RIO TINTO’s Kestrel coal mine in Queensland, where Anglo Pacific holds a 7 to 15 per cent royalty. Uniform and underground machinery at the mine is entirely pink, in support of a local healthcare charity.

Rio Tinto Cranks Up Kestrel Coal Mine in Queensland

Issue 52, July 2013

Rio Tinto’s coal division has begun production from a $2.1bn extension to its Kestrel mine in Queensland, lengthening its mine life by 20 years to 2032. The news promises a ramp-up in cash flow for London-listed royalty group Anglo Pacific, which holds half of a 7 to 15 per cent royalty on blocks of the expanded mine.

“It’s extremely good news,” Anglo Pacific’s chief investment officer Chris Orchard told Global Mining Observer. “We think this is one of the great royalties out there, in the public arena anyway.” Expanded capacity of 7m tonnes per annum is due by the end of 2014.

“It’s a very large investment by Rio,” Orchard says, “and we are very pleased to see their commitment to getting production up and running and getting their money back. It’s top rate hard coking coal.” Sales above A$150 per tonne incur the full 15 per cent royalty charge.

As the former owner of farmland above Kestrel, Rio’s only underground coal mine, Anglo Pacific has claim to half of the crown’s mineral rights over much of the deposit. Orchard expects approximate attributable production of 3m tonnes per annum until 2016, before a “substantial volume pick-up.”

The structure means that Anglo Pacific benefits from both Rio’s underlying investment and the tendency of Queensland’s government to bump up rates, whilst its de minimus operating cost model ensures that any increase in revenue drops to the bottom line. The company has increased its dividend every year since 2002 and is yielding 5.7 per cent.

The extent of Rio’s investment in Kestrel, which has included more than 3,400 tonnes of steel and construction of a 8km conveyer, has highlighted the benefit to Anglo Pacific of having deep-pocketed counterparties able to invest throughout the cycle; its other operators include Anglo American and BHP in Brazil and the Pilbara.

Uranium revenue is expected later this year from a 1 per cent royalty over the Four Mile deposit in South Australia. Subject to drilling requirements, it also has a 2 per cent royalty over Hummingbird Resources’ 3.8m ounce Dugbe gold project in Liberia, which on Monday announced in-fill drill results of 39m at 1.9 grammes per tonne.

Anglo Pacific closed on Thursday at £1.88, equal to 9 times annualised first quarter royalty income.

“We think this is one of the great royalties out there.”
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