Ecora Royalties PLC (ECOR) Earnings Call Transcript & Summary

Okay, Marc, over to you.

Good morning, all, and thank you for joining us today in relation to our most recent acquisition. I'm Marc Lafleche, CEO of Anglo Pacific Group, joined here today by Kevin Flynn, CFO. And we're absolutely delighted to announce the acquisition of a high-quality portfolio advanced stage development royalties from South32 for fixed consideration of $185 million and up to $15 million of contingent payments. The transaction last recycling of income generated by our coking coal royalty into copper and nickel, which is essentially straight down the fairway in terms of delivering on our stated strategy. Anglo Pacific is now positioned as the leading future-facing commodities, royalty and streaming business. The acquisition has been structured to minimize upfront cash outlays, which maintains balance sheet strength ensures a well-covered ability to support a 7p annual dividend into the future as well as maintain flexibility for future acquisitions. At transaction completion well understood base metals and copper, nickel, and cobalt, all essential to the energy transition will form the core of our portfolio. The investment is underpinned by strong structural long-term nickel and copper fundamentals driven primarily by the energy transition, which provides substantial commodity price upside to our investment case. The key royalties relate to world-class projects owned by well-regarded owners with proven project development track records along with strong sustainability credentials. The assets underlying the key royalties have long mine lives are expected to sit on the lower half of the industry cost curves. And as for the majority of our portfolio based on OECD jurisdictions. Finally, I would like to welcome South32 as a shell. South32 will receive an approximately 69% pro forma stake in the enlarged Anglo Pacific share capital as part consideration for this transaction. And as most of you will know, South32 is a global diversified mining company. We look forward to our partnership into the future, and they have indicated that they intend to be a long-term supportive shareholder. So turning on to the next slide. The acquired royalty portfolio. So we're acquiring a portfolio of 4 royalties, although 2 are really key. The first is the West Musgrave's nickel and copper project in Australia and the second relates to Santo Domingo's -- excuse me, Capstone Copper -- Santo Domingo's copper project in Chile. So turning first to the West Musgrave project. As I mentioned just now is owned by OZ Minerals and OZ Minerals is targeting a final investment decision in the near term and that could see first production as early as 2024, although material production likely to come later than that. We have now have acquired 2% NSR. And if you assume OZ Minerals guidance in terms of steady-state production and broker consensus, long-term commodity price forecast, should we expect this royalty to generate annual income in the range of $10 million to $15 million over a 26-year mine life. The Santo Domingo project is owned by Capstone Copper. And Capstone Copper is currently targeting first production at Santo Domingo between 2024 and 2026. We have acquired a 2% royalty, and this covers the highest grade copper portion of the project. If we assume copper production forecast as disclosed by Capstone and long-term broker consensus commodity price forecast, then that royalty is expected to generate $20 million to $35 million per annum over the first 6 to 7 years of production before moving out of our royalty area and coming back into our royalty an approximately 14% for the final years of the mine life. There are also 2 other royalties in the portfolio, Nifty and Carlota. These are smaller additions in the context of the first 2. Nifty in particular, is somewhat overshadowed. But Nifty is amongst the highest grade copper development projects in Australia, a top 10 in terms of size and really has some interesting potential. In terms of the entry point, you've all seen copper and nickel prices over the last 18 months, about 12 to 18 months, trade at historically elevated levels. And therefore, we feel that by acquiring development stage royalties, we've been able to price the transaction at long-term commodity prices that are well below the recent levels. So not too dissimilar to our Voisey's Bay stream acquisition we feel there is substantial upside to the commodity price forecast beyond our investment case. So with that, I'll turn it over to Kevin to discuss the transaction and financing structure.

