Earnings Call: H2 2019

Apr 7, 2020

Thank you all for joining the call this morning. The format of the call will be that I will give a brief COVID-nineteen update, followed by a summary of the full year highlights before handing over to Kevin Flynn, the CFO, who will talk about the financial results. And then Juan Alvarez will go through the portfolio. And then I'll wrap up with an outlook section before taking questions and answers. So starting with the COVID-nineteen update, We are very closely monitoring and evaluating the situation. This is Page 4 of the presentation. And at this time, fortunately, the majority, the vast majority of the mines underlying the company's royalty rate related revenues remain in production. We have checked with Kestrel and it's not currently subject to any restrictions. IOC has switched some production from pellets back to concentrate, but that is not material with respect to the expected effect on their dividends to us for the year. Obviously, that's another situation we are monitoring. And then the two situations which have announced short term shutdowns have been EVBC and McLean Lake, but those are, at the moment, scheduled 2 4 weeks, respectively. And collectively, that's equivalent to only 1% of our portfolio contribution. So overall, I think we are relatively fortunate in our mix of jurisdictions and minds that almost all of our revenues for the moment appear to be intact. In addition, commodity prices underpinning the group's revenues have held up well thus far in 2020. In Q1, the price of bulk commodities such as iron ore, coking coal and thermal coal have been relatively buoyant, which has helped us with our mix. But we are constantly monitoring the situation and vigilant. We do think that in the second half of the year, the challenging capital market conditions will assist us in sourcing more transactions on better terms. And we continue to work as usual with all staff members working remotely and continuing to pursue investment opportunities. Over time, there may be some delay in terms of on-site due diligence. So the pace of executing transactions may slow, but we do think there are more opportunities. And we're in a strong position with our balance sheet and material funding flexibility with a low debt to EBITDA ratio of well under one times. So we are not complacent, but I think we're relatively well positioned. Turning then on Page 5 to the full year highlights, which obviously refer to last year. Last year was a record year for us. I think as we highlighted in our trading update, we saw increases of around 20% in our royalty related revenues and portfolio contributions, as well as operating profit. We had a lower increase in adjusted earnings per share because of a higher tax charge. And the overhead increased by around 28% as a result of planned investment to increase the deal flow rate. So reflecting that strong year, we are delighted today to announce 12.5% increase in the proposed total dividend and 1 third increase in the final dividend. But the dividend continues to be well covered at 2.3x, reflecting the high underlining earnings. Free cash flow was up around 20%, in line with the other metrics. And the net assets increased despite a £37,000,000 earnings from Kestrel, which depleted the value of that particular asset. Net debt at the year end was close to £30,000,000 reflecting the Montos Blancos acquisition, which was £42,000,000 and £20,000,000 additional investment in Labrador Iron Ore. So we were very much committed to growing and diversifying the portfolio, as we'll talk to later. Operationally, the royalty income increase reflected in part the strong growth in Kestrel's volume, growing by 42% year on year, offsetting lower coal prices. Labrador Iron Ore became the group's 2nd largest source of revenues. And we have further increased that investment in the early part of this year, taking advantage of lower share prices. Maraca shrunk despite growing sales volumes because of the sustained decline in underlying vanadium prices. And obviously, we invested in Montos Blancos in August, which we will have the full year benefit of in 2020. And then fortunately, just ahead of the COVID crisis, we did refinance and upsize the borrowing facility, which includes a further accordion feature, so providing the group with facilities of up to $90,000,000 So that's the financial highlights. If we turn now to Page 7, you can see the way in which the acquisitions we've been making over the past couple of years have been diversifying the portfolio, reducing our dependence upon Castrol such that in 2019, the non cash draw income was roughly equivalent to the cash draw income in 2017. So we are making progress. And in 2020, we expect a full year's worth of benefit from the increased investment in Labrador Aynor plus the Montos Blancos full year contribution. So that process should continue. And as you can see on page 8, it really has transformed the profile of the portfolio over the past couple of years. So if you take 2013 to 2019, not only have we increased the number producing royalties significantly, but you can see