Anglo Pacific Group – I Move Slow and Steady, But I Feel Like a Waterfall (Transcript)

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An Interview with Julian Treger, CEO of Anglo Pacific Group (LSE: APF, TSX: APY)

We like royalties as an investment class. It can give investors access to much of the excitement of mining, with considerably less risk. Green royalties tick two of our boxes and get us rather excited. And large institutional funds like Blackrock seem to agree.

Anglo Pacific is perhaps a victim of its own pragmatism, and by focussing on de-risking royalty streams for investors, the market may have perceived the company as picky and stagnant. The reality is that Anglo Pacific has a clear, sensible, thorough criteria for royalty deals: the prospect of returns, quality of jurisdiction, position in a coherent narrative about purer and less pollutive materials, cost, and honesty/integrity of counterparties.

Because Anglo Pacific is unwilling to deviate from these criteria, the company has only made two recent deals. Two new transactions are expected by the end Q1/20, borrowing facilities have been extended to US$120M and the pace of investing has accelerated. Anglo Pacific Group is a “unique financing vehicle for the mining sector” listed in London and Canada. Anglo Pacific’s primary focus isn’t on widely prevalent gold and silver royalties.

Instead, the company’s central aim is to secure royalties on commodities that are part of the changing world; specifically, energy metals. Anglo Pacific has a reasonable portfolio of around 15 “major” royalties. Anglo Pacific started with 1 and have been diversifying the portfolio moving away from Kestrel, an underground coking coal mine located in the Bowen Basin, Queensland, Australia. The company concentrates on safe jurisdictions. Anglo Pacific appears to be a relatively unique opportunity for investors to get access to the EV story.

By taking the focus off Kestrel, Anglo Pacific is moving away from an aura of “dirty old coal.” However, Treger claims Anglo Pacific’s coking coal resources are cleaner. It is used in the making of steel and is not as dirty as other coal. Kestrel has produced, and continues to produce enormous amounts of income. This will decline in the next few years.

Treger was keen to stress the distinction between the coal used for energy (7% of Anglo Pacific’s total income) vs coal used for steel (much more difficult to substitute). Anglo Pacific’s challenge for 2020 is to segue to greener commodities. It wants to be a large-cap royalty company.

The competition in gold/silver Royalties is high, but for EV-related commodities, there is an increasing lack of capital in mining sector; therefore, the cost of capital continues to go up. Anglo Pacific’s share price has underperformed in recent months.

Anglo Pacific’s challenges for this year involve resolving the liquidity trap for North American investors, telling the story to more investors and developing a better portfolio of streams, with a focus on battery metals (lithium, cobalt, copper, nickel, graphite, manganese, vanadium), rare-earths, potash, phosphates, and even high-quality Labrador iron ore.

Interview Highlights:

1:07 – Company Overview: Which Portfolios are They Looking at?
3:16 – Kestrel Coking Coal: A Look at a Green Type of Coal
5:33 – Competitor or Niche: How are They Positioning Themselves in the Market?
7:46, 16:17 – Scaling Up Anglo Pacific: Criteria for Projects & Choosing Commodities 11:46 – Drop in Share Price: Reasons Why
18:08 – Thoughts on the Uranium Market
20:39 – Easy Access to Capital Yet Slow Growth: Moving Anglo Pacific Forward
23:44 – Telling the Story and Enticing New Investors

Matthew Gordon: Hello and welcome to Crux Investor. We’re here today with Julian Treger. He is the CEO of Anglo Pacific, Royalty and Streaming company here in London. How are you, Julian?

Julian Treger: I’m good. How are you?

Matthew Gordon: Yes, it’ been a while.

Julian Treger: Too long.

Matthew Gordon: Always too long, always too long. Okay, let’s kick off with the one minute summary for people new to this story, just so they know who you are, and then we will pick it up from there.

Julian Treger: So, Anglo Pacific is a unique financing vehicle for the mining sector, listed in London and in Canada. We are global and we focus, not on Gold and Silver, but on other commodities which are part of the changing world and energy efficiency.

Matthew Gordon: Now, I think you are the only Royalty company here in London.

Julian Treger: Yes.

Matthew Gordon: Is that still the case?

Julian Treger: Yes, well we are the only mining Royaltycompany. There is a general royalty company.

