Commenting on the investment, Julian Treger, Chief Executive Officer of Anglo Pacific Group, said:
“This transaction continues Anglo Pacific’s growth trajectory, and is in-line with Anglo Pacific’s stated strategy of diversifying its sources of income and commodity exposure.
The transaction is expected to be immediately accretive to adjusted earnings and free cash flow per share, and based on Anglo Pacific’s current shareholding and LIORC broker consensus 2019 dividend forecasts (Bloomberg), the Company expects to receive between C$4.7 – C$5.7 million of royalty related revenue during the 2019 calendar year via LIORC dividends.
China currently produces half of the world’s steel and the Chinese Government’s current environmental policies aimed at reducing pollution are driving structural changes in the Chinese steel industry, which in turn are driving the demand for high quality iron ore products. Sinter usage, which is high in China relative to North American and European steel industries, is amongst the largest generator of emissions within the Chinese steel sector’s production process. Going forward, we expect sustained demand for high grade iron ore concentrates with low alumina and silica contents, and an increase in pellets usage within the typical Chinese blast furnace load mix.
IOC is a top five global producer of seaborne iron ore pellets, has a reserve based mine-life in excess of two decades, and has both production expansion and mine life extension potential. This investment ticks the boxes of our royalty investment criteria, and positions Anglo Pacific to benefit from the positive outlook for high quality iron ore products, as well as from pellet premiums which we expect to remain elevated in the near-term.”
Anglo Pacific Group PLC (LON:APF) today announced that it has acquired a 4.25% shareholding in Labrador Iron Ore Royalty Corp at an investment cost of ~US$50 million (C$65.5 million, ~£38 million). LIORC is listed on the Toronto stock exchange (TSX:LIF) and has a market capitalisation of approximately C$1.5 billion.
LIORC is structured as a passive flow-through entity for a 7% Gross Revenue Royalty and a C$0.10 per tonne commission on all iron ore products sold by the Iron Ore Company of Canada (“IOC”). In addition, LIORC has a 15.1% equity position in IOC. LIORC has a policy of paying quarterly cash dividends to the maximum extent possible subject to the maintenance of appropriate levels of working capital. LIORC declared dividend payments of C$169.6 million in 2017, and currently has an historical 2017 dividend yield of ~11%.
IOC is operated by Rio Tinto, with mining and processing operations located in the area of Labrador City, Canada. IOC is one of Canada’s largest iron ore producers, and is among the top five global producers of seaborne iron ore pellets. IOC also sells an iron ore concentrate product based on the 65% Fe index. The current differential between the Platts indices for 65% Fe concentrate and 62% Fe concentrate has widened to ~US$27 per tonne, the highest spread in recent years.
Anglo Pacific views this investment as an attractive addition to its portfolio, providing exposure to the premium end of the iron ore concentrate and high margin pellet markets, on terms which are immediately accretive. Anglo Pacific will report LIORC dividends received, which are funded by the 7% GRR receipts proceeds and IOC dividends paid to LIORC, as royalty related revenue reflecting the long-term nature of the investment.
Highlights of the transaction:
· Indirect exposure to a 7% GRR over a world-class producing mine;
o Expected to be immediately accretive to adjusted earnings and cash flow per share;
· Further diversifies Anglo Pacific’s income profile, commodity and geographic exposure;
o LIORC cash flow paid out as shareholder dividends to the maximum extent possible;
o Exposure to high quality 65% iron ore concentrate and higher margin pellet products;
o Iron ore exposure increased to 20% from 5%, and Kestrel coking coal exposure reduced to 41% from 49% of the Company’s royalty related assets; (1)
o Increased North American footprint and exposure to Tier 1 mining jurisdictions;
· IOC produces premium products with low alumina, silica and phosphorous content;
o Environmental policy in China is driving structural change in the Chinese steel industry and demand for high quality iron ore products;
o Attractive market outlook for high grade iron ore concentrates and pellets;
· Long IOC mine life with extension potential;
o Reserves support a ~25-year mine life at planned IOC production rates;
o IOC has sufficient mineral inventory to support future expansion options;
· Operated by mining major Rio Tinto in a premier mining jurisdiction;
o IOC has been producing for over 50 years, demonstrating its ability to operate through the cycle;
· Future optionality;
o Liquid asset with potential for underlying growth, as well as flexibility to sell down or increase indirect exposure to LIORC’s 7% GRR and stake in IOC.
IOC has ore reserves sufficient for approximately 25 years at current production rates with additional resources of a greater magnitude. IOC’s primary products include standard and low silica acid pellets, flux pellets, direct reduction pellets and iron ore concentrates. Saleable products are railed 418 Km by a wholly owned IOC subsidiary to port facilities located in Sept-Îles, Quebec. From there, the products are shipped to markets throughout North America, Europe, the Middle East and the Asia-Pacific region.
Industrial action resulted in the suspension of IOC operations between 27 March 2018 and 28 May 2018. A new five-year collective agreement is now in place and the ramp-up to normal IOC production rates was achieved by the end of June 2018.
In June 2018, LIORC Directors announced the intention to call a special meeting to seek shareholder approval to change LIORC Articles in order to permit new royalty acquisitions, which would require 75% shareholder vote in favour. The LIORC Board has stated that an acquisition would only proceed in the event it is in-line with LIORC’s existing income distribution and balance sheet objectives. At this time, the special meeting date has not been called, and no date has been set.
IOC’s 2017 sales totalled 19.0 Mt, comprised of 10.4 Mt of iron ore pellets and 8.6 Mt of iron ore concentrate. Production in 2017 was 10.5 Mt of pellets and 8.5 Mt of iron ore concentrate for sale. Rio Tinto reported IOC 2017 gross revenue of US$1.9 billion, earnings before interest, tax, depreciation and amortization (“EBITDA”) of US$0.8 billion, for an EBITDA margin of approximately 41%.
The transaction was funded with cash on-hand and a £17.3 million draw down on the Company’s revolving credit facility. Anglo Pacific expects to be in a net cash position by year-end 2018 absent any other royalty acquisitions.