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Anglo Pacific happy with robust income and portfolio

Published: 09:00 08 Feb 2016 EST

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Anglo Pacific appears to be steering a steady course through current choppy waters

“We’re in good shape,” says Julian Treger of mining royalties specialist Anglo Pacific (LON:APF).

“Our income is going up quite sharply and that trend is expected to continue. We don’t have much debt and we are yielding 10%.”

Not many companies in the mining sector can say that these days, as the sector continues to be beaten down by weak commodities prices and poor sentiment in the equities markets.

But Anglo Pacific appears to be steering a steady course through these choppy waters, under the watchful eye of Treger, who took the helm back in the latter part of 2013.

Anglo Pacific was heavily exposed to coal when he joined, via its ownership of a royalty on a major portion of Rio Tinto’s (LON:RIO) Kestrel mine in central Queensland.

But rather than beating a retreat, Anglo Pacific chose to double down with the acquisition last year of a second major coal royalty, on the Whitehaven’s (ASX:WHC) Narrabri coal mine in New South Wales.

So far, that counter-intuitive move looks to have been right.

Coal may be an out-of-favour commodity in an out-of-favour sector, but because Whitehaven has actually produced more coal from Narrabri than had been anticipated, Anglo Pacific’s own royalty income has been correspondingly greater.

According to Anglo Pacific’s most recent commentary, Narrabri “continues to outperform expectations” and is now producing 8.3 Mt run-of-mine coal (CY 2015), well in excess of its original design capacity of 6 Mtpa, with permission to further increase production to 11 Mtpa.

That’s all to the good, and the resultant cashflow has allowed Treger to talk confidently about the future of the company, and to contemplate how and when the next deal will get done.

Treger is under no illusions that the current market will improve any time soon.

Indeed, from his standpoint, it looks like the contrary might be the case, and Anglo Pacific’s recent dividend cut to 3p for the half year is an all-too painful reminder of that.

But even so, as the Narrabri deal demonstrates, there are good assets to be had for the right price, and the longer this mining bear market continues, the more attractive the valuations are likely to be.

To that end, Treger, has been sounding out possible sources of funding should any potential deals materialise, and it looks as though at this stage, with Anglo Pacific shares close to year lows, that debt may be the preferred route.

Nothing’s been decided yet, and Treger himself isn’t willing to be drawn into specifics as, speaking on the phone from New York, he explains the import of the latest quarterlies.

Brokers across the board seem to be fairly supportive of Anglo Pacific’s latest set of numbers and its prospects.

“These look like good numbers from Anglo Pacific,” ran the commentary from SP Angel.  They continued that “despite a fall in coking and thermal coal prices of between 15-25% the company increased royalty income as production from Kestrel and Narrabi come through.”

Peel Hunt meanwhile, argued that the dividend at 6p would be maintained for at least three years, with a likely upward revision after that.

And Investec stated that it was encouraged by the performance of the Kestrel royalty, but argued that the key going forward will be the acquisition of new royalties.

Will there be more deals to come?

You bet. “We are long-term investors,” says Treger.

Watch this space.

 

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