid to the Detarra business being spun-out by Iluka will grow to around $170 million a year.

Valuing Deterra before it is cut loose from Iluka is not easy but it will become easier in the next few weeks when a report on the spin-out process is released ahead of an Iluka shareholders’ meeting expected in October and a stock exchange listing later in the year or early next year.

A handful of investment banks have made early attempts to value Deterra, including UBS which came up with a number of $2 billion, but that was built on an assumed iron ore price of $65/t — roughly half where it is today.

There are other reasons to watch the evolution of Deterra, including its potential to grow from a single-royalty business into a company owning multiple royalties, something it might need to do to comply with Australian tax law.

Mirror Image Royalty

Growth by acquiring iron ore production in its own right is also a possibility and a move which would further cement Deterra’s appearance as a corporate mirror-image of Rinehart’s personal fortune that started with the Rio Tinto royalty which was used to fund mine developments.

Deterra, when it lists, will also have a novelty factor for Australian investors because there are currently no pure-play listed royalty companies on the Australian exchange.

International investors have a far better understanding of the value of the pure cash streams represented by royalties which are peeled off the revenue line of a business and not dependent on project profitability.

Iluka On The Rise

On the Australian market, Iluka has been rising steadily over the past six months as demand for its traditional products of titanium dioxide used in paint and zircon used as a glaze on tiles improves in line with China’s buoyant property development sector.

But there is also growing interest in Iluka for the iron ore royalty business it is close to launching.

From a Covid-19 pandemic low of $4.30 in late March Iluka shares have risen to $7, up 60% in five months though another way of looking at the rise is to see it as a return the its pre-pandemic price in February.