Thanks, Marc, and good morning, everyone. If we can just turn to Slide 5. Thank you. It's very exciting to be able to discuss this acquisition with you all this morning, which actually brings our total investments over the last 18 months to just under $400 million, which is very, very significant for us. Looking at the transaction and how we financed it. The initial cash consideration of just under $48 million largely reflects the windfall levels of cash that we've been receiving from Kestrel over the last 6 to 9 months. And given the short remaining life of the royalty, it represents a good recycling of these recent record levels into a portfolio of royalties, which should ultimately backfill revenue when mining moves outside of Kestrel's private royalty area in the middle of this decade. The remaining components of the consideration structure has been financed in a way that retains pretty good access to liquidity and firepower, but also preserving the balance sheet strength. And this is achieved through the issue of consideration shares to South32, which at today's spot price, the pricing of that is just above. And the share consideration has meant that we restricted the day 1 cash component to just under $48 million. Following this, there will be 6 equal quarterly payments totaling $55 million and these should, depending on future commodity prices be financed from free cash flow that the portfolio is expected to generate. In addition to and depending on certain milestones at West Musgrave, there could be a further $15 million of future payments, which would take the total deal value here to $200 million. And this really complements the most recent $205 million Voisey's Bay acquisition in terms of pivoting us very much towards decarbonization and energy transition. Balance sheet strength is a key pillar of our capital allocation policy and the transaction shouldn't really result in high levels of operational leverage. I think at current spot prices, leverage is expected to remain comfortably below 1.5x. And that's plenty of headroom given that our facility allows us to operate up to 3.5x. Speaking of the facility, we took the opportunity with this transaction to make some modifications. Importantly, the $25 million step down, which is scheduled to take place next month has been removed. So the facility gets preserved at $150 million. In addition, we put in place a $50 million accordion feature like we've had in the past, such that the facility can be increased to $200 million depending on future acquisitions. We've obviously got a fantastic relationship with our lending syndicate. And we think that the modifications we've been able to make to this facility really validate the quality of the assets we're acquiring here and actually should better reflect the size of our business post acquisition, whilst leaving us with around $150 million plus of financing flexibility post transaction for further growth. If we could turn to the next slide, Slide 6, please. And this slide really shows how the group is on a path towards medium-term annual revenues of potentially $100 million plus. On the left-hand side of the page, we see the Kestrel number that Kestrel through cycle based on through cycle coking coal prices has earned approximately $42 million per annum. We see on the next block that the acquisitions we've made over the last 8 years are expected to produce annual revenues of about $55 million over the next 8 years or so. So that was really strategic objective #1 for Anglo Pacific to replace Kestrel through cycle. And currently, the residual portfolio achieves that and achieves that in a way which safeguards the 7p dividend and the central cost and tax base as well. This was really part of the reason why it was important for Anglo Pacific given Kestrel's short life to recycle these cash flows into growth. And we can see this growth on the right-hand side of the chart. We already have $90 million of optionality in the portfolio through the Incoa and Piaui investments that we've made in the past, and these could produce between $50 million to $20 million per annum once fully funded and ramped up. But if we go to the last block, this is where we really see the benefit of the assets that we've acquired today. Where by mid-decade, which is around about the time Kestrel should lead the private royalty area, these assets could produce between $30 million to $50 million per annum. And this is on a cumulative basis how we could see our portfolio getting to north of $100 million, which would provide a stable and recurring platform for our business going forward. Marc, I'll hand back to you to show how the new group will look post transaction.

