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Anglo Pacific Group plc: THE INVESTMENT CASE

Anglo Pacific yield looking increasingly anomalous suggests broker Macquarie

The focus is to add further royalties to the portfolio.
picture of coal mine infrastructure
Anglo still making money out of King Coal

When it rains in Australia it pours, but for Anglo Pacific Group PLC (LON:APF TSE:APY) that has proved a boon in  2017.

The mining royalty specialist’s results are set to be even better than previously expected after heavy storms (cyclone Debbie) caused another spike in the price of coking coal.

It had already surged compared to a year ago, but the storms affected both infrastructure and supplies, a combination that has sent prices beyond the levels Anglo anticipated at the beginning of 2017.

WATCH: Anglo Pacific to give investors more regular income with quarterly dividend

“It is our view that higher coking coal prices will now prevail for longer in 2017. With Kestrel's operations reportedly unaffected by weather events, we now anticipate an even stronger year of growth for Anglo Pacific than at the time we reported our 2016 results.”

Two coal mines, uranium and vanadium

Anglo has royalty interests in two coal mines in Australia: Rio Tinto’s Kestrel and Whitehaven’s Narrabri.

In the three months to March, and before the latest spike, Kestrel saw a 130% increase in its average coal price over a year ago while Narrabri was up 56%.

WATCH: Anglo Pacific boss says first quarter 'the sign of a good year ahead' 

That helped royalty income jump to £7.5mln from a comparable £1.9mln.

An additional £2.5mln (C$4.0mln) came from the Denison [uranium] financing and streaming agreement signed in February while the recovery in vanadium prices boosted revenues from Maracás Menchen to £0.4mln from £0.1mln.

Anglo added that this quarter is also expected to see the lowest sales volumes from Kestrel and Narrabri in 2017, with all material production at Kestrel also set to be on its royalty land for the foreseeable future.

Total free cash flow generated in the period was £13.4mln (£3.3mln) and Anglo now expects to be debt free by mid-2017.  

Julian Treger, chief executive, said:  "The additional £2.5mln generated from the recent Denison transaction is further evidence of the importance of continuing to diversify our portfolio.

Treger has stated previously its focus is to add further royalties to the portfolio.

“We see a number of prospective opportunities in the mid-tier and development arena where the lack of recent M&A activity, combined with underinvestment in growth, should spur renewed interest in developing the next wave of projects that will be required to meet expected supply deficits in the future.”

A flavour of that came last year 

Anglo Pacific has recorded a major success in backing the Salamanca uranium project in Spain, held by the consummate operators at Berkeley Energia (LON:BKY). adn it followed that up with a substantial stake in a North American operation, securing an income stream from processing ore from the famous Cigar Lake uranium mine in Canada.

Under the terms of the deal, Denison Mines (TSE:DML), a famous name in uranium mining, sold a right to 22.5% of the toll milling proceeds from the McClean Lake Mill, which takes ore from Cigar Lake.

The transaction comprised an up-front payment of C$2.7 mln, plus the granting to Denison of a C$40.8 mln loan.

It took Anglo Pacific into partnership with another great name in uranium production, Areva, which owns 70% of the McClean Lake Mill and 37.1% of Cigar Lake, and really begins to set it amongst the big leagues.

Dividend focus …

The group paid a dividend of 6p in 2016 and had already said it would consider the dividend level at the half year point of the current year, something that it reiterated again with the latest update.

Macquarie keen  

Aussie broker Macquarie reckons the shares are worth 190p ignoring any windfall benefit from the latest coal price gain.

“The stubbornly high 5.8% dividend yield currently on offer places the company well ahead of the ~2% yield offered by peers.

“A rerating to between 2-3% would imply a valuation range of £2.00-3.00/sh (TP: £1.90), and with FCF [free cash flow] dividend around 2 times going forward, there is a significant margin for error in our cash flow forecasts, even if coal prices weaken significantly from current levels.”


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Anglo Pacific Group plc Timeline

February 21 2017

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