Earnings Call: H1 2020

Aug 27, 2020

Thank you all for joining the call this morning and for your interest in our company. I will do a brief overview of the interim results. And then as usual, hand over to Kevin Flynn, who will do the financial review. That will be followed by Juan Alvarez, who will cover the portfolio developments. And then, it will come back to me for a final outlook summary and then we will take questions and answers. So starting on Slide 4, as usual these days with the COVID-nineteen update, we continue to closely monitor and evaluate the situation with regards to COVID. But at this time, all the material lines underlying our royalty related revenues remain in production. And in fact, UVBC, which was off production, came back on earlier a couple of months ago. And we're pleased to inform you that the McLean Lake royalty, which has been off, should start production in September. So all our royalties will be producing that were producing before from Q3. We are also seeing Kestrel benefiting from the recent improvement in coking coal prices, the stabilization of that and some hopeful recovery and COVID related border restrictions being relaxed in India. We also have seen some strong increases in iron ore and copper prices in the last quarter, as you will see on the bar to the right. And overall, we think that these challenging operational and capital market conditions for mining companies should present opportunities for us to acquire new royalty streams. Those were somewhat slower to progress in the last quarter as everything was much more difficult with our due diligence and also counterparties moving more slowly. But hopefully, in the second half of the year, we will see progress on that front. So turning to Slide 5, Kevin will go through the contributions from the various portfolio companies to the H1 revenues in further detail. But overall, the figure for income was at 19,100,000, 43% lower than the previous period. And that was mainly a result of the significant decrease in coal prices by the COVID pandemic, particularly in Q2. In Q1, the Chinese market was effectively not producing coal. They were continuing to operate their smelters for iron ore. And so the hoking coal price was quite high. But in that was reversed, and the Chinese were producing domestically, whereas the rest of the world demand wasn't that high. As the world recovers, we expect coking coal to recover with it. The impact of the lower coal prices was compounded by the ratcheted basis of our royalties, so there was a lower royalty rate. And there were a number of other one off events like the conclusion of the Glencore contract that Morak has mentioned, which in the short term hurt us, but long term should be beneficial with higher margins. And also, companies like Labrador Iron Ore taking advantage of the slowdown in Q2 to make more CapEx investments, which also resulted in lower portfolio contribution. Those one off events are highly unlikely to occur again in the second half of the year, and we expect continued recovery in pricing of commodities. And in anticipation of that and a stronger outcome in H2, we are maintaining the group's quarterly dividend of 1.75p per share, in line with our stated objective to return a significant proportion of our income to shareholders as dividends. Turning now to Slide 7. That is a repetition of a slide we showed earlier in the year, which shows the way in which the portfolio contribution has grown over time, but also emphasizes the way in which we have been making acquisitions and diversifying away from the dependence upon Kestrel. So that effectively by last year, we had replaced Vestal's contribution in 2017 to the business. And you'll see that trend very much being emphasized on Slide 8, where you can see from 2013 till now, Tesfro has gone from 76% of our assets. As of the 30th June 2020, it was down to 21% of our asset base on a net after tax basis. And this is the first time in the company's history for many, many years that we have replaced coking coal with another commodity as our primary exposure. And there you can see that our Labrador iron ore investments, as well as our other iron ore investment in the development portfolio now contributes 31% of our net asset value. You can also see the way in which the geographic exposure is being diversified. And Australia, having been 90%, now 41%. Canada has grown significantly to become our 2nd largest area of exposure, and South America has come up as well. Slide 9 looks at the way the portfolio would appear if the funding rights that we have to incur and how we are taken up. So incur was a high quality long life calcium carbonate project in the Dominican Republic with a processing facility in the U. S. And we've entered into a $20,000,000 financing agreement on that, which is subject to conditions, but we expect to be called on that funding in late 2021. And the Powe is a low cost nickel and cobalt operation in Brazil, where we have the ability to invest up to $70,000,000 as the project is developed. And including those two commitments, you'll see on the pie chart to the right that those metals would now become 29% of our total commodity exposure. And iron ore would, in fact, become 25%. And so I think this illustrates the way in which we are moving quite rapidly to reposition Anglo Pacific as a royalty company for 21st century materials, which are high quality and are going to be used to create a greener economy. Moving to Slide 10. This illustrates the way in which the dividend cover was strong in 2019 and why we are confident in maintaining the dividend at the historic level for the Q2. But despite the high dividend payments and the very high yield, the chart on the right illustrates the way in which our EBITDA multiples remain very, very low in the mid single digits as well as the share price compared to net asset value continues to trade at well below 1x NAV. Page 11 looks at some of the ESG