on this page the way in which coking coal has dropped from 76% to 26%. Iron ore is now equal weighting with our net coking coal exposure. Base metals having been nowhere is now 16%. Thermal coal continues to be around 14% of our net asset value. And then you can see the rest of the portfolio. So the model is becoming more diversified. And the virtues of that model, I think, are being seen in an environment as now, where our geographic mix and our commodity mix is making sure that we are relatively stable through a very difficult time. Geographically, you can see as well Australia halving from 87% to 44%, Canada growing very significantly to be the 2nd largest exposure for us and obviously, South America kicking in as well. So I think we are executing on the growth of the business. If you have a look on Page 9, you could see the way in which Kestrel's contribution to our NAV. Now this page is based upon broker estimates, whereas the previous page was based upon our actual numbers. So these broker estimates overestimate the carrying value of Castrol. But nevertheless, you can see the strong decline in Castrol over the past couple of years. And then turning to the share of portfolio contribution from Narrebrau, which is thermal coal, which we have announced earlier this year that we would not commit to making new investments in that commodity. You can see here that the share of our income from thermal coal has dropped from 37% in 2015 to less than 7% in 2019. So we are executing on our strategy and diversifying and strengthening the mix of our business. The last page I'm going to discuss before handing over to Kevin is Page 10, which talks about capital allocation and trading multiples. And you can see the way in which the dividend has grown over the past couple of years, that the dividend cover continues to be very healthy, unlike a number of other listed U. K. Entities which have deferred or cut their dividend. Our dividend has good coverage and gives us quite a lot of comfort. But despite the higher dividend per share, you can see on the right side of the page, our EV to EBITDA multiple and PNAV multiples have really declined significantly over the past couple of years. So we continue to believe the stock trades well below value. You can see in 2016, 'seventeen, we were trading at a 20x EBITDA multiple. Now we're trading at under 5. We were trading at a multiple premium to our NAV. And now on this metric, we're trading at around 0.45. So we have been significantly derated despite executing. And obviously, we hope that the differentiated dividend payment will provide create some focus on how we are doing as a business. With that, I'll hand over to Kevin to undertake the financial review. Kevin? Thank you, Julian, and good morning to everybody. Turning to Slide 12, which summarizes our key performance indicators for 2019. I think the summary of the financial results really can be summarized in 3 different amounts of USD 75,000,000. Firstly, we earned approximately USD 75,000,000 of revenue from our portfolio in 2019, which is actually the 3rd year in a row we're reporting record levels of contribution. We'll look at the composition of this in a couple of slides' time, but the numbers are largely due to the record volumes we received from Kestrel in the year. The second €75,000,000 is the acquisitions we undertook in 2019, which is also a record level of reinvestment in growth and actually represents virtually a dollar for dollar recycling of our revenue. The highlight was purely the €50,000,000 acquisition of Mantas Blancos during the year, which Lan will discuss later on. And I think finally, boosted by very strong levels of free cash flow being generated by the portfolio, we did take the opportunity to upsize and extend the term of our borrowing facility. And as of today, we have approximately $75,000,000 of available liquidity to make further acquisitions and to continue the growth story that we've been on for the last number of years. Record levels of income in the year, it's very apparent through our KPIs. Adjusted earnings in the year increased by 13%. And this is now 5 years in a row where we've shown significant growth in our adjusted earnings. And again, gave us the confidence to increase the dividend by 12.5% in 2019. And as the second graph shows, this is very well covered, represents a healthy balance between shareholder returns and our ability to reinvest in growth. If we turn the page and look at Slide 13, which summarizes our revenue for 2019 in various different formats and where it appears in the P and L. Including the mantas Blancos acquisition, which we made in 2019, we have now 9 sources of income producing assets in our portfolio. And as Julian said, this has never been more important in a period of such uncertainty to have a diversified source of revenue across several producing assets in different jurisdictions. Castrol clearly remains the significant royalty in the portfolio, But actually, its contribution decreased from 66% in 2018 to 62% in the current year. And this kind of demonstrates the success we're having in adding to and