Thanks, Kevin. This is really something that we find pretty amazing in the context of where the business was 8 years ago. In terms of our commodity exposure today, it is an amazing transformation away from our heritage of coal towards future-facing commodities. I mentioned it earlier, but we now have a transaction closed 70% of our portfolio in real core around copper, nickel and cobalt. And then beyond that, 80% of our portfolio into future-facing commodities at around 80%. We continue on our journey and met coal will remain a part of the business as we run met coal out until 2026. However, we really feel strongly that the progress that we've made and the track record we've demonstrated should give folks a lot of confidence about the direction of travel and ultimately, how the business should be positioned to really benefit from the energy transition over the next decades. The portfolio maintains its exceptional geographic footprint still today at 90% exposure to OECD jurisdictions, and it's pretty clear what we see in the world today that jurisdiction risk matters. And last, the bulk of our portfolio remains producing royalties and streams. Kevin mentioned this just now. We have a really strong platform of earnings based on the transactions we've done to date beyond Kestrel to support dividend, further growth in the business and these assets rebalance our portfolio such that we have now approximately 30% exposure to near- and medium-term development projects, which effectively means we have a transformed growth profile. On the next slide, I think it's clear to absolutely everyone that the energy transition will be highly metal-intensive and that's expected to drive enormous copper and nickel demand over the next 2 decades to levels that are sort of hard to imagine when you think about how capital intensive the mining industry is and how difficult it is to bring new projects from scratch into production from discovery to first production. Copper demand is expected to grow from 1 point -- almost 1.5x in the next 20 years and nickel almost 3x in the next 20 years. So on that basis, but this demand growth, even assuming substitution, even assuming thrift assuming recycling, it's just hard to see where the supply will come from based on the current project pipeline. And therefore, we really see some enormous commodity price upside potential over the life of these royalties. Furthermore, high-quality nickel and copper royalties are exceptionally rare. And you've heard us make the comment before that we've -- we are really keen to add copper and nickel to our portfolio, but finding the right opportunities is a challenge. And so to echo a comment I made earlier that copper, nickel and cobalt now form the absolute core of our portfolio, and we have this exposure to what our structurally very strong fundamentals in terms of the copper and nickel outlook. It's just a fantastic milestone for our business. And turning now to look at the royalties in a bit more detail. Look at both these -- the key royalties in this portfolio fundamentally just tick all the boxes for us, starting at West Musgrave, from a commodity perspective, it's a nickel sulfide ore body with copper and nickel, with copper and other byproducts. The project is located in Western Australia, excellent jurisdiction. And there is a very strong owner in OZ Minerals, very well-capitalized group. And furthermore, OZ Minerals has a very strong track record in terms of bringing projects into production. The project itself is expected to have a first quartile cost curve position, once in production, a long mine life at 26 years. And furthermore, there's potential for both production upside and life of mine extension. So across the board, everything we look for in royalties. If we turn to the next slide, please. At West Musgrave, it's not just the nickel itself in terms of the commodity exposure that we find really exciting about this acquisition. It's also the type of ore body in that West Musgrave is a nickel sulfide ore body. And these style of nickel ore bodies provide the lowest carbon route to producing Class 1 battery-grade nickel. And you can see this on the left-hand side of the page with nickel sulfide deposits typically representing about 1/6 of the carbon emissions of a laterite nickel pig our route to mat nickel which, if we look into the future, is amongst the vast majority of nickel supply growth. Nickel sulfide projects are increasingly rare. You can see on the very small chart on the right that these are expected to deplete in the medium and long term. And so Western Musgrave's commodity exposure and its carbon intensity to make it doubly attractive. Looking at Santo Domingo on the next slide, please. This is a fully permitted copper project located in Chile, it's expected to produce in the lower half of the global cost curve. The project is owned by Capstone Copper, are very well capitalized in the leading intermediate copper supply producer with a strong record of project development. Capstone is currently progressing a feasibility study. In addition, relation to a cobalt salt [ bate ] circuit and that has the potential to position Santo Domingo as the world's seventh largest cobalt producer and actually the second largest producer of cobalt outside the Democratic Republic of Congo. And so if you overlay that with our existing Voisey's Bay cobalt exposure in Canada, the -- this really complements our existing portfolio. On the next slide, we've outlined here, the pro forma portfolio of the Capstone Group following Capstone Mining and Mantos Copper's merger. And this is really important, we think, to our investment case. That merger earlier this year creates enormous potential synergies for the Santo Domingo projects given that it's only 35 kilometers away from what was Mantos copper producing Mantoverde copper project. And in many ways, we think was at the core of the commercial rationale for the combination. The combined entity provides benefits to the ability to bring this project on stream, particularly in the context of the Mantos copper team's track record and recent experience developing 2 copper brownfield projects in Chile, 1 of those being actually are Mantos Blancos copper royalty, where we have an existing royalty with the group and on that basis, on our already very strong and constructive relationship. So when you overlay that track record, we think it's going to be really invaluable in terms of bringing the Santo Domingo project online. As Synergies report for Santo Domingo and Mantoverde is due in Q3 of this year, hopefully September. And as I said earlier, given these assets are only 35 kilometers apart, the potential synergies appear substantial and are really, really create a strong case for this project being developed. So we look forward to that study's release as we expect it will demonstrate a number of benefits. On the sustainabilities slide on the next page, please. You'll see that in keeping with our ESG risk assessment framework, we always diligence all our investments against really strict criteria. And the projects underlying this transaction envisage an incredibly strong focus on sustainability. The project owners have strong track records of community benefit programs. They have strong relationships with local committees, traditional owners, strong workplace safety cultures and performance and really robust governance frameworks. On the right-hand side of the page, you can see on the pro forma basis, and this is, of course, very deliberate, we look to position our portfolio so that our exposure is not just the right commodities, but assets that are operating with really strong environmental and sustainability profiles. And on a pro forma basis, you can see that our portfolio now includes exposure to Voisey's Bay nickel by our cobalt stream, which is exceptionally well located in terms of carbon intensity. The West Musgrave project is equally fantastic in that regard. And Piaui, similarly, all at the very low end of the cost curve. So what this means is post-completion, our royalty exposure to low-carbon nickel mines and projects is arguably unmatched. On the next slide, from a cost perspective, it's similarly the case where this acquisition really complements our existing portfolio of low-cost operations, well positioned on the cost curve and expect it to generate strong cash flows through commodity price cycles. So to summarize, in short, what does the transaction do Anglo Pacific Group. First, it allows us to recycle strong coal cash flows into copper and nickel. It positions us as the leading future-facing commodities royalty group with a significantly enhanced sustainability profile and increases our exposure to copper and nickel to commodities with exceptionally strong fundamentals and very attractive medium- to long-term outlooks. It provides a significant source of medium-term growth. We now have a line of sight on $100 million of portfolio contribution ex-Kestrel, which is an incredible accomplishment given where the portfolio was approximately 9 years ago. And the transaction is structured to ensure that we have a strong balance sheet. We have confidence that our balance sheet and on an EPS basis, should ensure a well-covered dividend at 7p. And furthermore, with the flexibility to pursue further acquisitions. As Kevin mentioned, we've also amended our RCF to increase our firepower and ensure that we're in the best position to continue to grow. And as we look forward into the future, when we think about what's next for Anglo Pacific Group. Given the pullback in commodity prices, we think it's now a really good times, look, turn back to income generating royalties. And so in the near term, anyway, other than perhaps relatively small development stage royalties we expect that our next acquisition will be in relation to a producing mine, which should drive immediate or near-term earnings growth. So with that, I'm happy to turn to Q&A.

