Anglo Pacific Group invests in mining royalties. Questor keeps a buy.
Anglo Pacific Group 274½p+13¼ Questor says BUY
Last year was a difficult one for mining royalty company Anglo Pacific Group because of production problems at Rio Tinto’s Kestrel mine and a slide in commodity prices. However, this year should be much better.
Anglo is an unusual beast. The company is not a miner, but it provides capital to mining companies in return for royalties. It uses this
income to invest in more income streams as well as pay a dividend to shareholders. This means the group has exposure to the mining sector but it does not have much of the operational risks associated with operating mines, nor does it have to deal with the issue of rising costs facing miners.
However, there are risks associated with the investment that were demonstrated last year. At the moment, Anglo gets the majority of its revenues from the Kestrel mine in Queensland, Australia, and there have been problems there with flooding and the change-over of a “longwall” mine. Longwall mining is a very productive way of digging out coal, involving the removal of a large panel of coal in one slice. There was also a planned shutdown of a processing plant that hit output.
However, this isn’t really too much of a problem. The coal is still in the ground after the delays and the royalties will be paid once it is mined.
Production at Kestrel is expected to recover during 2013 and the company should also benefit form the fact that the Queensland mine has increased the royalty rate on coking coal by a quarter to 12.5pc when the price is above A$100 a tonne and by half to 15pc when the price is above A$150 a tonne.
Also, the Four Mile Uranium mine in Australia is expected to start production later this year, with a royalty of 1pc payable to Anglo.
In the year to December 2012, Anglo’s royalty income tumbled to £13.3m from £34.7m the preceding year because of Kestrel and a fall in the coal price. The balance sheet is strong, with £24m in cash and no debt.
Management have increased the total dividend despite the fall in royalty payments by 4.6pc to 10.2p a share. The final payment of 5.75p will be made on August 7. The yield is about 4pc and management are committed to growing the payment.
The valuation of Anglo’s assets has fallen by 5pc to £353m over the year, as the mining sector suffered a correction. However, this is not that significant given the scope of the changes in the industry during 2012.
Management has been building up the royalty portfolio having acquired two interests in the year. It continues to believe that uranium and gold remain attractive investments for the company’s business model.
Last year was tough for miners and tough for Anglo in particular. However, Questor likes the model and the long-term nature of the income streams. While not entirely without risk, Questor last tipped the shares in August when they were at 249p and maintains a buy rating as the shares are well below their 2012 peak of 340p.