Anglo Pacific Group plc (OTCPK:AGPIF) Q2 2022 Earnings Conference Call August 25, 2022 4:30 AM ET
Company Participants
Marc Bishop Lafleche – Chief Executive Officer
Kevin Flynn – Chief Financial Officer
Conference Call Participants
Marc Bishop Lafleche
Good morning, everyone. Thank you for joining us today to discuss Anglo Pacific’s Half Year 2022 Results. We are incredibly proud to report our best half year results in the group’s history. Each of our portfolio contribution, adjusted net income and cash flow per share were records for the half year period. And what we’re seeing is that the low-risk nature of our business model as a royalty and streaming company is incredibly pronounced in today’s inflationary environment.
Our top line royalty and stream interests helped us generate a highest ever levels of EBITDA at a margin of over 90%. The company is in a very strong position for further growth, with $180 million of liquidity available to find further royalty and stream acquisitions. And that follows a recent acquisition of a royalty portfolio from South32 for $185 million in July. So in summary, Anglo Pacific has delivered strong financial performance a significantly enhanced growth profile, we’ve maintained our balance sheet strength, and furthermore, we’ve established ourselves as the leading future facing metal, commodity royalty business. So all in all, it’s been a great half year period for the for the company.
Looking ahead, we have also announced today that we plan on renaming the company, which fundamentally reflects an evolution of our portfolio, which at its core has seen a change in its composition. But also, its commodity exposure, such that with around 90% of our contribution to come from the future facing commodities in the next years. We think it is appropriate and the right time to reflect the change in the underlying nature of the business. And we’ll be making a further announcement on this in the coming weeks.
But with that, I’ll hand it over to you, Kevin.
Kevin Flynn
Thanks, Marc. Good morning, everybody. If we can turn to the financial highlight slide, please. See our echo Marc’s comments very pleased to present what are record results for Anglo Pacific for the first half of the year. If we look on the left-hand side of the page, we can see the portfolio contribution chart showing that the first six months of 2022 surpassed the whole of 2021. So phenomenal achievement from the portfolio in that period. These record results were largely driven by pricing, as volumes in the first six months were largely consistent with a comparative period in 2021. But looking at pricing specifically coking coal by 260%, and cobalt was up 75%.
One of the main virtues of our model, as Marc just touched on is that the majority of these revenues fall through to the bottom line, we can see this in the middle chart and adjusted earnings per share, which were up almost four times on the same period in 2021. Now this correlation between income and profit is not being experienced in many other sectors right now, where inflation is rampant, which is resulting in significant margin erosion. But the royalty model is as we have been saying it’s very defensive in times like this.
We ended the period with very strong dividend cover, and we’ll touch on this later the dividend very well covered by the portfolio excluding Kestrel, and without the inflation threat based in other industries, the dividend is very well protected going forward.
If we turn to Slide 6, please which summarizes the income statement and I’ll use this slide to provide some commentary on some of the recent updates in our portfolio as well. But overall contribution was up 300% compared to the previous period, predominantly driven by Kestrel and the record levels of coking coal prices achieved in the first half of the year and in the first quarter in particular.
Now, it’s worth remembering Kestrel is very unique in our portfolio, as the royalty rates here increases through a ratchet mechanism with commodity prices. So not only to the price increase during the period, but the weighted average royalty rate increased from 8.3% to about 12.3%. So a 50% increase as well, which really shows when commodity prices are very high. There’s a real compounding impact for Kestrel. So this drove earnings from that royalty alone to be $70 million in the first six months.
Although coking coal prices have trended off a little bit from these highs in Q3 thus far. The announcement recently of the new higher Queensland royalty rates which Marc we’ll discuss a little bit later should compensate in the second half of the year for a large part of these pressing decreases. Looking elsewhere, we had a very good half from Voisey’s Bay, he generated almost $14 million of revenue, again, buoyed by very strong cobalt prices in the period. Now we think of our total volume of deliveries about two thirds of these have occurred in the first half of the year. So we wouldn’t expect the same kind of run rate to happen in the second half. But overall, very pleased with the contribution from our most recent producing addition to the portfolio.
