Royalty specialists are fairly common in the natural resources sphere, with the business model involving a handing over of money in exchange for a share of the product of a mine.
Often that is a share of the revenues, but it can also be a share of the physical production of the mine. The revenues take the form of a more conventional royalty, while the physical side becomes more of a stream structure.
Typically, the corporate listings of such companies are found on the Toronto Stock Exchange, and most have routine exposure to silver and gold mining. However, independent upstart Anglo Pacific Group doesn’t quite fit that typical mold. While it has a TSX-listing as well, the company is also the only royalty specialist connected with the mining of natural resources that’s listed on the London Stock Exchange.
“We offer a de-risked way of getting exposure to the mining sector via the royalty model, and we’re not a typical royalty company,” says Julian Treger, Chief Executive Officer of Anglo Pacific.
“Vast majority of the roughly $30 billion worth of listed royalty companies globally are gold and silver-focused. We've noted that gold and silver constitute only 15% of the mining sector by value and the other 85% which is by far larger really isn’t really serviced by a royalty vehicle. That's the space we occupy and see ourselves as unique globally – in that we do not focus on gold and silver.
“We do have one or two precious metal investments but they are hangovers from previous managers’ bets; and we tend to get the first call when people think of selling mining royalties that aren’t gold and silver.”
Anglo Pacific currently has 11 principal royalty and streaming related assets across five continents. More than 86% of its portfolio by value is producing and 95% of the portfolio is located in well established “mature and safe” mining jurisdictions.
On Wednesday (7 February), the company posted a robust set of numbers for 2017 on the back off higher coal and vanadium prices, combined with increased production on its land. Royalty income rose 90% to the £37-£37.75 million ($51.29 million) range, with a further £4.7-£5 million to come from its uranium operation Denison/McClean.
“Our philosophy has always been to stick to safer jurisdictions. It allows us to sleep peacefully at night. We offer a less risky route for investors and in fact many of our shareholders have Anglo Pacific as their only mining exposure.
“They see it as a sort of vehicle to play the commodity prices with partners who are among the best operators in the world, without taking a lot of the operating and capital expenditure risk.”
Treger notes the average price realized at its Australian coking coal royalty Kestrel last year was around 40% higher on an annualized basis. Thermal coal producer Narribri – another Australian play – saw royalty revenue rise by 15% despite lower volumes.
However, as the world marches towards a lower carbon footprint, exposure to coal - which often gets bad press as the most polluting fossil fuel – must be a cause for concern with plenty of market chatter about its decline in the wider energy mix?
Treger agrees that coal’s percentage of the wider energy mix is declining. “But actually in absolute terms, coal consumption is continuing to increase. So it’s not like coal is dead, just less of a growth market than some of the alternative sources of energy consumption. Furthermore, I think it’s rather simplistic to view all extracted coal as the same.
“There are wide ranges of product specifications and impurities within the coal space itself. We have stuck to the highest quality coal (coking and thermal coal). I think it would be more interesting and perhaps pertinent given the affordability of coal in some developing markets to try and encourage those countries to use cleaner coal rather than not use coal which is not really realistic.”
And the Anglo Pacific boss is equally circumspect about bleak iron ore price projections by the Australian government given his company’s exposure to the industry. In its market assessment for the year, Canberra said in January that it expects iron ore prices to average $51.50 per ton this year; down 20% from 2017.
“I have been in this business for many years, and the longer I go on, I discover that really nobody knows anything. I go to conferences every year where the best and brightest make forecasts and every year they are totally wrong. In the commodities space there often tends to be a herd mentality; that’s why we often go through boom and bust cycles because there is not enough contrarian thinking.”
“And again crucial from a thematic standpoint is the question of product purity. We haven’t invested in iron ore of lower grades. We are into high quality direct shipping ore or pellets. The price and demand for those is going up significantly.”
Treger says China is, and will remain, a large determinant of global natural resources supply and demand, and the world is also seeing the rise of Indian international champions. “Additionally, for the first time since the global financial crisis – we have pretty much got coordinated global growth; a new phenomenon that bodes well for the mining industry.”
In the CEO’s chair since October 2013, the former activist investor, portfolio manager, and financial adviser to Lord Rothschild, is busy accelerating the pace of profound changes at Anglo Pacific.
“The business has changed fundamentally over the last few years. In my first few years as CEO, we didn’t have enough income to service our dividend and our running costs; the focus was 100% on income generation. I’m pleased to say the strategy has been quite effective.
“It now puts us in a luxurious position of not only being able to cover our dividend and central costs but also to have significant further retained earnings to modulate our strategy. We are an acquisitive vehicle that's aiming to become significantly larger over the coming years.
“We would continue to invest 70-80% of our resources in producing assets, and those assets should yield 8-10% returns after tax making them accretive to our bottom-line. The other 20-30% of our retained earnings would be pumped into higher risk assets, targeting 5, 10 or 15 times returns on average.”
Anglo Pacific has always been opportunistic across the natural resources sphere, but will have a bias for commodities which the company thinks “would benefit from the technological disruptions” that we are seeing globally.
“For the mining sector, the evolution of solar panels, electric vehicles, battery storage, blockchain and cryptocurrencies are all accretive to demand for raw materials. The old and new are somewhat colliding and a strategic opportunity exists for Anglo Pacific to become the royalty company of the 21st century,” Treger says.
The company already has exposure to copper, vanadium and nickel sulfate. “Unlike traders in the mining space, we are by definition long term investors. We take a 10 to 20 year view when we make a royalty investment. Base metal plays would continue to interest us, alongside more specialized materials like bauxite. We are not tethered to gold and silver mining; and that will not change.”
Anglo Pacific expects growth to continue in 2018 and has a number of royalty plays that should come onstream in the next couple of years. “We enter the year with a very strong balance sheet, with significant net cash, unused borrowing pathways and non-core equity investments that we can bring into play. The big driver for the next 12 months is going to acquisitions and we’ll have to see how many of those we can execute.”
