Royalty and streaming companies provide financing to operating mines in exchange for a percentage of the revenue generated by them, but do not have any exposure to rising costs or environmental liabilities, observes Gordon Pape, editor of The Income Investor.
Anglo Pacific Group (London: APF) (Toronto: APY) is a royalty company with exposure to metallurgical (coking) coal as well as iron ore and chromite, and a small exposure to precious metals. It recently completed a transformational deal that makes it worth buying.
Anglo Pacific’s primary listing is on the London Stock Exchange. It is listed on the TSX for convenience, although the trading volume is lower. The company reports financial statements in British pounds.
Anglo Pacific owns a portfolio of 17 principal royalty and streaming assets on five continents. These are focused on base metals and metallurgical (coking) coal and are located in mining-friendly jurisdictions, including Canada, Australia, Chile, Brazil, and Spain.
As of Dec. 31, 2020, 49% of its revenues were from coking coal, 20%, iron ore, 8% base metals, 8% thermal coal, and 1% battery metals. Its revenues are 96% derived from OECD (developed) countries, with 39% coming from Canada, 37% from Australia, 22% from South America, and 3% from Europe.
The company recently made a transformational acquisition. In February it spent US$205 million to purchase a 22.8% royalty on the cobalt stream from the Voisey’s Bay nickel mine in Labrador, managed by Vale (VALE).
In operation for 16 years, Voisey’s Bay is coming to the end of its open-pit life, which is expected to conclude next year but is developing an underground mine with a projected life to 2034, based on current reserves, with the potential for further mine life extensions.
It produces premium alloy-grade cobalt metal products as a by-product of its nickel/copper mining and has production costs in the second-lowest quartile of global nickel mines.
The deal is immediately accretive to earnings per share and was funded by a placement of 19.99% of Anglo Pacific’s share capital (raising $60 million), the sale of 77% of its holding in LIORC (raising $85 million), and from a new credit facility provided by RBC, Scotiabank, and CIBC ($60 million).
Cobalt has a variety of uses, including batteries, superalloys, catalysts, and carbides, with automotive batteries for electric vehicles (EVs) as the fastest-growing end-market. EVs require at least three times more copper and related minerals than conventional petroleum-powered vehicles.
And the number of EVs sold globally is expected to more than quadruple between now and 2025, climbing to nine million from two million last year, representing 10% market share from the current 2.7%. Battery demand is expected to grow at a compound annual rate of over 17% between now and 2040.
With 70% of cobalt supply coming from the Democratic Republic of the Congo (DRC) and 70% of the refining capacity located in China, Voisey’s Bay represents one of the few sources of supply that will be acceptable to the rapidly growing assets managed by environmental, social and governance (ESG) investors.
About 34% of Anglo Pacific’s revenues will be derived from cobalt after the deal, which together with 6% from other base metals and 1% from battery metals, means that 41% of its revenues and 61% of its assets will derive from battery-related minerals and metals.
With $20 million agreed to be invested in Incoa’s calcium carbonate development in the Dominican Republic and $2 million into Brazilian Nickel alongside the U.S. government, up to 51% of its assets could be battery-related metals in a couple of years.
The stock pays a quarterly dividend of £0.0175 (C$0.0298), which it raised by 7.6% in 2020, with the fourth quarter usually higher to reflect the performance of its assets. In 2020, the fourth-quarter dividend was £0.0375, making a total for the year of £0.09 (C$0.1537), giving a yield of 5.8%.
Anglo Pacific is for investors looking to gain exposure to growth in EV demand through a low-risk income-producing vehicle, with a demonstrated track record of adding value through well-timed asset purchases and sales.
The stock sells at a discount, using price/book value, price/cash flow, and enterprise value/EBITDA measurements, not only to precious metal royalty companies but to other base metals royalty plays. Buy at the current price.
