Anglo Pacific: Tapping the Topline
Issue 32, February 2013
As bankers at S.G. Warburg advised their sober clients, since tax is the one thing sure to keep pace with inflation, alcohol post-excise is the best defence of wealth. Stamps, it is sometimes said, offer a similar guarantee.
Anglo Pacific Group, London’s only dedicated royalty house, has found an even better measure. As past owners of freehold land containing huge coking coal reserves in Queensland, mined by Rio Tinto since 1999, the company receives royalties on Rio’s Kestrel mine at a rate determined by Queensland’s state government.
In October, royalties were hiked 50 per cent to 15 per cent for sales above A$150 per tonne. Chris Orchard, Anglo Pacific’s chief investment officer, does not remember whether it is the third or fourth such rise in recent years.
“As a royalty company,” he says, “we have the luxury of money coming into us the whole time.” Besides its coking coal claims, it receives 1 per cent of all revenue from Anglo American’s Amapa iron ore mine, northern Brazil, being sold to Zamin Ferrous.
Cash inflows, coupled with its near-zero operating cost model, offer Anglo Pacific an unusual degree of earnings visibility, allowing the company to lift its dividend every year since 2002, whilst steadily expanding its portfolio of royalties over large, long-life assets.
Recent acquisitions include 1 per cent royalties over London Mining’s Isua iron ore project in Greenland and over Canada’s Ring of Fire, considered North America’s largest single future source of chromite. “It's a world class asset,” Orchard says emphatically.
In December, it also paid $15m for a 2 per cent royalty over Hummingbird Resources’ Dugbe gold project, Liberia. “We were very pleased to have struck the deal with Hummingbird. It's sitting on a potentially very large resource.” Drilling to date has delineated 3.8m gold ounces over two open-pit deposits. “For us to get a 2 per cent royalty was hugely attractive.”
Perhaps the company’s plummiest asset however is a 1.5 per cent royalty over BHP Billiton’s Railway deposit, bordering its iron ore operations in the Pilbara. “The ground has been well drilled, we know it's good quality ore and it's sitting in a very secure part of the world,” Orchard says. “In our opinion, its just a matter of time before it gets mined. Its almost a case of BHP’s existing operations migrating into it."
Anglo Pacific’s approach seems to be permeated by two things: a deeply conservative long-termism, communicated by pictureless annual reports and afforded by its existing long-life assets, and an innate contrarianism, eased by inflows throughout the cycle and opportunities that are thickest precisely when markets are weakest.
“We’ve tended to look for sectors that are slightly out of favour,” Orchard explains, having joined the company in 2007 shortly before chief executive John Theobald, with the brief of building its royalty portfolio. “Ideally, we would like to not be competing with an overly enthusiastic marketplace.”
Contrarian calls include a belief in uranium, as spot prices sit close to 7-year lows. “The market’s lost interest temporarily in uranium,” he says, “so for us it's an opportunity.” Anglo Pacific has royalties over Berkeley Resources’ Salamanca project in Spain and over the Four Mile uranium mine in South Australia, due to enter production this year. Orchard also sees opportunities in nickel, where Anglo Pacific has a 1.5 per cent royalty option over Horizonte Minerals’ Araguaia laterite. “There’s not a lot of optimism that I can find in nickel at the moment,” he says.
As miners aim to minimise dilution at current equity levels (which Orchard describes as “almost distressed in some instances”) the climate could not be better for striking deals. Anglo Pacific firmly believes that royalties tend to be less dilutive than equity raising. “A royalty is potentially advantageous because it is fixed on a particular project, whereas if you give away equity,” Orchard says with conviction, “you give it away on everything and everything you will do in the future.”
He attributes the market’s growing interest, in what has previously been labelled an ‘alternative’ funding model, to earnings season early last year when rising industry costs became evermore apparent. “Operating companies were reporting disappointing results, despite relatively high commodity prices. You started to see the disillusion in the share market. It was at that point that the logic of owning royalty companies started to hit home.”
Operating instead from Georgian offices at the heart of London’s mining district, Anglo Pacific offers an attractive counter to an otherwise volatile sector. “It's the nature of our market,” Orchard concludes. “The excitement comes and then it dies, but the reality is that mining is a long term process.”
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