I recently took a position in Contango Holdings PLC, a micro-cap company that are focused on coking coal and due to start production this year. This blog isn’t about that but you can read my research note here.
For now the market is ignoring the stock but as they formalise off-take contracts which will trigger production start it should get some attention given the annual projected EBITDA should comfortably exceed current market cap and the company extending their interests into gold !
The coking coal link however lead me to Anglo…
So Anglo Pacific…
So as I was looking more into coking coal (a critical ingredient for steel) I stumbled upon Anglo Pacific (APF). I’d also seen a few other investors had picked up on it too.
The company have been reasonably leveraged to coking coal given their large royalty interest in Kestrel which is tiered and starts at 7%. This has been a solid income generator for Anglo however softer coking coal prices H1 related to COVID saw a reduction in royalties.
But Anglo aren’t just about coking coal, they have built a diverse portfolio of royalty and metals streaming interests which have historically performed very well. In fact they have 15 interests all focused on low risk jurisdictions such as Canada and Australia. This currently consists of nine producing royalties and another seven early stage producing/development project royalties.
You can easily find this info on their website and they have a very nice mix of commodities for someone that is long-term bullish and perhaps likes some diversity.
Notably the company now have a very large interest in Labrador Iron Ore Royalty Corp. (LIORC) having re-invested this years dividends back into the company (a smart move if you have seen whats been happening with Iron Ore in my opinion!)
So why have the shares dropped this year…?
A valid question and one we could ask about many other stocks but from what I can see the main reason is the fall-out of softer coking coal prices directly impacting the Kestrel royalties and then translating into a c.43% drop in royalty income H1.
But it wasn’t just coking coal related, the LIORC interest had capital commitments so special dividends previously seen were reduced and Anglo in fact re-invested some of the dividends back into the company as previously mentioned to increase their stake.
A couple of other one-off charges relating to other projects contributed to income decline also but not significant going forwards from what I can see.
Add the fact another resource company Berkley Energia (BKY) who hold an Anglo interest (I assume, consideration shares for the Salamanca Uranium interest Anglo have) have been selling stock into a less liquid market, the stock has taken a hefty hit!
Furthermore some shareholders may feel the considerable 7.7% divi is at risk due to lower H1 earnings however this doesn’t match the companies view who state the full dividend is still in play and will be confirmed post 2020 FY results.
You can hear the recent CEO interview here (after you’ve read my blog!)
So now my 5 reasons why I’ve taken a position then…
I’ve actually taken a two-tiered investment approach here, tier 1 mid/long-term investment that will sit in the SIPP to collect the divi and benefit from what I think will be a recovery in share price, tier 2, a short-term investment based on technical entry an share price recovery (a trade if you like)
- Commodity Exposure – the Anglo portfolio of existing and planned royalty/streaming agreements offer nice exposure to base metals and some other commodities. particularly Iron Ore but including copper, gold, nickel, coking coal, cobalt, vanadium and uranium. Projects fall within safer jurisdictions.
- Recovery Play – The fallout from COVID including softening in coking coal prices, combined with some one-off events an re-investment caused a drop in income for H1 2020, however coking coal pricing has been recovering and later H1 has seen a significant move in Iron Ore prices. Other commodities such as nickel and uranium have put in strong performances too. On that basis I’m expecting much higher returns H2.
- Technical – I like the entry level at around 100p, when you look at previous support and factor in a) temporary impact on income as discussed and b) Berkley Energia have been selling stock into lower liquidity compounding the share price drop.
- Track record – The company have made some solid investments, Management seem switched on and the dividend yield has been impressive with stellar growth in earnings over previous reporting periods which I can only see improving in an improving commodities environment influenced by weaker dollar and stimulus.
- Balance Sheet – The company have a strong balance sheet net debt c.£40m but are well capitalised, and have access to $55m of an undrawn borrowing facility with cash in the bank.
In summary, I think Anglo Pacific offers a compelling entry for either a short or longer term investment after a pretty hefty pull-back and If you consider how H2 performance should play out, the strong dividend yield which ‘should’ be maintained and the companies healthy financial position.
This seems to be backed up by a swathe of Director buying only a few months ago at 150-175p+ price levels which further instills connfidence!
Research materials prepared based upon my own analysis and research. Accuracy cannot be guaranteed and research notes should not be taken as investment advice. Please always do your own research.