Menchen and Maracas both had solid performances in the first half. And Marc again, later on, we’ll outline why there are grounds for optimism to come from these assets going forward. Whilst in the short term, the fundamentals for copper and vanadium, in our view, seem very favorable. We’re hopeful of near-term volume increases from Mantos as they continue their Debottlenecking project. But the operator of Maracas has reduced their guidance by around 8% for their financial year 2022. As a result of some weather and production issues, some of this volume reduction has already occurred in the first half of the year.
Our formal royalty disputes. We received a favorable judgment on this case in the first half of the year, which will result in backdated royalty payments and interests to come. But as the operator has chosen to appeal the decision, we are not currently recognizing these back payments until the outcome of the appeal is known more certainty. Lie Ark [ph] was perhaps an idle outlier in the portfolio the dividend income in the first time from these assets reduced by around 50%, reflecting a pullback in the iron ore price, which is kind of endured into the third quarter of the year. But as part of the Voisey’s Bay transaction, we reduced our stake in this asset by about 75%. So the impact here is not as material as it would have been a year and a half ago.
EVBC probably did fall short of levels achieved in H1, mainly volume driven due to ongoing challenges being worked through by the operator. And McClean Lake, this was operational throughout the first half of this year, resulting in combined contribution of 2.6 million, you might remember that this operation had been placed on care and maintenance for a part of the first half of 2021. Due to COVID protection measures. We did note the announcement by Comarca [ph] post half year of its intention to operate the mind at 75% capacity from 2024 onwards in order to stabilize the uranium market.
Now they haven’t indicated how long that these measures will be put in place for. But if and when that should occur, we should expect to see slightly lower contributions. But overall, the first half of 2022 produce an outstanding performance portfolio and sets the full year up very nicely for another record here for Anglo Pacific Group. We expect H2 to be strong but probably not quite as strong as the first half, given the recent pullback in coking coal and cobalt prices in particular. But that said, there’s some very clear catalysts for growth in our portfolio moving forward and Marc will research on these illustrate later.
If we can move to the next slide, which is a summary of our income statements, I won’t spend too much time on this slide as we’ve kind of touched the main areas that drive the significant increase in bottom line profit after tax. But it’s worth noting that our operating expenses were largely in line with the same period last year, something which not many other business models can report at the moment. Finance costs reduced in the period as we had lower average borrowings. And also we had some one off finance costs in the first half of last year associated with the refinancing of our borrowing facility associated with the Voisey’s Bay transaction.
So overall, profit after tax was just under $100 million, and excluding the non-cash in valuation items in the income statements such as the $42 million Kestrel royalty revaluation or adjusted earnings in the period around $60 million, which is a record for the group and producing adjusted earnings per share at $0.28 in the period four times higher than the comparison period.
Turning to Slide 8, this is a snapshot of our balance sheets at 30th of June and clearly this predates the most recent $185 million acquisition that we undertook. So this this slide is probably a bit out of date. We’ll look at the cash and debt position on the next slide. But it’s worth noting that the customer loyalty valuation increased in the period due to both higher pricing inputs going forward. But also now the new higher royalty rate, the majority of the value of this asset will be realized in the next two years, as volumes from Kestrel really start to step down at the beginning of next year, as we start to see the transition into an out of the private royalty area. But that said, with current coking coal prices of around $250 a ton, these are still significantly above the long-term average. And we’re really well placed here to capture meaningful contributions from the royalty as it moves towards the end of its economic life.
Turning on to Slide 9, similar to the balance sheet, the slide is a bit out of date given the recent acquisition. But you can clearly see the impact of our strong first half results, dropping right through to the bottom line, and deleveraging in the first six months. Absent the South32 acquisition, we announced recently, we’d be in a net cash position at the end of this quarter, which really is a remarkable achievement given that we drew $123.5 million to finance the Voisey’s Bay acquisition. And that was only 15 months ago.