diversifying the portfolio despite record levels of contribution from Kestrel. Juan can probably discuss this later, but the increase in Kestrel was mainly volume driven. The owners had targeted a very ambitious 40% growth target in the year and actually overachieved and delivered 42% increases in salable coal production. Somewhat unfortunately, this growth was delivered in a softer commodity price environment, meaning the growth in 2019 was around 13.5%. But encouragingly for us, the new owners are targeting a further 6.5% increase in the coming year assuming that there's no COVID-nineteen operational issues outside? And I suppose just a quick note on currency with Kestrel. The significant weakening of the Australian dollar against the U. S. Dollar over the past couple of months, which has seen the rate move from about 0.7 to about 0.6 today, has positive implications for our revenue as the ratcheted nature of the Kestrel royalty is determined based on the average Australian dollar realized. So the weaker the Australian dollar against the U. S. Dollar, the higher our weighted average royalty rate. Working down through the list briefly. Income from Mirakus suffered in light with the well documented fortunes of the vanadium price during the year, despite there being record levels of production achieved by the operators at Maracas. This was primarily due to the completion of their expansion plan during the year. And Juan will probably explain why we're confident that there's more to come in the years ahead from this royalty. Whitehaven have done a pretty good job in stabilizing production volume levels, overcoming the technical issues they've had to deal with, with the localized poultry and coal deposit. And they posted improved volumes, although as it was the case with Kestrel, this was achieved in a softer price environment during the year. But there are signs that volumes could increase again in 2020, assuming no COVID-nineteen related disruptions. And I think their targets for their financial year 2020 would produce a higher level of sales volumes, particularly in the first half of this year. Fourmile continues to frustrate, but we're now in the Australian judicial system. So I think at this junction, we would prefer not to make any further comment in relation to this royalty. As Julian mentioned, LIORC is now our 2nd largest source of revenue at £8,000,000 We acquired this position, the first position in this, primarily in the second half of twenty eighteen at an average price of about C24 dollars The full year dividend in 2019 on those shares was CAD4, which represents a cash yield of 16 percent on the investment we made in 2018. We added a further $25,000,000 to our position during the second half of twenty nineteen, meaning we've now invested a total of $75,000,000 in this royalty. The 2019 revenue did benefit from a one off distribution of surplus cash, which had been retained in the business. And I think broker consensus dividend number is somewhat less than the $4 but we would still anticipate in normal circumstances to generate a very healthy running cash yield on this investment. Looking at Denison on a combined basis, whether that's the interest component or the principal, this generated about £3,500,000 of revenue, which is in line with the previous year with no commodity price exposure from this source of revenue. We would ordinarily expect this to be a relatively static contributor to our revenue of about CAD0.5 million a month. Although, as Julian did mention, we've been informed that the Cigar Lake operation, which feeds the mill, has been placed on a 4 week care and maintenance program in relation to COVID-nineteen. But again, 4 weeks represents probably less than £300,000 of revenue out of our total of just under £60,000,000 EBBC had another very strong year in 2019. Obviously, the gold price enjoying a very good end of the year. Their volumes were also up. They hit their guidance and probably would have done more had it not been for adverse weather conditions at the end of the year. But their plan is to continue to target efficiency at the plant. But we understand that we've had to shut down for a 2 week period due to COVID-nineteen restrictions. Obviously, this operation is in Spain, which has been very badly hit by COVID-nineteen. But again, 2 weeks of revenue is probably less than £100,000 based on 2019 revenue. So the combination of those two shutdowns is around about $400,000 out of cost $60,000,000 of revenues. So again, we've not seen a huge level of disruption to our revenue as a result of COVID-nineteen. Looking to the next page, Slide 14. This shows how our revenue during the year translates into earnings and our adjusted earnings per share. We've dealt with royalty revenues. So looking at operating expenses, this includes roughly £1,000,000 in each year of noncash share based payment charges. The increase in the year is mainly as a result of investments in business development, both in the form of higher headcount to process deal flow and also certain aborted costs where we pushed hard in the year on certain number of transactions