CAPE TOWN – U.K.-listed Anglo Pacific PLC (APF.LN ) is a rare breed for a mining sector-focused company.
It’s primary business isn’t running a mine or owning a deposit, but securing royalties from a mine’s revenue stream and in turn providing long-term, secure revenue streams for its shareholders.
The FTSE 250 company provides junior miners or project developers with the seed capital to fund the development of their project, in return for a royalty payment through the life of a project.
“The beauty of [royalties] is that you’re not affected by operating costs,” Chris Orchard, the company’s chief investment officer told Dow Jones Newswires Sunday. “You don’t have a lot of operational risk and you don’t have the balance sheet risk. You have a far more steady and secure revenue stream,” he added.
The royalty company benefits from the upside of a project’s resource and production expansion while keeping its capital expenditure costs fixed. In other words, it doesn’t have to pony up additional capital to expand a project as is often the case in equity investments, he noted.
The risk lies in the fact that it takes several years from the time the initial funds are granted to first production or rather the time when revenues start trickling in. Also, “if a mine goes on strike, it’s not good news for us. [But] for equity holders it’s disastrous” given their funding commitments, he said. The other notable publicly-listed royalty mining companies include Franco-Nevada Corp(FNV.T) and Canada Gold Corp. (CI.V).
Anglo Pacific, which has a market capitalization of about GBP300 million and posted GBP65.8 million in pre-tax profit in 2010, generates value for shareholders through share price performance and distribution of dividends equivalent to 3.35% of its net income. The balance of the cash is then reinvested into the business, Orchard said.
Anglo Pacific aims to grow its dividend 7% to 8% and has the ability to do so based on future expected revenues, Orchard said.
The company has grown its investment portfolio from two royalties on two Australian coking coal operations run by Rio Tinto PLC (RIO) and BHP Billion Ltd (BHP) to 17 royalties in a span of four years or so but only four of them are generating revenue, Orchard said.
It aims to now add three to four new royalties every year at a cost of about $15 million to $30 million each, or 5% of the company’s total asset value of $600 million per project, Orchard said.
The company’s investment criteria are good quality assets with life of mine of 10 years or more and locations with low risk profiles and good legal jurisdictions such as Australia, Europe and North America, in order to provide security for the royalty entitlement.
Commodity-wise, the company has about two thirds of its royalty interest in coal, and 20% in iron ore, followed by gold, uranium and chromite. Orchard said the company wants to expand across all its existing commodities and also push into copper and nickel, although the former is proving expensive at the moment. He said the company isn’t interested in aluminum because the initial cash layout is too big.
Anglo Pacific also invests in publicly-traded shares and buys small equity positions in some miners as a way to get to know management better and understand a project. Copper and nickel account for 15% and 9% respectively of that portfolio.
Copyright © 2012 Dow Jones Newswires