The South32 acquisition, we structured this in a way really to preserve balance sheet strength and financing flexibility for the short to medium term. So the day one cash payments of $48 million, brought total net debt to just under $70 million on completion. And this number has come down to about $50 million, currently, following the receipt of the monthly cash flow installments. With coking coal prices, where they are about $250 a ton, and obviously the new Queensland royalty rate as well, we’d expect that the portfolio should generate sufficient free cash flow to largely finance the $9.6 million quarterly different consideration payments associated with the South32 acquisition.
Looking into the short term, we’d expect the Iron Core $20 million financing is probably going to be made in early 2023. And given that and the deferred consideration payments associated with South32. We think our net debt shouldn’t based on current spot prices remain under $100 million in 2023 and reducing thereafter. And this is all with moderate gearing levels. So with our new refinance facility, which provides up to $200 million for growth, we have a $23 million residual stake in Lie Ark [ph] and around $8 million of treasury shares. We’re now in very good shape from a balance sheet and financing perspective with around $180 million of liquidity today to finance further growth.
Slide 10 is our capital allocation policy. And it’s worth remembering that we’ve now acquired $400 million of royalties and streams in the past 16 months. And as of right now we only have $50 million of net debt in the business. So our balance sheet remains in a very strong position to add further growth. On growth, we continue to see very good opportunities to continue adding further royalty and streams to the portfolio like we’ve been doing recently. And as I mentioned just now as part of the South32 acquisition, we modified the borrowing authority which preserved the $150 million headline number, which eliminated the $25 million step down which was due to take place this month. And we’ve also agreed a $50 million accordion feature with the banks which will be available for further investments.
And this is really important to us because it enables us to act very quickly and opportunistically to continue growing our business. Our quarterly dividend remains unchanged. I think the next payment is due at the end of this month. It’s fully covered and importantly, protected from the impact of inflation. And as I mentioned earlier, our 7p annual dividend is currently well covered from our core portfolio, which now excludes Kestrel due to its short-term nature. We do intend to switch to a US denominated — US dollar denominated dividend in the second half of the year just to bring this in line with our presentation currency.
So, we will be providing the US dollar equivalent to 7p per share. But we will provide more details in due course in relation to the mechanics of this. So that’s it from the financing perspective. Having run through the record numbers and outlining our current healthy liquidity position.
I’ll hand back to Marc to provide an update on the company.
Marc Bishop Lafleche
Thank you, Kevin. Turning to Slide 12 please operator. We repeat this slide. It reflects our asset base as of the half year period, pro forma for the South32 world the acquisition not a material changes from when we last showed this slide when at the time of that transaction. 75% of our exposure is approximately to base metals and copper and nickel. Cobalt, which is exactly where we would like the portfolio to be positioned for the next decade. And furthermore, we have seen our coking coal exposure tick up to slightly over 10%, as Kevin mentioned, as a function of the revised Kestrel royalty rates and near term or near-term short term metal price outlook.
That being said, this does represent a milestone for the group, where over the next few years that 13% is, should be a peak level running down to close to materially nil in the next few years, such that close to 90% plus of our exposure will be to future facing commodities.
On the Slide 13, we’ve summarized historical commodity prices, because we think that it’s we wanted to highlight that despite the pullback in some of our key commodities underlying our portfolio in the past, say six to eight week period, prices themselves still do remain at very healthy levels, especially if we look back to say 2020 or earlier, coking coal, for example, at $250 per ton is actually double the average of coking coal price in 2020. And at cobalt price at $25 per pound, that first of all remains well above the price we assumed and for the calendar year 2022, at the time of our Voisey’s Bay acquisition.
