Shares in Anglo Pacific Group plc hit a three-year high in the second week of January, spiking at 164p before giving up a modest amount of ground. For those who only read front page headlines, it might seem a little counter-intuitive that a company which has long relied on coal for cash flow should be so popular with investors.
But to Julian Treger, Anglo Pacific’s chief executive, it makes a lot of sense.
Mining, he argues, is a perfect way for investors to mix the old with the new: As enthusiasm for the latest fad, ebbs and flows there’s always one element of certainty, that the materials for whatever it is that’s being made will have to be mined.
Hence, there’s been a boom in the lithium mining sector in response to hype about electric car batteries, with cobalt slipstreaming along behind. Copper has enjoyed some benefit from this narrative too, as the thinking is that more wiring will be needed in electric vehicles than in petrol-powered ones.
And in the case of coal, there’s power. How much power is being used to mine the cryptocurrencies that are sweeping through world markets at the moment? That’s hard to quantify, but it has been notable that a US investor in Atlantic Power Corp (NYSE:AT) has been urging it to use surplus electricity to mine cryptos, while in China the authorities are said to have curbed power supply to known cryptocurrency miners.
In the US, much of the power generated for use in Tesla’s electric vehicles actually comes from steam-powered coal stations, an irony not lost on Treger. “These cars are powered by steam, as they were 120 years ago,” he muses.
Perhaps even more significantly for the longer-term, an immense amount of power is used to cool the world’s computers and to keep them cool, and in many countries, particularly outside of Europe, that means coal.
“It’s pretty unfortunate for UK investors that there’s a perception that coal is done for,” says Treger. “But demand continues to grow in absolute terms, although its share is falling.”
That dynamic, though subtle in itself, has had a fairly unsubtle read-through: the coal price has been rising. Indeed, in the past 12 months the coal price has outperformed the expectations of many analysts by at least 100%.
The other side of the same coin, though, is of course pollution. But paradoxically perhaps, here there is help for coal producers too. That’s because in China, a key bellwether for the world’s attitudes towards coal mining and pollution, production of the dirtiest coal is being aggressively phased out in favour of the highest quality coal.
This type of coal also commands the highest margin, and those that have it are quids in.
This is true in the case of Anglo Pacific, which derives the bulk of its royalty income from Kestrel, a high quality clean-coal mine in Australia operated by Rio Tinto. But Anglo Pacific doesn’t hold a royalty over the entire mine, and nor is the quality of the ground over which it does hold its royalty completely consistent.
So, three years ago, when Rio wasn’t mining as much of the Anglo royalty area as it is now, and when the coal price was lower, there was less money for Anglo Pacific. Not surprising that the share price dipped back then and took some time to recover.
But Treger’s been active in the intervening period. He’s raised money and acquired more royalties for the company, in clean coal at Whitehaven’s Narrabri mine, but also in other commodities.
“Coal isn’t going to go away,” he says. “It’s cheaper for the poorer economies of the world. The more thoughtful response isn’t no coal, but cleaner coal.”
Even so, the overall percentage of Anglo Pacific’s portfolio devoted to coal is now smaller, given the overall exposure to uranium, vanadium, gold, copper, silver, cobalt, iron ore and nickel.
“Generally we’ve done one or two transactions per year,” says Treger. “But this year I hope we can do three or four.”
He’s helped by a higher share price, of course. But also by a market that seems open to business, and seems well and truly over the optimistic sky-high valuations that were generated by the last boom.
But what type of deal would he like to do, bearing in mind that different markets around the world have had different responses to the new technologies that are emerging?
“Toronto has been a bit subdued,” he says.
“But Australia has been on a lithium, electric vehicle bandwagon for probably about 18 months now. There’s been a bull market for the more speculative mining stocks, but that’s a sort of universe on its own. We try to block out the chatter. But other than in the energy space we’re not seeing yet a very hyped story.”
Cobalt, for example, he thinks is probably nearing the end of its run. The emphasis instead, goes on general, longer-term global economic development.
“Base metals like zinc, copper and nickel could still run. The price of copper bottomed out at US$2.00. It’s now US$3.20. But it could go to US$4.00 or US$5.00. Or more. We’ll have to see.”
In that sense, Anglo Pacific stands out from most of its peers, in that it’s not focussed on gold and silver royalties. Instead, this is a royalty company that’s geared to the global economy and advancing technology.
“We as a sector are actually a beneficiary of disruption,” says Treger. “And there’s an opportunity for us to become the go-to royalty vehicle for the twenty-first century.”