Matthew Gordon: Right. Okay. And just on that, most people sort of know the large, American, Gold, precious metal-type Royalty companies; these billion dollar companies. You did a bit of Gold but you have touched upon some slightly more esoteric commodities. And it started off originally with the Kestrel Royalty, which quite a big deal for you back then. Well, why don’t you tell us a bit about the portfolio today?

Julian Treger: Well, the portfolio today consists of around 15 major Royalties. As you say correctly, we started with only one and we have been diversifying the portfolio, shifting away from Kestrel, which is the core investment, into new areas. Last year we were involved with Copper. I have always been sticking to good locations. We haven’t changed that. So we continue to be concentrated, in good jurisdictions, safer places. But I feel that we have a unique opportunity, unlike these precious players that you talk about, to be part of the electric vehicle, greener story, which I think is more difficult for Gold and Silver companies, and we are in that transition.

Matthew Gordon: Oh, the Silver companies are trying, believe me.

Julian Treger: I’m sure everybody is trying. But I think for us, it makes a lot of sense because our materials can actually, in some instances, be carbon negative, never mind carbon neutral.

Matthew Gordon: Okay. So let’s talk about Kestrel: this was a big deal, it has generated a lot of revenue for you, but it has that aura of, it’s ‘dirty old coal’. I think people would think it had that feel to it. But it is not that really, in the sense of conventional coal, is it?

Julian Treger: No. It is the coal that is used for Steel making. Not nearly as dirty as the other coal. The other thing about Kestrel is that it is producing enormous amounts of income for us. But after a couple of years, and now that’s probably 3 years away, it starts to decline so our overall coal exposure is really going to decline quite rapidly over the next couple of years. Kestrel is really important in terms of being able to make the steel that the world needs for development and I think there is increasingly a distinction amongst investors between the coal that we use for energy, which we also have a very small amount of, we do have some exposure to that; it’s around 7% of our income last year. And the other type of coal which is used for steel which is much more difficult to substitute, and not really part of the energy complex.

Matthew Gordon: Right. Worth distinguishing because most people just see the word, ‘Coal’, and don’t understand. So when you are talking about this green story, this green focus, this part of the EV revolution, people need to understand that you truly are delivering on that, or trying to deliver on that. Have they been making life difficult? I know they are going to tail off, but have they been making life difficult in the sense that they are producing more, generating more revenue for you right now? As a percentage of your total portfolio?

Julian Treger: Well, I don’t think that’s a bad thing; having more money is always good and it is something we can recycle into other commodities and materials, which is what we are in the process of doing. But I think the fact that they are really ramping up and growing rapidly is a good thing. And it also really gives us exposure to coal in the quite short term. If there are any negative material consequences for coal in the medium term, we will be pretty much inoculated against that.

Matthew Gordon: Right. Are you happy, again we talked about the American precious metal-type companies, these are billion dollar companies, you know, USD$2Bn to USD$12Bn companies, they have size on their side and Gold is obviously doing very, very well at the moment so this is nothing short of good for them. Where do you sit and position yourself? Do you want to compete with them or find your own niche, greener Royalties and Streaming company?

Julian Treger: Well, I think we want to find our own niche, but obviously, we would like to be of a similar size in terms of market cap. And you know, what’s interesting is the most successful of those companies, which is Franklin Nevada, which trades at, I think, a 90 times PE ratio, and we trade at a 9 x PE ratio, or maybe even 7 or 8. So there is a tremendous valuation gap and you know, how we bridge that valuation gap, I think, is one of the challenges we face in terms of getting better known. But we certainly don’t want to compete with them because of their very elevated ratings that they have, they have an extremely low cost of capital. And, you know, the market seems to still back them but I think, for the risks associated with the mining sector, getting 8% to 12% or more on your investment, and on your financing makes more sense, and that’s where what we can achieve if we don’t compete in the Gold and Silver space, which is highly competitive. What is very interesting about the mining sector recently, and the way it is evolving, is this increasing lack of capital coming into the sector and the fact that the cost of capital continues to go up. And I think, as you said, pretty unique investor to the non-Gold and Silver sector, we see so much deal-flow and we see much better terms on the table, both in terms of return but also in terms of the details of the contracts we can negotiate with our counter-parties.

Matthew Gordon: Right. Understood. Can we just talk about, you said when we talked before, this is mining and there is mining risk related to what Royalties there are in the mining space, and if I look at your portfolio now and what you said to me about being a part of the EV revolution, how are you going to be able to scale-up? Again, I looked at the presentation, you looked at 222 deals; you did 2. It’s hard. It’s time-consuming –

Julian Treger: No; it’s hard to make money.

