SMALL CAP IDEAS: Anglo Pacific’s chunky dividend looks more than safe

‘Anglo Pacific is in a very strong position currently,’ according to Julian Treger, the company’s chief executive.

London’s only mining royalty company of any scale put out full-year results on April 7, and they were good, showing new records hit in terms of revenues and earnings, and highlighting that for a company of its size, Anglo Pacific Group PLC (LON:APF) has access to a huge amount of financial firepower, both from its own balance sheet and in the form of various borrowing facilities that are in place.

Of course, things have moved on a bit since the year-end, but for Anglo Pacific the outlook remains fairly sanguine, as confirmed by a relatively robust first-quarter trading update that the company subsequently released on April 27.

This showed minimal impact on operations from the coronavirus (COVID-19), with the company’s portfolio performing strongly in comparison to the December quarter, albeit that some pricing weakness relative to markets a year ago took some off the shine off the 12-month comparison.

‘One can’t be complacent,’ says Treger, ‘but geographies we’re exposed to are operating relatively normally. The coronavirus has so far affected only 1 per cent of our income, and our model of diversified assets is proving somewhat resilient.’

Anglo Pacific derives its considerable income – nearly £56million in 2019 – from a portfolio of royalties and investments that provides exposure to coal and base metals across a range of jurisdictions, including Australia, Brazil, Canada and Spain.

And in spite of the widespread global uncertainty, what has been particularly noticeable is that pricing for two of the commodities Anglo Pacific has most exposure to – coal and iron ore – has held up remarkably well.

This may seem somewhat counter-intuitive, since the global economy seems to be on a world-wide go-slow, but Treger is able to explain matters fairly succinctly.

‘The smelters and the power stations that the coal and the iron ore go to, are very expensive and complicated machines and shutting them down is very expensive,’ he says.

‘In China they had to stop domestic mining, but keep the plants running. That meant prices of seaborne material, coking coal, thermal coal, and iron ore, actually went up. Because there was a continued domestic need without domestic production. And the same thing is happening in India.’

Treger concedes that this particular dynamic may not last long, and that it is difficult to predict anything very much at all in the short-term. But from the point of view of Anglo Pacific’s royalty income the message to date has to be: so far, so good.

What’s more, though it will be painful for the wider mining industry as a whole, the current situation with coronavirus may end up generating more opportunities for Anglo Pacific.

‘The mining sector was already very constrained (at) being able to access funding,’ says Treger, ‘but we’ve got US$75million in firepower.’

‘We’re in negotiations with counterparties,’ he says. ‘And it’s going well, although the physical due diligence is proving to be more complicated as a result of COVID-19. Things are slower, but then by the same token there are more opportunities.’

The opportunities he’s talking about are more in the medium to long-term, rather than of a short-term nature, though. So, while some investors may be able to make a quick turn on the movements in commodities like palladium or vanadium as South African production opens up or shuts down, the effects of all that are, says Treger, ‘too quick for us to take advantage of.’

Instead, it’s all about getting the finance in place for future recovery. And Treger has some clear views about this.

‘In the medium and longer-term the world economy should recover,’ he says.

‘But one of the long-term effects will be less supply. I can see there being a supply shock in two-to-three years’ time in commodities because there’s been no investment.’

And now, with the coronavirus constraining things further, those that have invested in new future capacity are likely to reap even bigger windfalls down the line.

It is in that context that the Anglo Pacific royalty and investment portfolio continues to broaden in scope.

‘The base metals, copper, nickel and zinc have been a bit out of favour,’ says Treger. ‘We’re interested in getting a bit more exposure to them.’

The movements in the makeup of the company’s portfolio bear this out. The relative exposure to coal is down, although the key Kestrel asset continues to perform well, while exposure elsewhere, to iron ore and base metals, is up.

It’s a trend that’s set to continue. ‘We’re slowly but consistently diversifying our mix,’ says Treger.

So what does this all mean for investors?

The first thing is that in stark contrast to the recent dip and then slight recovery in the share price, the company is in great shape financially and in terms of the opportunities that are open to it.

The second thing, though, which may be of more significance to investors in the immediate term, is that this strong financial and operational position is already translating into gains for shareholders.

In its financial results Anglo Pacific reiterated a commitment to its dividend, which is two-and-a-half times covered by earnings.

Dividend payers are becoming increasingly rare in any sector, especially ones that are committed to payments going forward too. The final dividend for 2019 can now be added to the quarterly dividend for the first three months of this year, meaning that shareholders are in line for a total payout of 5.875p between now and August.

‘Our final dividend should be paid in mid-June,’ says Treger. ‘And we have a very high running yield too. We remain prudent but there’s going to be a lot of income that we’re going to be paying out.’

Companies that are saying things like that with any degree of confidence you can count on one hand right now.