which failed to conclude. We're going to continue to invest in growth initiatives in the year ahead. And of course, sometimes that will result in some deal costs being expensed, but we're very firmly in growth mode at the moment. Looking down at some of the other non cash or valuation items. There was a modest impairment charge in the year. This is in relation to the Ring of Fire royalty, where lower commodity prices and extending the likely time to production produced a small impairment charge, which we've taken in the current year. The revaluation of financial instruments relates to EVBC mainly and unhelpfully includes the royalty revenue as well, which is why we split it out in the previous page. Kestrel deficit in the period reflects largely the depletion from the record year of revenue we generated from the royalty. So the fact that, that number is quite low is actually a positive number as other pricing inputs have really reduced the level of depletion for the assets on the balance sheet, which is very positive in supporting our net asset value numbers. Foreign exchange number relates to gains in translating the group's borrowing facility at the end of the year. We drew down our borrowings, I think, when the sterling to dollar rate was closer to $130 and obviously, at the end of the year, this number was much less. I think that the impact of this on the P and L is over time will kind of increase and decrease. And I think if you look at that number today, it's pretty much closer to 0. And for that reason, we don't bring these numbers into our adjusted earnings number. So all of this means a profit before tax for the period of £37,600,000 Looking at tax, there was a considerable increase in the tax charge in the current year, but this isn't comparing apples with apples. The first half of twenty eighteen benefited from a full tax shield in Australia, whereas our income in 2019 was fully taxable. Deferred tax is mainly a function of the Kestrel valuation and largely moves in line with this. And again, for that reason, removed that from adjusted earnings. So overall, profit after tax was in line with the previous year. But if you exclude those non cash valuation items, including amortization charges and IFRS share based payments, Our adjusted earnings in the year was £36,800,000 a 13% increase on 2018. And at that level, results in adjusted earnings of 20.4p with a dividend for the year of 9p. This results in dividend cover of 2.3x. Looking at the next slide, which is our balance sheet. I think we also make the point on the balance sheet slide that certain of our royalty assets are carried at fair value and others, which is now represented by the largest single line, which is our intangible assets of $102,000,000 is either recognized at impaired value or cost. So the inherent valuation increases, which we believe exist within that number, are not reflected on the balance sheet. Overall, total assets increased from £269,000,000 to £308,000,000 at the end of the year. And taking account of our higher level of borrowings in the year, net assets increased by about £7,000,000 to about £226,000,000 at the end of 2019. Slide 16 looks at our liquidity and the way in which we allocated capital during 2019. We began the year with £5,200,000 in cash and a net debt position of £3,100,000 We generated free cash flow during the year of £48,000,000 and we deployed £77,000,000 of capital consisting of £63,000,000 of royalty investments and £14,000,000 of dividends, which is a capital allocation ratio of around well, over 4 to 1x in favor of growth. All of the acquisitions that we undertook during the year were financed from our balance sheet, drawing down in our facility and using cash. And actually, over the past 2 years, we've now invested and acquired €125,000,000 of income producing assets without needing to raise equity. Although borrowings have been increasing as we've undertaken the acquisitions during the year, our leverage ratio remains pretty low at less than 0.7x and comfortably within our covenant restrictions of 2x. With the headroom that we had at those levels, we did seek to upsize and extend our facility in the final quarter of 2019, increasing it from a headline $60,000,000 to $90,000,000 and retaining access to a $30,000,000 accordion feature for further growth opportunities. We also took the opportunity to extend the term of the facility by 12 months, and the facility expires in Q3 2022. So before handing over to Juan, I think it's possible in the portfolio that we could see some instances of COVID-nineteen disruption in the year ahead. But in normal business circumstances, I think the underlying operations from which we derive our royalty revenue are mainly targeting volume growth in the course of the next year for various reasons. We're in a strong financial position. We have no material capital commitments or debt redemptions to undertake until 2022. And we now have liquidity in place to finance the next phase of our growth ambitions at a stage where market conditions are favorable to deal with. And with that, I will hand over to Juan to go through our