Shares in royalty specialist Anglo Pacific Group PLC (LON:APF) have soared by more than 25% over the past week, as a strong set of financial results serendipitously rode positive market sentiment towards commodities.
This strength is not something that has come as a complete surprise to Julian Treger, the former fund manager who took the helm at Anglo Pacific around two and a half years ago and who is now steering the company towards what he sees as considerable opportunity.
It’s underpinned by the strong performance in the company’s royalty portfolio and specifically from the new Narrabri royalty on a coal mine in New South Wales, Australia.
This mine is owned and operated by Whitehaven (ASX:WHC), a well-established coal producer with operations right across Australia, and a company that clearly knows its business. Narrabri produced 8.3 mln tonnes of coal in calendar year 2015, well ahead of the design capacity of 6 mln tonnes and comfortably ahead of the assumptions made by Treger and his team at Anglo Pac when they priced the acquisition of the royalty back in March 2015.
“When we bought the royalty we assumed production would be 6.5 mln tonnes,” says Treger. “But now it could rise to as much as 11 mln tonnes per year by 2018. And that certainly flies in the face of peoples’ scepticism about coal demand.”
Indeed, that last point is one of the main reasons naysayers on Anglo Pacific can get a hearing: coal, is the commodity of the 19th and 20th centuries, according to the prevailing narrative – there is no future for it in the 21st century.
Up to a point, this is true. In the Western World, the popularity of coal has taken a dip. But in South East Asia, where most of Anglo Pacific’s coal royalty revenue is generated, the thinking is different.
For one thing, the coal produced at Narrabri and at Kestrel, the Rio Tinto mine over which Anglo Pacific holds a royalty, is of the cleaner variety.
And it’s with that in mind that Treger suggests the global coal market should be regarded from a perspective outside of the western media mindset.
“In South-East Asia there’s a general acceptance that coal is a very useful source of power,” he says.
And he speculates that in due course coal prices should turn and rise once more as markets begin to recognise this. Even in the West, he says, it’s possible that there may be a change of heart.
Treger’s bet big on coal, bringing in Narrabri as a new royalty to add to the existing mainstay of the company, Kestrel.
But there are other strings to the Anglo Pacific bow now, and it seems likely that from here on in the company will diversify away from coal.
Salamanca is now at the financing stage, so there is a little way to go yet before Anglo Pacific sees any income from this project, but it’s backed by some experienced players in the uranium industry who between them built up Mantra Resources into a billion dollar company.
If anyone can get the financial support to put Salamanca into production, they can. And when they do, Anglo Pacific will be looking at a significant value uplift.
“We still carry that investment at the value we paid for it in 2011,” explains Treger, although royalty valuations can be nebulous.
The value of the Kestrel royalty was written down in 2015, causing Anglo Pacific to slip into losses, on paper. On the other hand, Treger is also confident that given the recent performance at Narrabri, that royalty is now worth substantially more than the US$65 mln price that it initially paid.
“My sense is that the write-downs will have stopped now,” he says. “There should be more write-ups now,” although auditors are often more cautious about actually signing off on non-cash value uplifts.
Even so, the outlook is certainly improving. Treger talks of doing further deals that range in value from US$10 mln to US$1bn, although obviously anything at the top end would involve partners and Anglo Pacific playing more of an asset manager role.
But at a more basic level, the outlook on Anglo Pac’s royalties is also improving. The amount of mining that occurs across the company’s Kestrel ground is set to increase, according to guidance given by the operator Rio Tinto (LON:RIO).
And in total the company now has five producing royalties to its name: the two coal royalties, a uranium royalty at the Four Mile mine in Australia, vanadium at the Marac á s Menchen mine in Brazil, and gold at the EVBC mine in Spain.
“Anglo Pacific is well placed to take advantage of opportunities in the royalty and streaming space, to further strengthen our portfolio and return to shareholders,” says Treger.