Anglo Pacific – almost a mining company without any mines

Anglo Pacific is an excellent way into sharing the ups and downs of so many commodities globally, opines Mark Watson-Mitchell.

As the only UK listed company focused on royalties connected with the mining and exploration of natural resources, that makes Anglo Pacific a quite unique investment.

It is also quoted in Toronto.

Having been based upon its interests in a coal mining venture in Australia, the company has been following a definite policy of switching away from its dependence on coal and it is now becoming fairly well spread in its royalty interests.

It is gradually developing as a leading internationally diversified royalty and streaming company with a portfolio centered on base metals and bulk materials.

The company’s royalty portfolio is now primarily in Australia, North and South America, and Europe.

By way of acquisition or investment in mining and exploration interests, the company now has a wide spread of commodities, covering coking and thermal coal, gold, uranium, anthracite, nickel, silver, vanadium, cobalt, copper and iron ore.

Its policy is to focus on accelerating its income growth through acquiring royalties on projects that are either currently cash flow generating or are expected to be so within the next 24 months. The company also makes investments in earlier stage royalties.

It pays a substantial portion of those royalties earned to shareholders by way of dividends.

Generally, royalty holders benefit from improvements made to the scale of a mining operation. Exploration success, or lower cut-off grades as a result of rising commodity prices, can serve to increase both economic reserves and resources.

Increased reserves will extend a mine’s life or facilitate an expansion of the existing operations. Subsequent increases in production will usually result in higher royalty payments, without the requirement of the royalty holder to contribute to the cost of expanding or optimising the operation.

The coal royalty at the Kestrel mine in Australia was the base of the company and it is still Anglo’s biggest income contributor.

The portfolio, which only concentrates on low-risk jurisdictions, also includes a royalty held over the Maracas Menchen vanadium mine in Brazil and another over the Pilbara iron ore mine in Australia.

Others include: the El Valle-Boinas/Carles gold, silver and copper mine in Spain; the Amapa and Tucano iron ore mine in Brazil; the Ring of Fire cobalt mine in Canada; the Narrabi coal mine in Australia; and the Dugbe gold mine in Liberia.

Anglo has some 14 principal royalty and streaming related assets, 92% of which are producing.

Kestrel is an underground mine in Queensland, Australia. The group owns 50% of certain sub-stratum lands which entitle it to coal royalty receipts. Its royalty is based on the invoiced price of coal – 7% up to Aus$100, 12.5% over and up to Aus$150, and then 15% thereafter.

On the Narrabri thermal coal mine in New South Wales, Anglo receives 1% of gross revenue.

Royalty rates differ from project to project and country to country.

It receives a portion of the uranium toll milling proceeds from the McClean Lake Mill in the Athabasca Basin in Saskatchewan, Canada.  It also has uranium royalty interests at the Four Mile mine in South Australia.

Its iron ore royalties come from the Iron Ore Company of Canada.

It also derives uranium development royalties come from Salamanca, in Spain; anthracite/coal from Groundhog; and at Piaui it derives royalties from both nickel and cobalt.

Royalties provide exposure to underlying commodity prices; however, the group has stated that it expects to benefit from a rising commodity price environment, with the upside feeding through to increased royalty receipts.

The company’s chief executive is Julian Treger, who holds 3.14% of the equity. Treger has a very useful background and has steered the company very well over the last few years. He previously worked for Lord Rothschild as an in-house corporate financier, before co-founding Active Value Advisors, where he advised on more than US$900m of funds over a 12-year period.

In 2005 he co-founded Audley Capital Advisors, a hedge fund, with a principal focus on special situations investment strategies the natural resources sector. He joined Anglo Pacific as chief executive in 2013, since when he has helped to guide its current course.

There are 181,470,392 shares in issue, which are trading at around the 196p level, valuing the company at £356m.

Large holders include: Schroders (9.95%); Hargreave Hale (9.88%); Aberforth  (9.16%); AXA Investment (7.28%); Liontrust Investment (4.51%); Miton Asset (4.20%); Ransome’s Dock (4.13%); Walker Crips Investment (2.02%); and Hargreaves Lansdown (1.88%).

The company has some $100m of cash and loan facility available to invest still further in its royalty diversification. It has a very strong balance sheet.

As far as revenue and profit are concerned it must be remembered that there are always very lumpy, bumpy returns from the commodity sector. However, brokers estimates suggest that revenue for the current year to end December will have picked up from £42.1m in 2018 to £57.8m this year, with pre-tax profits having jumped from £44.5m to £56.1m (largely boosted by a revaluation of its Kestrel interests).

Earnings could increase from 15.9p to 22p per share, more than amply covering an increase in dividend from 8p to 9p.

I rate this company as an excellent way into sharing the ups and downs of so many commodities globally. I set a target price of 250p before the end of next year.