Thank you very much, Marc. [Operator Instructions] We will take our first question from Richard Hatch from Berenberg. Richard asks, can you talk us through the $15 million contingency payment or how this is -- how this $15 million contingency payment is calculated and paid? Marc, if you want to take that one?

Sure, Scott. I'll take that. So Richard, thanks for your question. This contingent payment is linked to future nickel prices and also to minimum production volumes at West Musgrave. The nickel price thresholds start around $10 per pound such that to the degree we're seeing levels of production roughly in line with current envisaged commercial production levels, you should anticipate that those contingent payments get triggered.

And another question from Richard is, he asked, those portfolio contribution from Santo Domingo moved to 0 from year 8. And if the life of a mine is 18 years, does it generate cash from year 14 to 18?

That's correct, Richard. In time, we hope to work with Capstone to be able to publish a map of the mine plan overlaid with our royalty area, which should help you better understand how our royalty interacts with the production profile of Santo Domingo. But you should assume, based on our estimates, that our royalty will capture the first 6 to 17 years of production and come back into our royalty lands plus or minus year 14 for the final 4 years of the mine life.

And another from Richard is, do you see an opportunity to increase your royalty exposure to Santo Domingo in the years where mining moves out of your royalty area, given your strong relationship with Capstone?

It's certainly something that we will look to explore. It's difficult to speculate as to whether or not that might be of interest to Capstone at this time. But ultimately, we do have, in our view, a strong partnership with that group. Is it possible? Yes. And is it likely, it's very hard to say at this time.

And another question for Richard. How soon do you think you could announce a producing royalty deal?

We continue to look, as always, as you know, Richard, have multiple opportunities. I think, as always, we continue and will continue to be really disciplined in how we deploy capital. It's -- we have been strict in terms of ensuring that whatever we announce meets our criteria. We would hope -- and we have the balance sheet capacity to announce something quite quickly. It's simply a matter of finding something that really ticks all the boxes for us.