Matthew Gordon: Right.

Julian Treger: You can put money up and people will take it 24/7. So we could have done many more deals but I think the trick has been to invest wisely and make sure we get the right stage of the cycle, investing cheaply and have a good entry point. But there is, you know, a lot of opportunity. And as I said, because of the shortage of capital in the sector, I hope that we will be doing more deals 3 to 4 years. But we will never be a deal machine if we want to do good transactions. Particularly in that most of our team focusses on producing Royalties and not on the development of Royalties, which is the area where there is a lot of risk but also capital shortages.

Matthew Gordon: Absolutely. Again, coming back to this scale thing; how do you drive scale? You have set yourself some thresholds. So what are the criteria by which you will and won’t invest? Because clearly, returns is the ultimate number.

Julian Treger: Returns is one of the numbers.

Matthew Gordon: Right. So what is the most important thing for you?

Julian Treger: Well, there are many: one is not being in bad jurisdictions, being a part of this coherent story about having a purer, less polluting materials, the counter parties behaving responsibly from an ESG perspective.Part of it is being, you know low cost. Part of it is being with honest counter parties. So much criteria for why we only did 2 deals last year, because it is very difficult to tick all those boxes. This year, we are confident that in the first year we will announce 2 transactions, and so I think we are on course to put more money to work in more deals. In fact, we have just announced, as you may be aware, an extension of our borrowing facilities: so we have more fight power. So I think we are very conscious of the need to accelerate the pace of investing and there are some things that came over from the end of last year that will be completed in the first quarter of this year.

Matthew Gordon: Right. I guess what I am trying to establish is; you have some standards and some controls in place which you are not deviating from because you want to hit certain numbers. I get the soft stuff, because that’s what sets you apart, you are saying that this defines us, it differentiates us, I get that.

Julian Treger: Yes.

Matthew Gordon: But you have also got to get, you want to hit good numbers, returns to the portfolio.

Julian Treger: Yes. You know, we roughly have a 6% dividend yield today. We can borrow money at 3%. And our criteria are to get after tax returns of 8% to 12% for the very best quality Royalties, going up to 15% to 20% for situations which have more development risk. And ultimately, that is the overriding criteria; for me to make sure that the deals we do are accretive for our shareholders and we keep growing as we have done over the past couple of years. But increasingly, there are these other issues which are very important and relevant to us. Even if we had a 20% deal in a terrible jurisdiction which was very polluting, we wouldn’t do it because we are on this path to be, you know, part of this story of how we green the planet.

Matthew Gordon: Yes. It’s kind of part actuarial and part philosophical, in the sense that you have to do right, which is great, but at the end of the day, you are judged on your numbers which is your share price; it has come off a bit. You were flying last year, and I say just a bit, its come off a little bit. Why do you think that is? What is the cause of that?

Julian Treger: It’s not, it cant be our performance because we have just announced, as you know, that last year we had around USD$75M of income. When I joined the company, 6 years ago now, we had USD$5M of income because share price was higher than it is today. I mean, I think a lot of retail investors are concerned about the corona virus in China and the slow down in China, and particularly the materials that we are exposed to which are for use in steel making, and also for electric vehicles. And all of that is slowing, apparently, in China. What people don’t appreciate is because of the fact that some of these materials are produced domestically in China, for instance, the Kestrel coking coal product, which the Chinese would have produced domestically isn’t happening anymore, so coking coal prices are up 10% this year. And similarly, on iron ore, we have had some news in the last couple of days that Brazil and Viola have cut production significantly. And that price hasn’t really moved down this year in any real material fashion. So I think the headlines are showing different concerns about slowdown than the micro issues around particular commodities and the ones we are exposed to. And the flip side of that is that later in the year, I think people are increasingly confident, I think we saw President Trump say this just today, that he is determined to hit his 6% growth figure, even though people in the West are derating Chinese growth. So I think the chances of a big stimulus package, the Chinese domestic space, which will be very good for infrastructure expenditure is quite high. So I think of people understood that better, and looked through the short-term fears, then they would see this as an interesting buying option. And today, I don’t know how this is going to date, but it was announced that I had bought some sharesin the past couple of days. I’m pretty confident that we are going to be seeing volume growth in our various mines this year. We are going to be making new investments and so far at least, the pricing for 2020 hasn’t been below our original expectations for this year, despite the issues.