portfolio. Thanks, Kevin. Good morning, all. Hope everybody is safe. So if we switch to Slide 18, a very familiar slide, the key message here is really that APG continues to diversify its portfolio and it's added 2 new assets since this time last year. The first being the Pontos Blancos copper mine asset in Chile, which we completed in August. And the second one is the one that we closed earlier this year, which is the Incoa calcium carbonate project located in the U. S. And the Dominican Republic. Over to Slide 19, Kestrel. Key message here, which Julian has alluded to, is that business it's business as usual at the mine with mining and related infrastructure, both the rail and the port, all being classified as essential by the Queensland state and the Australian federal governments. 2020 production guidance was announced by Adaro in its Q4 'nineteen activities report 7,200,000 tons of saleable production compared to 6,800,000 tons of actual production in fiscal year 'nineteen. And this is an increase of some 7% or about 40% increase on fiscal year 2018. We expect the next longwall move to be in Q3 2020. And the map on the right, which is also a very familiar map to most of you, gives you an indication of how long we expect mining to be in our royalty area. So, as you can see, it's going to be we expect another 2 years or so before starting to decrease. On the next slide, Slide 20, on the left hand side, LIORC. We made an investment of an additional £20,300,000 in 2019 and £5,700,000 of dividend income was reinvested in Q1 2020 and this has taken us up to approximately a 7% stake. 2019 production was 90,000,000 tons compared to 15,200,000 tons in 2018, which is slightly below guidance due to some flooding that they experienced and some unplanned shutdowns. The guidance for this year is 17,900,000 tons, 20,400,000 tons. However, please note this may change due to the effects of COVID-nineteen. And on that topic, IOC announced on the 24th March that it was shutting down 2 of the 6 pallet machines due to the reduced demand due to COVID-nineteen. And Quebec also has strict restrictions on activities at the Ceptiels port, although mining has been classified as an essential industry. On Mantos plant costs, we purchased a $1.525 NSR of $50,250,000 last year. And this was to fund the debottlenecking project, which will take production from the current 4,300,000 tons per annum processing capacity up to an expected 7,300,000 tons per annum, and this should produce over 50,000 tons per annum of copper in clean high grade concentrate. As Evan has mentioned, we received the first income from the royalty in Q4 last year. And we understand that the debottlenecking project appears to be going well. We expect it to complete in 2021. On the next slide, Slide 21, Maracas, Largo really has had a very good run-in 2019. They recorded a record fiscal year 2019 production of 10,500 tons of V2O5 with a record monthly production of 1,100 tons achieved in December 2019. Guidance for 2020 is up to between 11.7 5,000 and 12,250,000 tons. And this is really as a result of the successful building and commissioning of the expansion plant, which increased nameplate from 11,000 tons per annum to 12,000 tons per annum. There are further plans for expansion. A kiln feed rate optimization is planned for April this year, which is expected to increase nameplate by a further 1200 tons per annum. Another key event last year or another key event for Largo is that the Glencore offtake will expire in April this year. And Largo has a marketing team in place now to sell their product direct to the market. And APG should benefit from the increase in receipt pricing as a result of this. Largo has also announced a number of further expansion plans, including a ferrovanadium plant, which is due in Q2 2021 and a V203 or vanadium trioxide plant, which is due in Q3 2021, which should increase the margins on products and access even higher purity markets, which will benefit our royalty. Just on COVID 19, as at 20 March, Largo announced that there had been no significant disruptions to their supply chain and not a single employee or contractor has tested positive for the virus. On Narrabri, Whitehaven has had a strong production year last year, beating their fiscal year 2019 guidance of 6,000,000 tons. Guidance for fiscal year 2020 is 6,000,000 to 6,500,000 tons, but this should be weighted towards fiscal year H2 due to the longwall changeover that happened earlier this year. We expect the next longwall changeover from Panel 109 to 110 in fiscal year Q3 2021. Just a word on the Stage 3 project, which will implement Narrabri South. This appears to be progressing well and should produce considerable extensions to the mine life up to 2,045 and an increase in production rates up to 11,000,000 tons per annum, which will benefit our royalty. As of 26th March, Whitehaven announced that there were no recorded cases of COVID-nineteen in their workforce. So, it's a very good news there. On the next slide, Slide 22, Denison, McLean Lake Mill produced £80,000,000 in 2019. This is very consistently on target. And another