Dalrymple Bay Infrastructure: Strong Revenue with Expanding Growth Opportunities

About Dalrymple Bay Infrastructure Limited

Dalrymple Bay Infrastructure Limited (DBI, the Company, ASX: DBI) through its foundation asset, the Dalrymple Bay Terminal is the world’s largest metallurgical coal export facility. It is a critical supply chain link between the Bowen Basin and global steelmaking markets.

Certainty of revenue

DBI’s inflation-linked revenue is fully contracted in that coal handling volumes through the terminal are on a 100 percent take or pay basis. This means that regardless of the tonnes of coal handled, DBI is paid a $3.59 Terminal Infrastructure Charge for every tonne according to the terminal’s 84.2 million tonnes of contracted capacity. This Terminal Infrastructure Charge inflates annually at CPI and all operating and maintenance costs are passed through to the terminal’s Users. Importantly, the Terminal Infrastructure Charge is not impacted by the coal price and is payable regardless of Force Majeure events such as an epidemic, industrial action or natural disasters.

Revenue is diversified across 21 mines owned by 11 customers that supply 13 percent of the global seaborne metallurgical coal export market. Eighty-one percent of DBI’s revenue is derived from metallurgical coal that is essential for steelmaking.

DBI has a 76-year lease term of the coal handling facility out to 2100, comprising a 50-year lease that commenced in 2001 and a 49-year extension option at the election of DBI.

Although a regulated business, DBI can agree a commercial infrastructure charge directly with customers under a 10-year negotiated customer agreement that expires in 2031. This agreement is based on the Queensland Competition Authority (QCA) revenue model used to regulate DBI’s permitted revenues prior to DBI being permitted to undertake direct Terminal Infrastructure Charge negotiations with Users from 2021. This implies that provided DBI’s Terminal Infrastructure Charge remains within the reasonable confines of the QCA revenue model, the existing ‘light-touch’ regulatory approach of the QCA is unlikely to be an issue in 2031.

Growth opportunities

DBT has a range of organic and external growth opportunities that should support distribution and capital growth in the decade ahead.

The key organic growth opportunity for DBT (called the 8X Project) is to optimise the existing terminal footprint by increasing the coal storage volume by 20 percent, increase the inloading and outloading capacity of the existing systems, and instal a 4th ship loader. The required environmental approvals and technical aspects of the feasibility studies have been completed. The 8X Project is expected to deliver up to 14.9 million tonnes per annum of additional capacity and be underwritten by long-term take or pay contracts. The expansion plans are exclusively underwritten by mines and projects that predominantly ship metallurgical coal.

The production, storage and export of liquid ammonia (a form of green hydrogen) from the Dalrymple Bay terminal is a renewable energy infrastructure opportunity for DBT that is currently under consideration. Hydrogen Feasibility Studies are underway given the deep-water nature of the Hay Point port and the abundant supply of nearby land to support further development which is located within one of Queensland’s defined Renewable Energy Zones.

In addition to the revenue expansion opportunities afforded by the 8X Project and green hydrogen exports, $500 million in organic growth through to 2031 in Non-Expansion Capital Expenditure (NECAP) spend is available to DBT. NECAP spend is recovered by an annual uplift in the Terminal Infrastructure Charge commencing from the 1 July following project commissioning. NECAP spend earns a return on invested capital of the 10-year Australian Government Bond rate plus a margin.

The Future

The inflation-linked nature of the Terminal Infrastructure Charge provides robust pricing upside, and the amount spent on Non-Expansionary Capital Expenditure earns the 10-year Australian Government Bond rate (currently 4.47 percent) plus a margin. All operating and maintenance costs, as well as the Queensland Competition Authority levy and related costs are passed through to the terminal’s Users. This robust pricing upside is reflected in the 8.4 percent increase on the Terminal Infrastructure Charge for the first half of FY24, compared to the first half of FY23.

Ongoing organic investment in the Dalrymple Bay Terminal, including capacity expansions to meet consistently strong export demand for metallurgical coal as well as selective acquisition of third-party infrastructure assets, have the potential to boost revenue in the decade ahead.

The inflation-linked and cost-recovery nature of the DBI pricing model ensures that growth in revenue leads to growth in investor distributions. This regulated pricing structure and the strong credit quality of terminal Users dependent on DBI’s critical supply chain infrastructure ensures that DBI is suited to yield-conscious investors seeking defensive characteristics within their portfolio.