The fall in commodity prices has caused considerable pain for Anglo Pacific (APF) and its investors in the past two years. Dividend payments - the chief reason for holding the company's stock - have fallen along with the share price, which since the beginning of 2014 has slumped 60 per cent. But with costs slashed, royalty income set to pick up in 2016 and management pledging a minimum "medium-term" dividend level of 6p a share, there are good reasons to believe that the worst is over. And without calling a rebound in the commodities Anglo Pacific is involved in, we believe the group's shares now offer investors exposure to a possible uptick in prices, without the burdensome long-term capital expenditure costs of most miners.
- High dividend yield
- Recovery in royalty revenues
- Berkeley Energia stake
- Internal costs trimmed
- Reliance on third parties
- Tough commodity market
Investing in a mining royalty group is a little like buying an index fund. Anglo Pacific operates from a single office in London with just 11 employees, but has a legal claim on royalty streams from 11 mines across five continents. Some of those investments are speculative positions in development projects, but by the end of 2015, 83 per cent of all assets by value were in production, including stakes in gold, copper, silver, vanadium and uranium projects.
Currently, Anglo's biggest source of income is a 50 per cent stake in a substratum portion of Rio Tinto's (RIO) Kestrel coal mine in Queensland, Australia. Assuming a discount rate of 7 per cent, the licence has been independently valued at £82.6m, although it has been a disappointment of late. Unfortunately, low coking coal prices and Rio's habit of drilling outside Anglo Pacific's royalty land resulted in a sharp decline in income from £26.5m in 2011 to just £3.6m in 2015. That trend should be about to start to reverse. Between 85 per cent and 90 per cent of Rio's mining activity in the second half of this year will centre on licences owned by Anglo Pacific, compared with just 30-35 per cent in the first half. This should increase to 90 per cent in 2017.
That pick-up in royalty income should lift earnings to cover the dividend in 2017. And while the payout is not expected to be covered this year, management has recently made a commitment to paying the higher of 6p or 65 per cent of adjusted earnings. This could be assisted by small asset disposals and last year's 35 per cent reduction in costs has helped considerably.
The other key source of cash comes from a royalty in Whitehaven Coal's (ASX: WHC) Narrabri mine in New South Wales. The licence, which entitles Anglo to 1 per cent of gross revenues, was acquired in March 2015 and provided £3.2m in income in the year as the miner hit production of 8.3m tonnes of coal. This is set to increase in 2016 as the mine expands to 11m tonnes per year. Elsewhere, an improved gold price and project efficiencies should boost the 2.5 per cent net smelter return royalty from Orvana Minerals' El Valle mine in Northern Spain.
ANGLO PACIFIC GROUP (APF) | ||||
|---|---|---|---|---|
| ORD PRICE: | 74p | MARKET VALUE: | £125m | |
| TOUCH: | 73-74p | 12-MONTH HIGH: | 105p | LOW: 50p |
| FORWARD DIVIDEND YIELD: | 8.2% | FORWARD PE RATIO: | 11 | |
| NET ASSET VALUE: | 95p | NET DEBT: | 1% | |
| Year to 31 Dec | Turnover (£m) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
|---|---|---|---|---|
| 2013 | 14.7 | 9.2 | 8.4 | 10.2 |
| 2014 | 3.5 | -2.8 | -2.5 | 8.5 |
| 2015 | 8.7 | 4.7 | 2.5 | 7.0 |
| 2016* | 10.7 | 6.5 | 3.5 | 6.0 |
| 2017* | 17.3 | 13.0 | 6.6 | 6.0 |
| % change | +62 | +100 | +89 | - |
Normal market size: 5,000 Matched bargain trading Beta: 0.73 *Peel Hunt forecasts | ||||