highlight for the operation last year was a new 3 year collective bargaining agreement was reached with workers taking that uncertainty out. Guidance for 2020 is the same at £18,000,000 for the year. However, please note this could change due to COVID-nineteen. Just on that subject, on March 23, Cameco announced that had placed the Gar Lake on temporary care and maintenance for 4 weeks due to COVID-nineteen, but they did confirm that there were no cases in the workforce at the time of the announcement. At the end of the 4 week shutdown, Cameco will reassess the situation and decide whether to restart the mine or extend the shutdown. On EVBC, another pretty good year from one of our assets. Production for 2019 was 64.3 for the 1,000 ounces of gold and £5,000,000 of copper, which met the guidance for gold and exceeded the guidance for copper. Guidance for 2020 is 60,000 to 65,000 ounces of gold and £5,500,000 to £6,000,000 copper, although this is under review. On the 30th March, EBBC announced a temporary 10 day suspension in accordance with Spanish authority rulings that all non essential workers stay at home until April 19. Fulvana has said that they intend to resume operations there have been no reported cases of COVID-nineteen at their operation. So just over to Slide 23. This slide shows where we believe there is significant upside from our producing assets. IOC currently has 25 years of reserve life, but mineral inventory vastly exceeds this and we would expect mine life extensions or possible production expansions. And LIORC actually announced this morning that it's had all of its 12 minuteing leases renewed for an additional 30 years, but they now expire somewhere between 2,050 and 2,061. On Mantos Blancos, this mine has the potential to extend their oxide production past what we originally modeled in our investment case at time of acquisition as well as a further expansion of the concentrated plant up to 9,700,000 tons per annum, which has been studied by Mantuskapa, but is not quite is not yet at DFS standard. On Maracas, I've already mentioned a couple of the plans for expansion there. Another one that they've announced recently is the potential to build an ilmenite flotation plant, and this product would be included in our royalty. On McLean Lake, we expect the Phase 2 reserves extension to take place for which we paid a minimum price. On the next slide, Slide 24. This slide just outlines resulting in our current track record. The key tenet here is really our very rigorous due diligence process, which focuses on technical, legal, tax and ESG, as well as always looking for upside potential. We focus on sourcing high quality asset opportunities with proven management and safe jurisdictions and so far this is paying rich rewards. And a further key focus is on ESG and greener technology materials and Strategic Metals. So on Slide 25, just a word on ESG. We are really refining our ESG strategy, not only on commodity selection, but on how we select assets and how we monitor our existing assets for compliance to good practice. As you know, we don't control or operate the operations over which we have royalty assets. However, we've got a rigorous ESP due diligence process when considering new investments, including a screening tool of the first half and a detailed DD Framework to assess ESG risk and the way ESG is being managed by our potential partners prior to us investing. And that framework looks at things like the effect of operational stakeholders and environment, waste and water management, human rights, health and safety, and of course, we look at the high integrity within the partner business. We're also aiming to positively influence our current partners towards ongoing strong ESG performance. By incorporating ESG into our new royalty documents, we're including things like audit and reporting rights, material breach provisions and change of control provisions in case of a change of ownership. We conduct regular site visits. We try to get to each site every 2nd year. And we're on a path to educating and encouraging our partners to align with leading ESG initiatives, including the ICMM Sustainable Development Framework and the IFC performance standards. And with that, I'll hand back over to Julian to end with the highlights and outlook. Thanks very much, Juan. So turning to Page 26. I think that we have demonstrated our ability to grow and diversify the portfolio over the past couple of years. We look forward to full year contribution from the Montos Copper Royalty and look to increase our exposure to base materials opportunistically. We have grown the business in a self financed and disciplined fashion, and we made an important commitment earlier this year to make no further investments in thermal coal. We are not complacent about the impact of COVID-nineteen, but thus far, fortunately, it is largely business as usual for us. Our revenue stream appears to be almost entirely intact, and we continue to work as normal, albeit remotely. The commodity prices underpinning the revenues have held up well thus far, And there should be some organic portfolio