Anglo Pacific Group PLC set to reap rewards from Kestrel mine ramp-up

Kestrel mine royalty set to deliver record volumes this year
Peel Hunt sees greater shareholder returns in 2019
Strong finish to 2018 with record income from royalty portfolio
Anglo looking to diversify its portfolio with US$100mln warchest

What Anglo Pacific does:

Anglo Pacific Group PLC (LON:APF) (TSE:APY) is a London and Toronto-listed company that gathers royalties through investments in mining and exploration assets.

The group has built its presence in the mining royalty space on the back of its coal royalty at the Kestrel mine in Australia but in the past few years, it has branched out into new areas and invested in new commodities to diversify its portfolio.

Its royalty portfolio is primarily in Australia, North and South America, and Europe.

Royalty portfolio:

The Kestrel mine is Anglo’s biggest income contributor but the company’s portfolio also includes a royalty held over the Maracas Menchen vanadium mine in Brazil and another over the Pilbara iron ore mine in Australia.

Others include the El Valle-Boinas/Carles gold, silver and copper mine in Spain, the Amapa & Tucano iron ore mine in Brazil, the Ring of Fire cobalt mine in Canada, the Narrabi coal mine in Australia and the Dugbe mine in Liberia.

Inflection points:

The operator of the Kestrel mine, Adaro Energy, has implemented changes at the project that are expected to increase production in 2019 by 40% year-on-year. Andaro expects any increase in production to be well absorbed by the market due to the high demand for Kestrel's premium quality coal.
Anglo Pacific directors have recommended a 25% increase in its final quarterly dividend for 2018 to 3.125p, to be approved at its annual general meeting on 13 May 2019. That takes the total pay-out for 2018 to 8.0p, around a 14% increase on the 7p per share paid in 2017.
The group has US$90mln to invest in new opportunities after a strong finish to 2018.
Income from the portfolio jumped 15% to a record £48mln-50mln in 2018, led by contributions from the Kestrel and Maracás Menchen mines.

Blue Sky:

Peel Hunt has a ‘buy’ recommendation and target price of 213p each on Anglo Pacific shares.

The broker said the expected 40% increase in coal production from Kestrel in 2019 would take the total output to 5.9mln tonnes for the year.

This led Peel Hunt to raise its estimates for 2019 total income by 3% to £63.5mln and for earnings (EBITDA) by 4% to £55.7mln.

Due to better-than-expected income from Kestrel and Maracas last year, Peel Hunt now expects the build-up of a larger cash pile.

“The extra cash flow we believe the group will generate leads us to increase our 2019 estimates for dividend per share to 8.5p from 8.0p,” the broker said.

Peel Hunt added: “We see deal capacity of over £110mln by mid-2020, suggesting management has capacity to make a significantly larger transaction than it has achieved to date.”