But furthermore, there’s a really positive outlook for electric vehicles where we’ve seen for example, in the first half of the year 50% increase in EV sales, which is quite remarkable. And furthermore, recently, the Chinese State Reserve Bureau has announced that it could look to expand its strategic cobalt stockpile during the second half. So if that happens, we would also anticipate some fairly positive price support. But to make this point in a in a simpler way, and to echo what Kevin has already said, we don’t expect in the second half of the year, the same level of record performance from the portfolio. But certainly, we do expect a strong showing in the context of prior years.
Slide 14 provides a bit more detail and sensitivity to the revised Kestrel royalty rates. As Kevin mentioned, this royalty is quite unique in that it’s ratcheted. But the right another feature of the royalty which is quite unique is that our royalty entitlement is derived from the rate set by the Queensland Government. And so therefore, as a first of July this year, as Kevin mentioned, we saw the introduction of a number of new royalty rates when coal prices exceed $175 per ton, and Australian dollar terms. The right-hand side of the page, we’ve illustrated the impact on a per ton basis of royalty revenue to Anglo Pacific Group, from the prior regime to the current regime, a plus or minus the current spot price of $250 per ton.
What this means is that all else being equal per ton, core soil angle Pacific would expect incrementally US dollars approximately $10 more per ton. And in a more bullish scenario, assuming $400 per ton. On an illustrative basis, that would mean almost $30 more per ton, or almost double what we would have received from that royalty. So as you can see here, the — there is significantly more torque and a fantastic tailwind as we approach the end of this royalties life.
Turning to Slide 15, the next 12 months are going to be quite busy across a number of our assets in our portfolio. Some really key milestones and catalysts. To highlight here today, first of all, Voisey’s Bay, is now as reported by valet beginning of transition from the avoid open pits to the underground operations. That’s expected to last the next 12 to 18 months. And therefore, volumes on 2023 are expected to be in terms of delivered volumes Anglo Pacific under our stream, expected to be roughly flat year on year 2022 to 2023. ramping up thereafter, up to 2.6000 tons of cobalt produced by Voisey’s Bay per annum in 2025.
POE [ph] is one that we’ve highlighted on almost every call we’ve had the past few years. So we’ve seen some big milestones here already and expect more to come later this year. First of all, we saw first production at POE start a plant. Second, we saw the completion of a bankable feasibility study with some details to be released to the publicly Kaiser and Nicola later this quarter. And third, we’ve seen the group initiate financing activities. So all in all, we want the one that we’re monitoring exceptionally carefully over the next 12 months.
At Mentos, Kevin’s already mentioned the approach of the near completion of the Debottlenecking project. But turning ahead at the time of the acquisition of this royalty, we did flag and we’re quite excited by the prospect of two sources of potential upside. And those two are really now coming to light and we expect further visibility and daylight into how and what that might look like in the next 12 months. First, there’s the potential to further increase the production capacity of the sulphide concentrator plant from 7.3 million to 10 million tons. And second, the capstone is currently evaluating potential to extend the life of the copper cathode production. Mat Capstone has announced that a pre-feasibility study on relation to both these initiatives was completed in Q2, and that they’ve proceeding to advance basic engineering, which is expected to complete in Q4 this year.
Trying to look at West Musgrave. The first piece of news here since we last updated you on West Musgrave is that Oz minerals has received all regulatory approvals required to proceed with construction. And they are currently finalizing agreements with local communities and effective peoples. Oz minerals has restated that is targeting a final investment decision later this year. So that is one that we anticipate in H2. More generally, in relation to Oz minerals they have, as minerals has announced that it received a indicative proposal from BHP to acquire all shares and Oz minerals.
And as a third-party royalty company, we aren’t in a position to comment or speculate on that approach, or Oz minerals response or any of the specifics. But we would point out, however, that we see this as a positive validation of our investment case underlying our recent West Musgrave royalty acquisition, both in terms of the quality of the project, but also the assets longer term upside potential.
At Santa Domingo, we expect in early 2023, or in the first half of 2023, and updated feasibility study, that’ll include the wider district synergies. At Domingo call out the project is progressing well, although it’s probably likely that the CPS triggering our $20 million investment will be met in H1 next year rather than Q4.
