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Anglo Pacific Group plc: THE INVESTMENT CASE

Anglo Pacific on a roll as commodities move in its favour

Anglo has royalty interests in two coal mines in Australia: Rio Tinto’s Kestrel and Whitehaven’s Narrabri
picture of coal
INVESTMENT OVERVIEW: APF The Big Picture
Coking coal price has rallied strongly

Anglo Pacific Group PLC (LON:APF TSE:APY) is set for a strong year in 2017 as commodity prices have moved in its favour.

The mining royalty specialist’s results have already been aided by a rally in the price of coking coal and vanadium

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

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

Royalty income shot up by 295% to £16.1mln in the half year to June as strong production led to a record performance at the Maracás Menchen project in Brazil and a significant improvement in vanadium prices to an average of US$5.46 per pound from US$3.15 last year.

Anglo has a 2% net smelter return royalty on all mineral products sold from the project to which the royalty interest relates.

Kestrel mine supported by rebound in coking coal price

Royalty income was also boosted by a favourable exchange rate and an increase in mining within the company’s private royalty land at the Kestrel underground coal mine in Queensland, Australia.

“It is pleasing to see that this increased volume in mined coal that is subject to the group's royalty has coincided with a strong rebound in the coking coal price,” said chief executive Julian Treger in a statement.

“This, along with the contribution from the rest of the portfolio and the recent Denison financing arrangement, has seen us post a doubling of income over the last two years and a similar outcome is expected this year.”

READ: Anglo Pacific Group reveals steep rise in royalty income

Adjusted earnings for the period came to £12.9mln, up 438% on the previous year.

The company declared an interim dividend of 3p per share as it ended the period debt free after repaying all its loans following the receipt of royalty income in the second quarter and paying a 2016 final dividend. In June, Anglo said it would be making quarterly dividend payments.

Anglo had net assets of £209.6mln at the end of the period.

Treger added that the company has access to between US$30.0-US$40.0mln of cash and borrowing facilities for further royalty investments, which will be “very much the focus” for the second half of the year.

Positioned for electric cars

In keeping with that, the group acquired a royalty over a nickel-cobalt mine in Brazil to position itself for the expected surge in electric car usage.

Cobalt, alongside lithium, is a key component in battery packs for electric vehicles and is in scarce supply.

Initially, Anglo will pay Brazilian Nickel Limited (BRN) US$2mln for a 1% gross revenue royalty (GRR) on the Piauí nickel – cobalt project in the north-east of the country.

WATCH: Anglo Pacific widens portfolio with nickel-cobalt acquisition

Anglo-Pacific also has an option to spend up to an additional US$70mln to increase the gross royalty on Piaui by up to a further 4.5 percentage points dependent on when it is exercised and how the project has developed.

Julian Treger, Anglo Pacific’s chief executive, said: "The Piauí royalty reflects the company's strategy of investing into earlier stage, high growth potential royalties.

“Combined with our Maracás Menchen vanadium royalty, this investment also represents a continuing strategic pivot into metals which are exposed to the burgeoning electric vehicle story.”

BRN will use the initial funding for a pilot plant with nameplate annual production capacity of 1,000 tonnes of saleable nickel, which, if successful, will be followed by a full plant producing 24,000t of nickel each year and 1,000t of cobalt.

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

Anglo Pacific has already notched up a major success in backing the Salamanca uranium project in Spain, held by the consummate operators at Berkeley Energia (LON:BKY).

And 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. 



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