[Operator Instructions] We've got a question here from [ Paul Cote ]. Paul asks if and when the assets begin generating for how many years is APF entitled to royalties for each asset?

Well, I'll focus here on the key royalties. At Santo Domingo, as I think I just answered that question over at West Musgrave, we anticipate a baseline of income for the entire mine plan, which is in excess of 20 years. However, there are other sources of potential upside of that royalty, which could result in life of line extension. And furthermore, there are also sources of upside that could drive production upside during that initial contemplated mine life, as I mentioned, above 20 years.

We have another question here from -- this question is from Jason Fairclough from Bank of America. Jason asks is South32 subject to a lock of honest shares. Does South32 have any other hidden royalties that might be of interest to APF?

Jason, thanks for your question. To take the first one, yes, South32 subject to a 9-month lockup at this time, as I mentioned earlier, South32 has indicated to Anglo Pacific that it intends to be a long-term shareholder and part of the rationale of transacting with Anglo Pacific Group was to retain residual exposure to these royalties as they develop and as they increase in value by way of the shareholding. Ultimately, the length of South32 shareholders have been Anglo Pacific will, of course, be a commercial decision by South32. But at this time, we look forward to a very constructive and positive relationship which does take us to your second question. Yes, South32 has a portfolio a significant portfolio of other royalties. We at this time anyways, we think this is a fantastic first step to establish a strong commercial relationship with the group and does create a strong commercial logic and rationale for Anglo Pacific and South32 to explore acquiring future royalties in the future.

I think we have 2 more questions as it stands. So take the first from [ Shiver ], a private investor. He asked West Musgrave appears to be low-grade/bulk tonnage with complex met in the middle of nowhere, those OZ Minerals have capacity to move it forward given their focus elsewhere?

In our view, yes. And ultimately, it's important to keep in mind that the outlook for nickel and copper is both exceptionally strong. So OZ Minerals has, in the past, stated a strong commitment to this project. I think as you look at all nickel projects in particularly across the world, the reality is that the vast majority of new nickel supply is significantly lower on a grade profile and existing nickel sulfide ore bodies. And so therefore, in the context of demand growth on the nickel side, largely fueled by lithium-ion batteries on a relative basis as we look into the future of this project, in our view, stacks up extremely well.

And we have a question from David [ Crome ] from Fort William Merchant Securities. David asks, should shareholders assume future such deals are likely to be part funded by allocations of APF shares?

I think when we think about structuring transactions, there are a number of factors at play. Of course, the transaction size, balance sheet flexibility, relative accretion profile, all play a factor. In the past, we have looked to fund transactions by way of equity issuance, although this is in the last 9 years anyway, is the first time that we've issued a material amount of shares as consideration. I think that on a transaction-by-transaction basis, we'll evaluate what makes the most sense. That being said, we do, as part of this transaction, remain -- retain -- excuse me, substantial balance sheet flexibility such that we do have the capacity to transact on an all-cash basis on a smaller deal on a relatively smaller ticket size.

And a question from Marina Calero from RBC Capital Markets Estimates. What level of portfolio income would you need to reach before you consider reviewing your current dividend policy?

I think it's very much a question of the commodity cycle in the context of our portfolio income level because ultimately, what we're looking to do is deploy capital when we see attractive entry points and slow that down, we see valuations getting toppy. At this moment, we continue to see really attractive value in the market, really attractive opportunities to potentially grow our portfolio further. And so at this time, we continue to believe from a capital allocation perspective, that growing the portfolio is in the best interest of shareholders, such that at level of 7p dividend is one that's well covered and achieves a good balance between growing the business and returning capital to shareholders.

Well, that is all our questions. So I'd like to hand back to Marc for any closing remarks.

Well, I'd like to say thank you very much for joining us today. We're absolutely thrilled to have gotten this transaction across the line. We really could not be happier with how far the business has come. We think that this transaction really marks the second phase of Anglo Pacific, if you will, where Phase I was achieved Kestrel income replacement. Phase 2 of this business is just to continue growing and continue to position this business as the leading go-to future-facing metals royalty business that we think should be really attractive over the next decade as the energy transition wraps up.