Matthew Gordon: I did look at the numbers; practically all of the numbers are up. I agree with you: you are growing and continue to grow, apart from the share price. When you say people don’t understand, there are different types of people out there: there are institutional analysts who should be aware of the macro environment. They should understand it and they should take a view on it. Are you seeing them selling or do you think this is down to retail selling? Who are the people selling?

Julian Treger: I think it is retail that are, after the virus occurring, because I think there is a link between, obviously the mining sector and China. There may also have been some selling relating to coal, and there, what I think you have to be clear about is that thermal coal, which is the thing that most people are concerned about, only represents less than 7% of our income last year and is really not material, and that’s a message we need to work harder getting across to people. That as a percentage is only going to decline as we do more transactions.

Matthew Gordon: Let’s talk about some of those things. I’ve got a lovely map of the world in front of me. Hot off the press, where we are looking at the types of commodities that you are moving into, around the EV thematic batteries.

Julian Treger: Yes.

Matthew Gordon: And the jurisdictions are Europe, Australia, a few in South America, North America predominantly; so safer jurisdictions.  So how are you going about selecting the commodities that are going to work for you? Is there anything that goes in the battery that is going to work for you or is there a bit more to it? Obviously, Cobalt has its chequered past.

Julian Treger: Yes, and there’s a huge supply of Lithium at the moment.

Matthew Gordon: Absolutely. You did say that last time we spoke, actually; you called that early.

Julian Treger: No, they’ve really been troubled in terms of getting the returns that they have expected. So I think it is a combination of being opportunistic and identifying the commodities which you think are going to do well. And, you know, the themes of greening include the materials for Teslas and wind turbines and solar panels, but can also be involved with light-weighting: so alloys like Caladium, Vanadium, would make sense, as well as Copper and Nickel which are used for batteries. We are very interested in rare earth and that’s something where I think there could be interesting investment opportunity. Phosphates, Potash, which is part of the agri-space. And even further Iron ore; you know, we continue to like Labrador Iron ore because it is very high quality and creates pellets. So there is another thematic which is just purity, less pollution as well. So within those areas we continue to look opportunistically. But you are right; you have to look in the right place and it has to make the right returns for us.

Matthew Gordon: Right. Slight segue, only because you called the Lithium market when we spoke last time – Uranium.

Julian Treger: Yes.

Matthew Gordon: What are your thoughts?

Julian Treger: Yesterday, on the bull side for Uranium, it was announced that President Trump wants to put together a USD$150M Uranium stockpile, which there isn’t that much Uranium in the world.

Matthew Gordon: 2Mlbs

Julian Treger: I think the general concern about Uranium, I’m not clear about Uranium, with Lithium I was sort of clear. We do have a number of Uranium Royalties already so it is unlikely that we would want to increase that. But I think with Uranium, it is clearly a managed market. There is clearly an excess of supply now, both in Canada and in Kazakhstan. So I think that will put a cap on the price. But it is possible that a two-tier market develops in the US, maybe Canada which supplies the US because they want security of supply. That pricing could be a bit higher. But I think that the idea that the Uranium price has got to go back up to USD$60 or USD$80 to incentivise production, is sort of fanciful in my view because there is a lot of production on the side-lines which is just shuttered and could come back. And then you have to overlay on top of that. Yes, it is a theoretically clean source of energy, and a lot of people say that if you want to get rid of natural gas or oil, you absolutely need Uranium as a replacement. But I think it does have a very chequered history with the environmentalists as well, so that is a factor that may hold back its general implementation. So it is not absolutely clear one way or another, and therefore, probably for the moment, we would not plough back in there. For some of the ESG funds, in the same way that coal is a no-no, Uranium is a no-no. It’s unclear to me whether that trend will develop further or will it go away. But there are many other commodities which are more predictable, I mean nothing is totally predictable, but you can see better the trends than Uranium which has a number of these factors which potentially cloud the outlook.

Matthew Gordon: I appreciate it. Thanks for that. We are dealing with a lot of Uranium customers, and they are constantly trying to understand the macro piece. You don’t have a problem accessing capital at all. I know you have increased your facility and you have access to USD$120M and you have, potentially, the closing of a couple of transactions by the end of this quarter. So money is not a problem; which is a nice thing.

Julian Treger: Yes, we are fortunate because if we had to raise money with our currently depressed share price, that would be an unfortunate combination.

