Anglo Pacific Group records positive first half

Anglo Pacific Group (TSX: APY; LON: APF) has doubled its income over the last three years, and 2018 is shaping up to be yet another good year for the natural resources royalty company, says its chief financial officer, Kevin Flynn.

In the first six months of the year, Anglo Pacific reported adjusted earnings of £15.4 million (US$19.8 million), or 8.56 pence per share, which is up 15% year-on-year.

Total royalty and financing income in the first half reached £20.8 million, up 20% from the first half of 2017.

The company also completed two acquisitions this year, bringing its principal royalty portfolio to fourteen.

In August, Anglo Pacific unveiled a US$50-million investment for a 4.25% shareholding in Labrador Iron Ore Royalty (TSX: LIF), after the US$1-million acquisition of a 0.5% net smelter return royalty (NSR) on Candente Copper’s (TSX: DNT) Canariaco project in Peru.

Labrador Iron Ore Royalty Co. (LIORC) holds a 15.1% equity position in Iron Ore Co. of Canada (IOC) and receives a 7% gross overriding royalty, and 10¢-per-tonne commission on all iron ore products produced, sold and shipped by IOC.

The IOC is a leading Canadian producer of iron ore pellets and concentrate and has a 25-year mine life ahead, as well as potential for mine-life extensions.

Anglo Pacific expects its 4.5% stake in LIORC will bring between $4.7 million and $5.7 million of royalty-related revenue in 2019.

The addition of LIORC lowers Anglo Pacific’s exposure to coking coal from 46% to 42%, and trims its exposure to Australia from 70% to 64%, while increasing its exposure to North America from 18% to 26%.

Its largest share of income comes from its cornerstone royalty on Kestrel, an underground coal mine in Queensland operated by Rio Tinto (NYSE: RIO; LON: RIO).

“The main strategic objective of our investment in LIORC was obviously to build a diversified royalty portfolio,” Flynn tells The Northern Miner in an interview. “In the past we’ve been very concentrated on Kestrel, so we’ve been working very hard over the last couple of years to diversify our exposure away from coking coal, and we see the acquisition of a 4.2% stake in LIORC representing a very good step in that journey.”

Pit operations in 2016 at Largo Resources’ Maracas Menchen vanadium mine in Brazil, where Anglo Pacific Group holds a 2% NSR. Photo by The Northern Miner.

Flynn notes that LIORC was also attractive due to its high-quality products (its pellets are low in alumina, silica and phosphorous), which generally command a premium price, its location in a safe jurisdiction, and the quality of its operators. Rio Tinto owns a majority stake in the IOC. Flynn also pointed to waning supply in China, which is cutting back production on environmental and corporate social responsibility grounds.

As for its new royalty on Candente’s Canariaco project, Flynn says, it meets its goal of investing smaller amounts of money into “development royalties, which have the potential for much higher returns.”

He adds that “this project has the potential to become a very large copper operation over the years, and offer much higher returns than what we would normally expect to be able to obtain for income-producing royalties.”

Flynn says he anticipates strong financial results.

“The outlook for the second half of the year continues to look very positive,” he says. “We expect higher volumes from the Kestrel royalty and our Maracas vanadium royalty, which combined with an ever-improving price outlook bodes well for the second half of the year, so we would expect to report another year of growth to build on the progress of the last three years.”

The company also says that Kestrel will produce higher volumes. In August, a joint venture made up of EMR Capital (a private equity resource manager in Australia) and Adaro (one of the largest coal producers in the world), acquired the mine from Rio Tinto and said they plan to double production there over the next two to three years.

As for its 2% NSR on all products from Largo Resources’ (TSX: LGO) Maracas Menchen vanadium mine in Brazil, Maracas was Anglo Pacific’s standout performer in the first half of the year, with revenues up 12.9% year-on-year, and Flynn expects even bigger things from that contributor.

“We’re pleased that in the first half of the year the contribution from Maracas exceeded 10% of our overall income,” he says. “Income increased by 170% from Maracas — that exceeds the entire income from 2017, so looking ahead to the full year, we’re already ahead of where we were last year, just from that one mine.”

Flynn also notes that Anglo Pacific plans to make more acquisitions before the year is out.

“We drew down on our facility and used cash-on-hand to finance our LIORC stake, and we will return to a net cash position by the end of the year, which obviously gives us plenty of liquidity,” he says.