achievements that are occurring within our counterparties, the way in which Labrador Iron Ore is producing pellets, which result in much lower Scope 3 carbon emissions. And you can see that illustrated on the right side of the chart. They're making a big difference in carbon emissions by as much as 40%. And the rest of the table on the left looks at the way in which Montes Blancos, our copper royalty is moving towards renewable power. The vanadium producer, Lager, is reusing its water and using local employment. And McLean Lake are mining in a more efficient fashion. So with that, I'll hand over to Kevin Flynn to cover the financial review. Kevin? Thank you, Trina. Good morning, everyone. If we turn to Slide 13, which is our new performance indicators. As Julian mentioned, our revenue and portfolio contribution was significantly down in the first half of the year down 43 percent. So, not surprising to see the impact of that coming through our KPIs. But I suppose looking beyond those, the main reason for this was an unprecedented disruption in coal markets caused by the Indian coal ash restrictions as a result of COVID-nineteen. And I think lastly we've made very considerable progress in terms of diversifying away from coking coal certainly in terms of asset value as Julian mentioned as well as becoming our largest royalty. For the next couple of years, we would still expect Coca Cola to represent a majority of our revenue source whilst the revenue from our other investments made over the past few years kicks in. So a significant disruption in the coal market unfortunately has impacted our earnings in the quarter top of the year along with 1 or 2 other one off brands which we've got up next. But I think it's important to note that as we think a lot of the drivers are hopefully behind the initial shutoff of COVID-nineteen, which really came through the Q2 of the year. As the past markets have returned to a degree normality and actually as well as got a lot of commodities in our portfolio very, very well But as well, the key royalties which contribute to our revenue remaining fully operational at normal capacity. And that's really testament to our strategy of investing in jurisdictions, which really prioritize the mining industry and support our industry of key economic activity. Kestrel and Maribor suffered in the period due to the disruption in the coal market. Largely as a result of the Indian import restrictions, which really favorably sort of a key import market offline for basically the Q2 of the year. And with the China self sufficient in terms of its supply and demand, well, the domestic versus which basically resulted in producers being private tapers. So a very weak first the potential for COVID-nineteen in particular to outperform in the second half of the year. So we're hopeful we will see a rebound in terms of pricing coming from CapEx trial and we're pretty optimistic on volumes as well. We might see market dynamics is a for the agreement termination. As June said, we actually what was impacted on Hatch Fund, But we have a discount associated with that alternative engine. And now that the first function is back in hand, we would see some higher margins coming through in this royalty going forward. And MANSET was pretty steady during the year, during the year to date. We're pretty pleased with that, as I'm sure Juan will discuss. Coupled by a week in the second quarter, but actually have really rallied since. So we see some upside to come from that in this area. For now, unfortunately, the legal process is still ongoing. Obviously, I don't want to say too much about the CROSSA on this call. We still believe we have a very good case in both revenue performance should have been higher other than the level of charges and the deduction that they continue to apply. Our standard It might be surprising that the revenue from wireless not outperforming on our P and Ls, but the reason for this is that there was some planned as well as like CapEx expenditure being undertaken by the underlying operator, which reduced the level of dividends paid up to Lyle. We would expect, given the strength of the iron ore market at the moment and the fact that our CapEx is now behind them, that there could be some upside to those numbers in the second half of the year. Elsewhere, the McLaren Lake revenue, certainly in terms of the principal repayment portion of that revenue, was down and this reflects the care and maintenance of this operations throughout the Q2 of the year. And even if we still again similar to the Labrador, you might expect that to be higher than the gold price performance, but there's been a working capital drag associated with the 2 week shutdown. So there's been a slight lag between the resumption of fair sales and receipt of cash restricted to our own. And so overall, whilst it's disappointing to report a 43% downturn in revenue, it's largely due to increases in terms of disruption in core markets, but we see a lot of potential for I've seen that H1 last year, probably slightly, in terms of used to pay share based payments. So this time, we have made a provision for the remaining costs for the 4 mile process. So we would expect to see slightly less costs coming through in the second half of the year. Amortized cost. So once you go further down the balance sheet and take the deferred provision against the Kestrel headline number of €75,000,000 as Julian pointed out. LIORC is now our largest asset exposure on our balance sheet as of 30th June, the first time, a non core royalty has held that Some other items just to flag the item on exploration interest as of June, the $5,500,000,000 that basically is our holding embargo here at GEA, which has performed very well recently given the fact that they have attended one of the 2 key high value permits left to commence construction. So that portfolio was probably some upside impact versus the probably large option. Overall, our net