At Maracas, Largo continues the construction of an ilmenite byproducts plant, and that’s progressing on track for its production in 2023, based on largos disclosure, and turning now to look more generally at some of our uranium exposure. In the past six months, we’ve certainly seen a strengthening in the uranium market fundamentals. But most recently, we’ve seen a pretty material strengthening in the near term to long term outlook, where we note that in the past 24 hours, I’ll report a change in Japan’s energy policy, which would see a near term restart of a number of idled reactors in 2023. And beyond that, the possibility of extending the life of the existing fleet, as well as the construction of new next generation technology reactors. So all in all, that is quite positive for our uranium exposure.
On Slide 16, last month, we announced the acquisition of a high-quality portfolio of advanced stage development, nickel and copper royalties from South32. In a nutshell, without going into too much detail, this transaction allowed for the recycling of significant cash flow generated largely by our coking coal royalty into copper and nickel, which, as everyone who has been tracking Anglo Pacific will be aware of that that is straight down the fairway in terms of delivering on our stated strategy. Kevin mentioned already that the transaction structure with specifically designed to maintain balance sheet strength and flexibility to keep growing the business and certainly the last point but not to be diminished. These were the key royalties in this acquisition related to what we view as world class projects. With well-regarded operators with a strong development track record or strong sustainability credentials on all located in OECD jurisdictions.
On Slide 17, we’ve highlighted here an interesting dynamic where the key strategic challenge at Anglo Pacific and in the past has certainly been to replace the Kestrel royalty. That’s really been the core of our business development strategy for the past nine years. And we are really proud and delighted to show that the acquisitions completed over the past eight years have transformed not only our commodity exposure, but also our medium-term income profile, such that as the Kestrel royalty runs off in the next two to three years, based on the existing producing assets and, and growth within medium term growth and angle Pacific’s royalty book, we have a line of sight on income of $100 million, excluding Kestrel.
So turning now to Slide 18. To summarize, our portfolio is performed exceptionally well in the first half of the year. And whilst commodity prices have indeed pulled back, we do remain well above lows that we’ve seen in the last five years, such that we do in our historical context, our portfolio appears well positioned for a strong second half. And we continue the virtues of the royalty and streaming model to continue to shine in the context of the strong inflationary pressures seen across the mining sector. That the vice royalty rate at Kestrel is an exceptionally helpful tailwind. Prior to the royalties run off, which will see us continue to recycle met coal royalty cash flows to deliver the balance sheet, and should we see opportunities into future facing commodity, royalty and stream acquisitions.
In the medium and long term, the structural demand trends for future facing commodities remains very, very strong. And all the while having now completed almost $400 million of acquisitions in the last soak a year and a half. We retained balance sheet flexibility with firepower and excessive $150 million. And furthermore, on strong balance sheet to underpin our which should hopefully underpin investor confidence and a baseline dividend that’s level of 7p. So to clewed on our pipeline, at the moment, we’re seeing equity valuations which are quite challenging for both mine developers, but also producers.
These equity valuations are particularly depressed in this high inflationary environment. And that suggests that we may see opportunities to put capital work for with good projects or producing assets. And that being said, we think it’s likely that our next acquisition of meaningful scale will be a producing royalty or very close to production. But should we see a high-quality development stage opportunity with a ticket size of $20 million to $30 million, that may be something that we that we would pursue.
So, thank you very much for joining us today on the presentation. And we’re happy to begin the Q&A session.
Question-and-Answer Session
Operator
Great, thank you very much, guys. Our first question is from Cameron Needham from Bank of America. Cameron asks, how are you thinking about some of the potential jurisdiction risks in Chile specifically in relation to the Santo Domingo royalty?
Marc Bishop Lafleche
Thank you, Cameron. Capstone has disclosed publicly if amount of detail in relation to a stability agreement agreed with the Chilean government. We’d be happy to provide further detail. If that’s helpful, I think our takeaway from that information and that disclosure from Capstone at this time, is that arrangement should provide a base level of support for that project.