Matthew Gordon: Yes. So to have that facility is fabulous. Your issue is finding the right deals that meet the right criteria to deploy capital sensibly and to the long-term profile that you seek.

Julian Treger: Yes. And the volume of that. We need to ramp up the volume and ideally do larger transactions.

Matthew Gordon: Well that’s what I was getting to; with this capital available to you, how do you get that scale?

Julian Treger: Yes, and on top of that, we also have retained earnings of around USD$15M per quarter, so we are constantly look at bigger opportunities. There are a number that are in development at the moment. You know, eventually we will do one and there are actually two or three at the moment that are of significant size. So big in fact that we would have to partner with others. So I think we are ever hopeful but in the meantime, we fill up with smaller transactions that fulfil our criteria.

Matthew Gordon: Absolutely. It’s about keeping that revenue flowing and that’s fine. That’s fascinating to me; that you are looking at significantly larger transactions, if you are having to partner with other groups. How do those relationships work? You both cut the same deal: 50/50?

Julian Treger: Yes, it depends who they are, whether they are co-investors already in the space. Given the fact that these Royalties are non-precious by definition, that’s what we look at and we are pretty specialised and have great knowledge in that, generally, we would try and manage the consortium and get paid something for doing the sort of work and the auditing and the negotiations around the Royalty. But otherwise, the terms would be pretty standard. So there will be some sort of deal fee which Anglo Pacific should –

Matthew Gordon: You prefer to be in control and in the driving seat, as it were. So if I look at people like Blackrock, who have made various announcements about investing green, I’m not saying there’s any connection, but people like that; investing green, for the same ethos that you do. In terms of investing, you would say, we know a lot about this, we do the diligence, we understand what will and won’t work. You give us your money and we will invest it wisely. Or is it that they have made the decision independently and then you manage that process? How does that work?

Julian Treger: Each process can be unique. But ideally, we would get paid a small fee for our expertise, but obviously having critical capital mass in order to implement a transaction is also of benefit to us.

Matthew Gordon: Okay. And do you think those two new deals coming up, and potential for more coming up after, this year, do you think that is enough to move the needle, get people interested? New people interested in your story, because you are bringing scale?

Julian Treger: Well I hope so. All we can do is what we do. What’s interesting, as I said, if we were listed in Canada as our primary listing, and had the same rating, we would have a much different and much larger valuation already. And so one of the things we will be doing, and we have been doing over the past couple of years, is to raise the profile in North America, and market more there because it may be that people who are already familiar with the Royalty space and are already invested in the more expensive precious Royalty companies, can be convinced to swap over to us.

Matthew Gordon: So what comes first? The marketing and getting known and then listing, co-listing there?

Julian Treger: Well, we do have a co-listing there, it’s just not a primary listing. On the TSX.

Matthew Gordon: On the venture?

Julian Treger: On the full listing.

Matthew Gordon: On the full listing, okay.

Julian Treger: So we have to do everything. There’s no chicken and egg, there’s just constant daily production of scrambled egg.

Matthew Gordon: Chicken and egg; there’s this golden egg sitting there which is, you’ve got a listing on the TSX. You’re telling me about the sorts of multiples that these companies are achieving, why aren’t you chasing and hunting that down?

Julian Treger: We are. We are there and we are spending more and more time marketing to Canadian institutions. And we are making progress; they see the valuation gap. They understand the virtues of our model. It’s just because there is not much share trading in Toronto, they see us as a foreign entity and then need more liquidity. So we are sort of caught in that trap.

Matthew Gordon: Right.

Julian Treger: Not a value trap, but a liquidity trap for a North American institution to invest abroad.

Matthew Gordon: Okay. That’s difficult; so you are trying to be a challenger brand over there, get known and then hopefully you will get those institutons. That’s your path to success.

Julian Treger: Yes. That’s the strategy.

Matthew Gordon: For North America?

Julian Treger: Yes.

Matthew Gordon: But in the meanwhile, business as usual back here?

Julian Treger: Yes. Exactly.

Matthew Gordon: Brilliant. Well look, thanks for the catch up. I really enjoyed that.

Julian Treger: It was really good to see you.

Matthew Gordon: It sounds like things are going well. The figures look fantastic, obviously.

Julian Treger: Yes. And we are confident about the year ahead too.

Matthew Gordon: And a bit more marketing this year?

Julian Treger: We will never stop marketing.

Matthew Gordon: Okay. Speak to you soon.

Julian Treger: Thank you.

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