growth during the course of the year, absent unexpected shutdowns. Relative to the Mining sector, we are in a fortunate position of having access to liquidity, and the sector is going to be very capital intensive and requiring funding. So that should result in some good opportunities for us in the second half of the year. And we continue to focus firmly on execution, diversification, but at the same time, with high standards of ESG and quality in the portfolio. So with that, I will hand over to the moderator to open the Q and A session and happy to take questions as ever. Thank you. Thank you. We will now take the first question from Tim Huff from Peel Hunt. Please go ahead. Yes. Hi, it's Tim Huff here from Peel Hunt. Well done on the results today and no doubt the dividend was a highlight for us and for many in the market from feedback this morning. Just on your asset reinvestment strategy, I know it develops over time and I was just wondering if you could maybe give us any more thoughts as to how broad your thinking, especially with respect to geographies and the current situation that we find ourselves in? And even if it includes a little bit more about the Incoa investment into calcium carbonate and how maybe you might be thinking in that direction a little bit more? I wasn't quite sure, but I thought I'd at least ask. Thank you, Tim. Well, I think, I mean, geographically, we don't intend to relax our stringent standards as to which jurisdictions we go into. I think we have successfully avoided not only risky jurisdictions, but also jurisdictions which have had more significant shutdowns in this crisis. So I think it continues to be very much the Americas, Australia and Europe. In terms of focus and diversification, move to Encoa, which is more of an industrial mineral, I think, is in further effort to diversify the revenue base and to be less cyclical. But we continue to look at base materials, which have been particularly badly hit in this Q1 as well as rare earths and look at opportunistic situations as they arise. But hopefully, this crisis will allow us to deploy capital more rapidly in the second half of the year. Okay. And that's really helpful. And I guess main takeaway in there for me is that calcium carbonate, obviously, within COA, that wasn't necessarily a commodity focus, but it's more of a cyclicality focus. My guess is you could probably make further investments into less cyclical exposure going forward. Yes, exactly. Okay. Thank you. Thank you. We will now take the next question from Richard Hatch from Berenberg. Please go ahead. Thanks very much and thanks for the call. First question is just on LIORC. You mentioned that you've increased your stake there. I just wonder just what your view is on that. Do you think that 7% is kind of the maximum level that you'd like to go to? Or do you think that if you see the shares see any further weakness, then you could potentially look to top that up? That's the first one. Sure. I mean, we look at LIORC opportunistic. I think we have quite a lot of exposure to that at this time. But we continue to monitor the situation. And depending upon the opportunity set we're seeing, it is possible we could top that up should the share price decline further. Okay. Thanks, Julian. And just one for Juan. Juan, you talked about ilmenite potentially being brought into the royalty income stream from one of the existing ones. Can you just talk a little bit about that? Like have you got any kind of meat on the bones in terms of size, potential volume, type of ilmenite, just so we can potentially kind of put some kind of figure around it? Yes. Thanks, Hachi. I mean, it's all very early days for Largo. When we first made the investment, we understood that because it is like the host rock of the vanadium is essentially an iron magnetite with ilmatite in it. We understood that this was a potential for the future. Largo was very much focused on building their vanadium, so it didn't really concentrate on this. But it is there present in the tailings. So what Largo would be looking at is potentially some sort of flotation concentration plant to try to retreat the tailings and extract this ilmenite. In terms of production numbers, grades, type of ilmenite, this is still very much at early stage, as I said. So we don't really have any color on that. Okay. No worries. Thank you. Appreciate that. And last one is just for Kevin. Kevin, just you talked around operating expenses slightly ticking up just due to that increased investment in sourcing deal flow. Is that £7,000,000 number kind of a sensible number to use sort of for future years? Or do you think that you can dial it back a little bit? Yes. The €7,000,000 includes €1,000,000 of noncash share based payments, of course. But the €6,000,000 number did include considerable investments in growth during the year. We do look, where possible, to recover our deal costs in advance. We've been successful with that with a number of opportunities we've looked at. So I would say fixed is a reasonable estimate going forward, assuming that we remain in growth mode and are unaffected by