Operator
Great, and our second question is from Steven Reeves from SCR Holdings. Steven asks, many successful companies like yourselves are making excellent profits at the moment and in these inflationary times are raising dividends as a result, given Anglos, profits are likely to you start to fall back to more normal levels. If you keep the dividend flat, is there not a risk, the share price will start to fall back?
Marc Bishop Lafleche
Well, thank you very much for the question. It’s difficult to speculate as to what may or may not happen in the future given of a number of factors that go beyond the ongoing run rate of dividend. I think what we would say though, is echoing a comment made by Kevin earlier in terms of capital allocation, our first priority is always remains to ensure that our balance sheet is in very strong position. Second of all, at this time, we continue to see really attractive opportunities. That being said, we will maintain our very disciplined approach to growth. But at the moment, we see an opportunity to continue to scale the business and buy a value of creative royalty and stream transactions.
Operator
Our next question is from Andrew in PEI, is there any imminent route news about the acquisition of an accretive paying royalty, and creative painting royalty? Apologies?
Marc Bishop Lafleche
Apologies, could you please repeat the question?
Operator
Sorry, my source Andrew from PI. Is there any imminent news about the acquisition of an accretive paying royalty?
Marc Bishop Lafleche
Okay, thank you for the question. As I mentioned earlier, we would anticipate that the next transaction of material size would likely be in relation to a producing or near production royalty. That being said, we don’t generally comment publicly as to the near-term nature, or medium- or long-term nature of our pipeline. I think it’s clear. One point that should be clear, however, is that we are constantly reviewing opportunities. And to round that answer out, I would tell So highlight the fact that our portfolio today has a fairly significant amount of organic growth potential, as I mentioned earlier, when highlighting some of the near term, key catalysts, and across our broad epoch, which includes both producing assets, but also development stage assets.
Operator
Great. But our last question is from Andrew, or sorry, is from Adrian Maument [ph] in AB. What are your thoughts on carbon credits, slash sequestration royalties? Is this something Anglo Pacific might pursue in the future?
Marc Bishop Lafleche
Thank you for the question. The carbon space is incredibly dynamic at the moment. And in some ways, on the carbon capture side, for example, the United States almost transformed overnight with the latest inflation legislation that was passed. Quite recently, we’ve monitored the space and at this time, are strategically focused on our on our core areas of strength, which is fundamentally to acquire future facing metal royalty and stream acquisitions. We may consider carbon streaming. And while of course, any carbon stream would need to stand its own two legs on its own merits, that would probably would be more in terms of a context of maintaining carbon neutrality for Anglo Pacific Group, rather than as purely an economic investment on its own led simply to position the portfolio towards carbon exposure. But that can change; it’s something that we’re monitoring but not something that we’re actively pursuing at this time.
Operator
We’ve had another question. It’s from David Chromie [ph] from Fort William Merchant Securities Limited. David asks, given the likelihood of continuing pressure on base metal prices in the current economic environment, will Anglo Pacific consider such rather than future metals.
Marc Bishop Lafleche
So, we would very much include base metals within the remit of the nomenclature future facing commodities. When we think about future facing commodities, are considering two groups the first those groups that are directly required as part of the electrification of energy consumption, or in other words, decarbonization. And second, commodities are mine projects that have relatively cleaner pure greener operational footprints. products. So I think it’s worth just highlighting that base metals are absolutely within its remit. And in that context, underpin our strategy to position our portfolio with approximately 75 exposures to copper, nickel and cobalt.
Operator
That’s been all the questions we’ve had today. So, Marc, I’ll pass back to you for any closing remarks.
Marc Bishop Lafleche
Well, thank you very much, everyone for joining us today and this half year results. We are. It’s been a really strong half year. And while there’s no shortage of interesting developments across the commodity sector, already, only a few months into the second half of the year we look forward to having and showing what we’re on track for a record 2022.
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