My TP for ILU pre-the-demerger-of-DRR was $10.80, and if you add up today's closing prices of ILU ($6.70) and DRR ($4.13), they are a little over that $10.80 target price - at a combined total of $10.83. ILU shareholders got 1 DRR share for every 1 ILU share they held. I think that $10.80 TP is still OK, but I would split that 60/40 now, so 60% of it - or $6.48 - is my new TP for ILU, and 40% (of that $10.80) is my new TP for DRR - being $4.32. DRR are a little below that now because the market was underwhelmed by their report and first dividend. The real money won't flow until later this year and next year when BHP's massive South Flank mine ramps up to full capacity. The extra royalty income that Deterra (DRR) receives from BHP over that upcoming period will translate into higher dividends to DRR shareholders. However, in the meantime, punters are looking elsewhere, and I'm one of those - I'm looking elsewhere too, having sold my DRR and ILU shares. I was in ILU for the positive catalyst that was the demerger of the MAC iron ore royalty, and that happened, and the combined prices of ILU and DRR hit my $10.80 price target, and now I've moved on. I'll likely have another look at DRR in around January 2022, just before their next interim report (for H1 FY2022), but after their first full year report.

Mining Area C (MAC) is currently Deterra's only significant performing asset and as such forms the basis of current value. The rest of their royalty portfolio is not producing anything of meaningful value and there is no guidance on likely revenue, none the less I am attributing a generous $0.50 price to this as sort of an option value on top of my below MAC valuation. MAC - DCF: Production at MAC is expected to reach around 140dmt by 2023 and DRR will receive MAC capacity payments as this scales up on top of royalties which leads to NPAT of $160-170m through to 2023 based on FX at 0.75-0.80 and average Ore price of 125 reducing to 100 by 2023. I have then assumed a 2% increase in Ore prices for a 30 year life of the mine area to get cash flows. The below table has the per share value of cash flows discounted at 9% at various FX rates and Ore price assumptions for years 2023 to 2050 (when BHP have said they expect to operation to continue to). I have taken a 0.75 FX rate and US$100/t price average as my preferred basis for valuation - adjust the valuation accordingly if you think otherwise, but I accept that it is basically plucking a figure out of the air... DCF price per share: (Top: AUD/USD, LHS: Ore Price US$/t) 0.60 0.65 0.70 0.75 0.80 0.85 50 2.63 2.48 2.35 2.24 2.14 2.06 60 3.01 2.83 2.68 2.55 2.43 2.33 70 3.40 3.19 3.01 2.86 2.72 2.60 80 3.79 3.55 3.34 3.17 3.01 2.88 90 4.17 3.90 3.67 3.48 3.30 3.15 100 4.56 4.26 4.01 3.79 3.59 3.42 110 4.94 4.62 4.34 4.09 3.88 3.69 120 5.33 4.97 4.67 4.40 4.17 3.97 MAC - EV/EBITDA Method: An alternative way to look at it is based on EV/EBITDA, which I estimate EBITDA of around $240m by 2023, which base on current market cap of 2.4b is a EV/EBITDA of 10. Page 31 of the Demerger Booklet provides some comparative EV/EBITDA values for royalty companies, gold miners and ore miners. Take your pick - there is a very wide range, but in terms of royalty companies an EBITDA/EV of 10 is very low, but compared to the major Iron Ore miners it's high. Note that the MAC is Iron Ore only and the royalty companies shown cover a wide range of resources. Given the valuation is based on a 9% discount rate, the current share price is over my valuation and I am looking for companies that can provide a return of 20%+, DRR will not be on my buy list... If more info becomes available on non-MAC royalties, then a reassessment will be called for. NB: The business has mentioned they will look to purchase other royalty assets to provide additional and possibly extend the income stream beyond what MAC provides. If they do, the valuation of the MAC cashflows remains valid as it would be assumed that they redeploy the cash at similar NPV values at the 9% discount rate assumes. Hence I am indifferent to them paying out 100% as dividends or reinvesting in new projects for a similar ROI.

I initially got quite excited by this prospect, thinking it was going to be an underpriced "find". The reasons behind this are: 1) the iron ore price is is pretty strong 2) it looks likely to remain strong for some time 1-2 years (but who really knows) 3) BHP are about to expand their production in the area DRR have royalty rights 4) its a capital light business so all that extra royalty stream will convert straight to extra dividends 5) in these yield-starved times, investors are prepared to pay significantly for any kind of yield so the SP should appreciate significantly in the event of a lift in yield 6) with a re-rate it is possible to exit with a healthy profit However. It would appear everyone else has the same idea, and management are keen to expand. So the cash will be diverted from divvies to investment. There goes the re-rate on yield. Secondly, the risks of buying royalty streams at elevated prices (everything is expensive nowadays) increase the risk that they will be over-paying, thus reducing future returns. Plugging various irons ore prices and ROM, give a range of cash streams to DRR. It would take sustained irons ore price at current levels, good ROMs from the new area opening up plus restrained new purchases from management to justify paying much more than $4.50. Add in a margin of safety to bring it down to $4.00. Having said that, in the hunt for yield in the TINA environment, todays price could be considered reasonable