SMALL CAP SHARE IDEAS: Mining royalty company Anglo Pacific Group

Two major factors underpin the case for Anglo Pacific Group, London’s longest standing mining royalty company.

The first is that, to use the modern jargon, it’s becoming increasingly future-facing.

Anglo Pacific owns income streams on vanadium, nickel, cobalt and copper assets, amongst others, all of which are commodities that are essential to the future of the global economy. And not just the future in general, but the green energy future.

Anglo Pacific owns income streams on vanadium, nickel, cobalt and copper assets

In that regard the company ticks many of the environmental and social governance boxes that are so crucial to investors these days, as well as positioning itself well in a sector that’s likely to experience long-term and sustained demand.

After all, the industrialisation of the developing world isn’t going to stop and, where China led the way, other countries like India, Indonesia and Saudi Arabia are likely to follow. As their economies grow, so demand for the crucial industrial metals like copper, vanadium, nickel and cobalt will also grow.

But if positioning itself for the future is key, Anglo Pacific is also benefitting from its current position, as a well-established royalty player in an industry that looks like it might be in for a bumpy ride.

In a time of inflation and with war in the air, metals prices haven’t been performing that well. Not that good for Anglo Pacific, or so you might think.

But actually, a booming mining market isn’t always the ideal time for royalty companies. Yes, the income stream can benefit handsomely from high metals prices, but such an environment also means that the junior mining companies from which the likes of Anglo Pacific often source their royalties are flush with cash.

And that in turn means that cutting good deals on royalties is that much more difficult.

However, when times are harder, and equity markets are in less generous mood, royalty companies like Anglo Pacific can find themselves in a much stronger position when it comes to deal-making. So, with the base metals complex all much weaker this year, look for announcements on new deals from the likes of Anglo Pacific, and its recently-listed fellow traveller on the London market Trident.

Anglo Pacific in particular has an ace up its sleeve at the Kestrel coal mine in Australia. Yes, the company’s been moving away from coal for many years, and will continue to do so. But just at the minute the coal price is riding higher than ever as everybody scrambles to source their energy from somewhere other than Russia.

What this means is that Anglo Pacific has plenty of cash coming to allow it to fund new deals. From out of the old, springs the new. But the high coal price does at least mean there is plenty of money around to continue to fund the transition.

In the first quarter of 2022 the company brought in $43.6million in income from royalties, the third record-breaking quarter in a row. Now contrast that with Anglo Pacific’s share price, which has dipped since the spring, in line with the wider market.

Is there a mismatch? There could well be, because although the global economy is under pressure and the US economy looks likely to go into recession in the next quarter, not all companies will suffer.

As we’ve said, Anglo Pacific has its eye firmly on the long-term prize. But it’s also pretty well positioned for the short-term.

As at the end of March it had upwards of $120million in the bank to act either as a cushion against financial shock, or as a war-chest to provide funding for future deals. The immediate focus, while other options are being evaluated, has been a reduction in debt.

At the end of the first quarter debt stood at just over $45million, but more than three months on it’s likely to be significantly lower than that now.

Apart from anything else, a new nickel royalty has just come on stream, so there’ll be an additional contribution from that. For the time being though, it’s the coal, and to some extent the cobalt that’s providing the platform for growth.

And when the coal drops away, as it inevitably will in the end, the Anglo Pacific that will be left standing will be focussed on the energy metals of the future with all the long-term upside that entails.