Anglo Pacific (APF) has built a leading position as an investor in mines, from which it generates royalties as commodities are extracted. It's a business model that's common in the US although little-known in the UK and it offers exposure to the upside of commodity prices without the operational risks and cost pressures associated with mining.
- Long-term demand for commodities
- Royalty model sheds risks
- Exposed to wide set of commodities
- Decent dividend yield
- Few producing royalties
- Some deals may not come to fruition
Mining royalties provide APF with an entitlement to a percentage of a mine's sales revenue, generally over the life of the project. Royalty companies secure such deals by financing development projects several years before production.
Crucially, mining royalties are directly linked to revenue - not to profits - and investors assume no liability for production costs or capital spending. This provides exposure not just to commodity prices, but also to volume growth and new finds. Royalty agreements offer miners a benefit, too - royalties only become payable on production whereas loan financing entails interest payments immediately.
Mining royalties are well established in the US, where companies such as Royal Gold and Silver Wheaton have flourished. However, Anglo Pacific is the only mining royalty company in the UK.
Mining royalty operations, of course, depend on demand for commodities, the prices of which have fallen appreciably since the summer. Yet the outlook for commodities remains strong, driven by urbanisation in the developing world. This is currently led by China, with India about a decade behind. Beyond that, other parts of Asia, South America and Africa could maintain urbanisation as a global investment theme for decades to come.
Urbanisation requires vast amounts of raw materials and is energy intensive. The demand this entails is growing just as miners' ability to satisfy demand looks less assured. Mines are depleting and the quality of ores is falling. Explorers increasingly have to drill deeper and turn to more remote, politically riskier locations. The only way miners can satisfy growing demand in such circumstances is if commodity prices remain firm.
| ANGLO PACIFIC (APF) | ||||
|---|---|---|---|---|
| ORD PRICE: | 251p | MARKET VALUE: | £274m | |
| TOUCH: | 248-251p | 12-MONTH HIGH: | 399p | LOW: 226p |
| DIVIDEND YIELD: | 4.1% | PE RATIO: | 13 | |
| NET ASSET VALUE: | 304p | NET CASH: | £36.7m | |
| Year to 31 Dec | Royalties (£m) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
|---|---|---|---|---|
| 2009 | 20.3 | 25.9 | 19.1 | 8.4 |
| 2010 | 30.1 | 65.8 | 52.0 | 9.1 |
| 2011* | 33.8 | 38.0 | 20.2 | 9.7 |
| 2012* | 35.7 | 30.7 | 19.7 | 10.2 |
| % change | +6 | -19 | -2 | +5 |
Normal market size: 700 Matched bargain trading Beta: 0.7 *Bank of America Merrill Lynch estimates (profits and earnings are not comparable with historic figures) | ||||
APF has five producing royalty deals and 12 paid-for deals still in exploration and development. It targets royalties from a broad range of activities, notably steelmaking (iron ore, chrome, nickel and coking coal), energy (thermal coal and uranium) and precious metals. In addition, APF holds a portfolio of investments (valued at £100m at 30 June 2011) that it uses as a pipeline for future royalty deals.
The core producing royalty is at the Kestrel coal mine in Queensland, Australia, which is operated by Rio Tinto. APF should receive around $50m (£32m) from Kestrel this year. Rio is currently increasing the mine's capacity and extending its life from 10 to 30 years, and APF gets free exposure to this upside. Although APF only has five producing royalties, management expects a further four - plus the Kestrel expansion - to come onstream over the next couple of years.
Royalty deals come with their own set of risks. Deals are generally restricted to small and mid-size developers, which are less likely to have the resources and know-how to bring projects to production than big players. Nevertheless, APF is debt-free and cash-generative, enabling the company to pay a dividend that currently yields 3.6 per cent and to target dividend growth of 7 per cent a year.
