Anglo Pacific looks like a great way to ride the commodities super-cycle

If inflation is a concern for you, some exposure to a diversified commodity royalty company such as Anglo Pacific could be a good move at this juncture. 

Anglo Pacific (LON:APF) is almost unique in the London market in that it operates a royalty model, whereby it gets paid royalties on the production revenues of the mining assets that it helps to finance. This can be a very lucrative business model and it has become very popular, especially in North America, although it has only recently begun to gain traction in Europe. 

That said, Anglo Pacific has been around for quite some time, and it has a strong track record of successful royalty deals under its belt. But recently the shares have suffered due to the heavy exposure to coking coal, prices for which suffered during the Covid fallout. In addition to this, the company’s shares have faced selling pressure from Berkeley Energia, another resource company and shareholder. 

Nevertheless, better times appear to be ahead for Anglo Pacific shareholders, as the company is taking steps to diversify its portfolio, with a particular focus on next generation minerals such as those used in the EV (electric vehicle) industry. Its latest acquisition in particular could be transformational for the company. 

In February this year, Anglo Pacific acquired a 70% net interest in a stream on cobalt production from the Voisey’s Bay mine in Canada from private equity sellers for a cash consideration of $205 million. 

Anglo Pacific CEO Julian Treger commented on the deal: “This transaction is not only the largest in our Company’s history, but it also marks the start of a fundamental transformation, as we reposition the business towards 21st century commodities and become an increasingly battery metals focused royalty and streaming company.”

The fundamentals behind the move into the cobalt space look very good indeed. Since the start of 2021, the cobalt price has increased by around 60%, reaching two-year highs at US$24.95/lb. The increase has been driven by continued demand from the lithium-ion battery sector as electric vehicle sales reached record highs in 2020, with projected EV battery demand growth of 17% per annum forecast over the period to 2040.

Furthermore, Anglo Pacific part-financed the deal through the monetisation of a portion of the group’s Labrador Iron Ore Royalty Corporation (LIORC) investment, netting a 60% return. Iron ore prices have rebounded sharply since Covid, while cobalt prices are believed to be only at the start of a bull run. If this is correct, this could prove to be a very savvy move by Anglo Pacific. 

Income investors will note the c. 6% yield on offer, which had come into question but now looks safe given that the company confirmed its final dividend of 3.75p per share at the time of the first-quarter trading update earlier this month. Moreover, the group has around $70 million dollars headroom in its financing covenants, which provides room for further deals, should any opportunities arise. 

The first-quarter numbers weren’t much to look at, especially given the much-reduced contribution from LIORC, but the outlook appears strong as commodity prices continue to recover as economies reopen. 

If inflation is a concern for you, some exposure to a diversified commodity royalty company such as Anglo Pacific could be a good move at this juncture.