debt increased. We'll touch on that when we get to liquidity, but we're very comfortable. Hi, good morning, George. And Kevin, there is some static coming from your line. We just double check you have your PC muted? Okay. Apologies everyone. Hopefully, you can hear me a bit better. I'm just about to turn to Slide 17, which is my last slide before handing over to Juan, just to touch on our cash and bond position and where we see this moving in the second half of the year in terms of availability to finance future growth. Despite revenue being planned in the period, we still generated a significant amount of cash from our portfolio of 21,900,000 Our cash flow in the first half of the year, the outfilling dividends and taxes are always kind of weighted more to the first half of the year as we pay the balance of our previous year's tax in May or June of the calendar year. And obviously, the dividend, the final dividend is a much higher level or was a much higher level in 20 19 versus the interim level. So those 2 items are weighted heavily heavier to the first half of the year. So we would expect those to reduce a relatively low level of leverage around that one time that June. We obviously have capacity to go to 2 times leverage. So And also to note, we did make GBP7,000,000 of investments making into 5 different periods of reinvestment in the first half of the year. So I think just to summarize in terms of where we are from a financial position, I think we're still very strong balance sheet. Opportunities in the second half of the year. This is interim behind some of the commodities that we have exposure to and we would be cautiously optimistic that the second half of the year will be better for us given that some of the normal events in the first half of the year are behind us and hopefully some of the normalization in the coal markets to come. I will wrap our Andre, who is willing to discuss the portfolio. Thank you, Evan and good morning everyone. Over to Slide 19, the first slide shows our current global portfolio. And as Kevin and Julian mentioned, the only COVID related shutdown with Experian are the Zenith and Clayne Lake assets and the BBB team work and both of these are the businesses non Ontario. During the COVID situation, we've been proactively keeping in contact with our counterparties on a more regulated basis just in order to keep abreast where possible with any new development. Turning to Page Slide 20, technical production continued without significant interruption from COVID. However, Adaro did provide its production guidance for 2020 down from 11,200,000 tonnes. Importantly, the Kessel product remains a high demand product due to a developing characteristic and has contracted the majority of the 2020 production, mainly to AE customers including India, South Korea and Japan. Over to Page 2, Slide 21. We invested an additional GBP 5,700,000 per car increasing in our updated system in the center. And guidance from IOC on 2020 production is especially unaffected by COVID and remains at £17,900,000 to £20,400,000 tons. As mentioned previously, IOC has did announce the closure of 2 pellet plants out of the line at the end of the Q1 of 2020. But these have now been bought back online and we've seen the improvement in the demand in the Atlantic pellet market. Pacific. And Landtox, again, no significant disruption due to COVID. The debottlenecking project, which we embedded in and is due to increasing through to 7,300,000 tonnes, that continue to progress and build during completion in H2 next year. Once completed, project is expected to produce an average Over the page on Slide 22, Marika has mentioned, we've heard the some logistical challenges The project had a record level of sales in Q1 2020, which is great for our work, royalty, but also attributed the second deferred consideration payment of $1,500,000 payable to the original items of the royalty. 2020 production guidance is unaffected by COVID and has remained unchanged at 11.75 to 12.25 to a 1000000000 5, and sales guidance remains at 9.5, are now recognized at the time of delivery instead of that in my day and this impacted several months on the time of shipment from supply to the delivery at the end of The planned upgrade have been put on hold for the short term, including Kiln improvement, which would have had the effect of increase namely 1100 tonne on the bottom and then it is now presented until Q4 2020. At Narrabri, typical year 2020, strong coal production was within the white paper coal guidance, specifically to 60,500,000 tonnes and slightly below fiscal year 2019 production mainly because of the major long haul that happened in this year an upgrade to deliver the long haul support. The very exciting 2021 is 6.7000000 tonnes, which is roughly in line with the 2020 production. The next one will move during Q1 calendar year 2021. Also, the narrowband stage reinsurance program appears to be on track with EIS and engineering and remain shut at present. However, Cameco has announced that it will restart operations at the beginning of December this year. New drivers into this year are 10,000,000 pounds of uranium compared to previously positive £18,000,000 of a press wide portion of the Spanish authority. The production decline for the fiscal year ending 30th September 2020 as lease spend by Wazwana and then widened to fall short mainly due to lower grade or fee cost. At Salamanca, where we own an approximately business and equity stake as well as the 1% NSL and all reductions in the project, We're very positive there. Bartley Energy announced that it had received a very long wait of the permanent license, which is issued by the local government municipal authority. This was really a great debt, permitting with latest reports being that construction is on time and on budget and commissioning is due in 2021. We've also had several very positive news stories on our other on some of our other development assets