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Anglo Pacific Group PLC

Anglo Pacific’s latest royalty acquisition is unlikely to be its last this year, as it still commands plenty of cash and a substantial borrowing facility

Anglo Pacific is London's only listed royalty specialist

Anglo Pacific Group PLC -
Royalty transactions are Anglo Pacific's speciality

Here’s a couple of salient facts about Anglo Pacific Group PLC (LON:APF)(TSE:APY).

One, at 186p, the company’s shares are currently trading at around 20% higher than where they were at a year ago. And two, the same shares are also trading significantly higher than they were at five years ago.

Who says there’s a bear market in the mining sector?

Indeed, this year, in May, Anglo Pacific’s shares got as high as 228p, the highest they’d been since March 2013.

In context, that’s a pretty good performance, because the truth of course is that there is a bear market in mining and that it’s been going on for at least as long as that five year stretch over which Anglo Pacific has returned its gains.

The thing about Anglo Pacific, though, is that it’s set up precisely to capitalise on weakness in the mining sector and to turn it to account both in bad times and good.

That’s because when traditional forms of finance are hard to come by companies with assets to develop turn to the idea of the royalty or the stream - the Anglo Pacific speciality.

Anglo Pacific is the only royalty specialist operating out of the London market and to some extent this gives it an appeal to local investors over larger specialists like Franco Nevada Corp (TSE:FNV) or Sandstorm Gold Ltd (TSE:SSL) that operate out of Canada.

But there’s more to it than that.

In fact, the Anglo Pacific model is unique in the world of mining and mining finance, in that it’s a royalty company with a deliberate focus outside of precious metals.

Thus, to date it has made something of a speciality in coal, with royalties on the Kestrel and Narrabri mines in Australia and the Groundhog development project in Canada. There are also production royalties on a vanadium mine in Brazil, uranium projects in Australia and Canada, an iron ore project also in Canada, and yes, a gold project in Spain.

So precious metals aren’t cut out of the equation altogether, they just aren’t the main focus, as they would be in the standard Canadian model.

“Our peers are mainly in the precious metals royalties,” explains Treger. “But for us precious metals royalties have always been too expensive.”

Which is why, in Anglo Pacific’s development portfolio there’s iron ore, nickel, uranium and coal, and why in its early stage portfolio there’s chromite, iron ore, and one other gold asset.

And it’s also why when Treger goes looking for deals later this year, as he surely will, the focus will be on base metals, in particular copper, zinc and nickel, and strategic minerals like vanadium, niobium, rare earths and possibly lithium.

“It would be great if we could do another couple of deals before the end of the year,” he says. “I think that’s doable.”

On 31st August the company announced its latest deal, the US$50mln acquisition of a Chilean copper royalty that will be earnings accretive immediately. It’s a significant outlay, but by no means exhausts the resources of the company.

On the contrary financially, Anglo Pacific remains in great shape to make further acquisitions.

In its most recent results, for the six months to June 2019, revenue was up 64% to £31mln, while free cash increased 53% to £27mln. There were equally impressive boosts to earnings and net profits, both of which more than doubled, and to net assets, which rose by 19% to 260mln.

More significantly for the future though, the company has significant financial firepower at its disposal for deal-making, as Treger explains.

“We are cashed up and we have resources to deploy,” he says.

“We’ll be putting around US$150mln to work, comprised of our net cash position by the year end and our borrowing facilities.”

It’s a formidable sum (although it does include the latest US$50mln deployment) and Treger is in no doubt that now is the right time to invest.

First off there’s the straightforward dynamic that mining companies are feeling the pinch and that royalty assets outside of the precious metals space are likely be on offer at attractive prices.

But more than that there’s the longer-term outlook, both for the global economy and the mining sector in particular.

Treger is relatively sanguine about the trade war. Instead of getting wrapped up in the day-to-day jitters of the market, he takes a more pragmatic view.

“I think Trump is driven by the Dow Jones,” he says.

“He’s not going to allow a tremendous accident to occur. Yes, we have this tussle between the two world powers, but both the US and China could be subject to considerable fiscal stimulus programs on the foreseeable future.”

In the meantime, the bear market in mining is storing up supply side issues for the future.

“What’s really driving our investment thesis,” says Treger, “is that every day the sector doesn’t invest in new capacity, supply will erode.”

So, as a broad play on the global economy, Anglo Pacific has considerable attractions. It avoids all the risks associated with actual mining, but is positioned to enjoy both project-specific uplift and uplift from ongoing global economic growth.

Yes, there are headwinds. But Treger has proved adroit at navigating through them thus far. It will be interesting to see what he does next.

Quick facts: Anglo Pacific Group PLC

Price: £1.99

Market: LSE
Market Cap: £360.22 m
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