COVID-nineteen as we go through the year. Thanks a lot, and have a nice day. Thanks for your time. Thank you. We will now take the next question from James Bell from RBC Capital Markets. Please go ahead. Yes. Good morning and thanks for the call. 2 from me. Firstly, when you look at the opportunities you have in your pipeline, are these more larger transactions? Or are they sort of similar sized to what we saw with the Encoa deal? And I guess as an extension of that, would you be happy to use a large proportion of your available liquidity given the uncertainty we have at the moment around COVID-nineteen? Well, I mean, we see a variety of transactions. We continue to focus on producing assets. And obviously, in the current environment, there are a number of mines which generally produce but are having more cash flow issues. So we will husband our resources very carefully and be cautious about deploying our capital. But nevertheless, this is a time when we can do better deals. We'll have to see how the business evolves during the course of the year. But obviously, we generate significant free cash flow on a quarterly basis as well. Okay. So I mean, maybe as an extension then, typically, you've gone for assets which have pretty attractive positions on the cost curve. Clearly, the assets potentially which are getting into a distressed situation or may need financing may be in a worse position on the cost curve. Would you consider kind of maybe looking at assets which maybe have a less optimal position on the cost curve given the environment and the available tempting and there are many, for instance, copper mid tier producers who are struggling, but they are high on the cost curve. And I think we've got to be disciplined enough not to get involved with them unless there's a clear path for them to move down the cost curve as a result of actions they are taking. So, yes, I think there are definitely more opportunities to deploy capital, but we will continue to be very strict as to what we actually put our money to work on. Okay. Very clear. And then one more, if I may. I realize it's a little bit difficult given everything that's going on to look too far ahead at the moment. But you have grown your dividend consistently since 2016. So if we leave aside the COVID-nineteen situation, would your aspiration be to continue to grow the dividend from here? Or should we think more about allocation towards growth and maybe dividends being flat at best from this point going forward? Well, historically, we've been trying to grow the dividend and but tilt, as Kevin mentioned, our capital allocation firmly towards growth. There's definitely more opportunities now to deploy capital for growth. But it's really premature to make any predictions as to the dividend for the year ahead. I think we will monitor the situation, and we possibly might give an update when we do our Q1 results announcement around the time of the AGM. Okay. That's perfect. Thanks for the call and answering the questions. Thank you. We will now take a follow-up question from Tim Hoff from Hillhunts. Please go ahead. Yes. Just one follow-up question, which was if could you remind me what your current thinking is around minimum dividend coverage going forward. I can't remember if you have a minimum level or if you're currently thinking of the dividend in that way, but any help would be appreciated. Kevin, do you want to pick up this one? Yes, sure, Julien. I think, look, it's very important to have a very healthy dividend cover. You don't get much credit having a dividend if it's not well covered in the current environment. I think where we've been over the last few years, we've been at over 2x. And I think that's a good place to be. I don't think we want to go any less than 2x covered, certainly given the volume growth that's due to come or we would expect under normal business circumstances. I think the capital allocation ratio over 4:one is important, and it's important that we continue that trend as well. But look, I think we don't have a certain target for dividend cover per se. The unfortunate thing about dividend is your yield fluctuates based on your share price as well. So what's the correct measure? But capital allocation is one we're certainly looking at. And if anything, we'd like to see that greater than 4x to 1x in the years ahead. Okay. That's helpful. Thank you. Thank you. There are no further questions in the queue at this time. Okay. Well, then thank you all for your time at this moment. We appreciate your interest in our company. And as ever, we can always be contacted directly if you have any further questions to follow-up. But so far, underlying the reduction in our share price, I think, although we are very cautious, the company model is performing well, showing the benefits of the diversification, geographic and in terms of operators and how income base is almost fully intact. And we look forward to getting through this process and supporting our shareholders and our stakeholders and having a better half to 2020. So thank you all for your interest and appreciate your time. Thank you. Bye bye.