during the half. At Tango Reactor, 10 Wednesday announced that final major quarter few metals were taken at the near 20% stake in the company and has allocated 2 engineers to work on a joint technical committee to help identify the optimum strategy to develop the project. On the JUV-one gold project in Liberia, Humberger Law whereby ARS will undertake feasibility study on the protein in return for a 49% interest. These were all very positive developments for us. And now I'll hand back over to Julian to wrap up. Thank you, Juan. Yes, I think those positive developments do bode well for the medium term growth in our royalty income, and we've been very encouraged by these developments, particularly in Q2. So wrapping up the outlook, we do expect stronger results in the second half of the year across much of the portfolio. As I said, cash flow should benefit from the recent stabilization and slow growth in coking coal prices. And the fact that the Indian market has been reopened effectively to coking coal imports. Labrador Iron Ore will benefit from the very strong current iron ore prices, as demand fundamentals remain strong. And the one off charge from Marakka's mention in Q2 is not going to be repeated thereafter. And we expect enhanced margins from the conclusion of the Glencore overtake agreement to assist us going forward. Copper device is helpful for mentholed copper. And when the Denison financing agreement kicks in again from September, that will be an additional source of income. So we face the second half with optimism and we do have substantial undrawn borrowings available, as Kevin mentioned, to finance further growth in H2 and we are seeing some interesting opportunities. It's been frustrating having executed on them, but we continue to expect to be able to do 1 or 2 transactions in the second half. With that, I'll hand back to the operator to arrange the Q and A session and look forward to your questions. Thank you. Thank you, sir. We have a question in the queue from Richard Hatch from Berenberg. Please go ahead. Thanks very much. Yes, good morning, Julian and team. Thanks very much for the call and congrats on that. I saw this as the testral and electrical product takes into the market and where that sort of discount range is in various parts of the cycle for the coal market, what we're seeing at the moment and where we believe that's going. Secondly, just on the dividend. You point out about the flexibility on the balance sheet, but I just wondered, Kevin, if you might just be able to expand a little bit more about how you're considering the dividend cover just in a range of scenarios for the coal price, for example, if we see the met coal stays copper for longer, how does that sort of shape your thinking? And I suppose that kind of cash flow and patient? Thanks. Sure. Well, taking the first question about cholesterol, I think what we were seeing before COVID was that as Kestrel was ramping up production, they were needing to attract new customers and were providing a larger discount to the benchmark pricing of the product in order to gain market share. And with the developments in Q2 in India, they then had to divert some of that material to China, where again, there was an oversupplied market and they accepted larger discounts and those discounts were up to 20%. You would expect as the market tightens and we understand that they sold house production, we'll remember that the other those discounts would narrow somewhat. But if we don't have complete clarity as to what those narrowed discounts would be. I'll hand over to Kevin to discuss the dividend question. Kevin? Thanks, Jim. Yes, thanks for the question. I think dividend level is And I think it's whilst we expect some of the malignancies to return to the coal markets, which will be key for us in the second half the year. I think it will be very premature to make a dividend decision or alteration at this point based on really unprecedented disruptions to coal markets for what's hopefully an isolated period of time. So again, I think we like and we aim to have 2 times dividend cover. We may not achieve that this year depending on how quickly the coal markets reopen and rebound. But again, I mean, I think it's too premature to think about dividend levels, especially if some normality returns to those markets. And then, Richard, with regards to the question about potential deals, we continue to look particularly at areas which are interesting and out of favor. So we're looking at cobalt. We're looking at lithium. There are some more copper opportunities. And we're looking at a potash and phosphate. There are a variety of transactions of different sizes. None of them have already fallen away over the last quarter. Some have been delayed. I think many companies are making decisions more slowly in the current environment. But the aim is very much to reposition Anglo Pacific away from the core heritage towards being the royalty company for 21st Century Materials. I think we went on the road to achieving that. The focus continues to be on producing royalties and then a number of those, which are in the pipeline and we'll just have to see which one of those which ones of those in fact we can bring to fruition and how we finance those will be decided at that time. Are no further questions on the line at this time. I would now like to turn the call back to the host for any additional or closing remarks. Well, thank you very much for all of your interest. You know how to get hold of us if you have any further questions. But I'm glad we've got through this more difficult second quarter. As I said, we look forward to remainder of the year with optimism. We're positive about prices recovering as expected. The positive developments in the development portfolio bodes well for the medium term. And we will continue to execute and diversify the portfolio. But do reach out to us if you have any further queries. Many thanks for your time.