Ecora Royalties PLC (ECOR) Earnings Call Transcript & Summary

Good morning, everyone. Thank you for joining us today to discuss Anglo Pacific's Half Year 2022 Results. We are incredibly proud to report our best half year results in the group's history. Each portfolio contribution, adjusted net income and cash flow per share were records for the half year period. And what we're seeing is that the low-risk nature of our business model as a royalty and streaming company is incredibly pronounced in today's inflationary environment. Our toll royalty and stream interest helped us generate our highest ever levels of EBITDA at a margin of over 90%. The company is in a very strong position for further growth with $180 million of liquidity available to fund further royalty and stream acquisitions, and that follows our recent acquisition of a royalty portfolio from South32 for $885 million in July. So in summary, Anglo Pacific has delivered strong financial performance, a speculated enhanced growth profile. We've maintained our balance sheet strength. And furthermore, we've established ourselves as the leading future-facing metal commodity royalty business. So all in all, it's been a great half year period for the company. Looking ahead, we have also announced today that we plan on renaming the company, which fundamentally reflects an evolution of our portfolio, which at its core has seen a change in its composition, but also its commodity exposure such that with around 90% of our contribution to come from future-facing commodities in the next years. We think it is appropriate and the right time to reflect the change in the underlying nature of the business, and we'll be making a further announcement on this in the coming weeks. But with that, I'll hand it over to you, Kevin.

Thanks, Marc. Good morning, everybody. If we can turn to the financial highlights slide, please. [ See ] I echo Marc's comments, very pleased to present what are record results for Anglo Pacific for the first half of the year. If we look on the left-hand side of the page, we can see the portfolio contribution chart showing that the first 6 months of 2022 surpassed the whole 2021 achievement from the portfolio in that period. These record results were largely driven by pricing as volumes in the first 6 months were largely consistent with a comparative period in 2021. But looking at pricing, specifically, coking coal was up about 260%, and cobalt was up 75%. One of the main virtues of our model, as Marc just touched on, is that the majority of these revenues fall through to the bottom line. We can see this in the middle chart in adjusted earnings per share, which were up almost 4x in the same period in 2021. Now this correlation between income and profit is not being experienced in many other sectors right now where inflation is rampant, which is resulting in significant margin erosion. But the royalty model, as we have been saying, is very defensive in terms like this. We ended the period with very strong dividend cover, and we'll touch on this later, the dividend very well covered by the portfolio excluding Kestrel. And without the inflation facing other industries, the dividend is very well protected going forward. If we turn to Slide 6, please, which summarizes the income statement, and I'll use this slide to provide some commentary on some of the recent updates in our portfolio as well. But overall, contribution was up 300% compared to the previous period, predominantly drew Kestrel and the record levels of coking coal prices achieved in the first half of the year and in the first quarter in particular. Now it's worth remembering Kestrel is very unique in our portfolio as the royalty rate here increases through a ratchet mechanism with commodity prices. So not only did the price increase during the period, but the weighted average royalty rate increased from 8.3% to about 12.3%. So a 50% increase as well, which really shows when commodity prices are very high, there is a real compounding impact for Kestrel. So this drove earnings from that royalty alone to be $70 million in the first 6 months. Although coking coal prices have trended off a little bit from these highs in Q3 thus far, the announcement recently of the new higher Queensland royalty rates which Marc will discuss a little bit later, should compensate in the second half of the year for a large part of these pricing decreases. Looking elsewhere, we had a very good half from Voisey's Bay generated almost $14 million of revenue, again, buoyed by very strong cobalt prices in the period. Now we think of our total volume deliveries, about 2/3 of these have occurred in the first half of the year. So we wouldn't expect the same kind of run rate to happen in the second half. But overall, very pleased with the contribution from our most recent producing addition to the portfolio. Mantos and Maracas both had solid performances in the first half, and Marc, again, later on, will outline why they're on grounds for optimism to come from these assets going forward, whilst in the short term, the fundamentals for copper and vanadium, in our view, seem very favorable. We're hopeful of near-term volume increases from Mantos as they continue their debottlenecking project. But the operator of Maracas has reduced their guidance by around 8% for their financial year 2022 as a result of some weather and production issues. Some of this volume reduction has already occurred in the first half of the year, though. Our Four Mile royalty dispute, we received a favorable judgment on this case in the first half of the year, which will result in backdated royalty payments and interest to come, but as the operator has chosen to appeal the decision, we are not currently recognizing these back payments until the outcome of the appeal is known with more certainty. LIORC was perhaps an outlier in the portfolio. The dividend income in the first half from this asset reduced by around 50%, reflecting a pullback in the iron ore price, which has kind of injured into the third quarter of the year. But as part of the Voisey's Bay transaction, we reduced our stake in this asset by about 75%. So the impact here is not as material as it would have been 1.5 years ago. EVBC probably did fall short of levels achieved in H1, mainly volume driven due to ongoing challenges being worked through by the operator. And McClean Lake, this was operational throughout the first half of this year, resulting in a combined contribution of $2.6 million. You might remember that this operation has been placed on care and maintenance for a part of the first half of 2021 due to COVID protection measures. We did note the announcement by Cameco post half year of its intention to operate mine at 75% capacity from 2024 onwards in order to stabilize the uranium market. Now they haven't indicated how long that these measures will be put in place for. But if and when that should occur, we should expect to see slightly lower contributions. But overall, the first half 2022 produced an outstanding performance from the portfolio and sets the full year up very nicely for another record year for Anglo Pacific Group. We expect H2 to be strong but probably not quite as strong as the first half given the recent pullback in coking coal and cobalt prices in particular. But that said, there are some very clear catalysts for growth in our portfolio moving forward, and Marc will touch on these a little bit later. So if we can move to the next slide, which is a summary of our income statement. I won't spend too much time on this slide as we've kind of touched the main areas that drive the significant increase in bottom line profit after tax. But it's worth noting that our operating expenses were largely in line with the same period last year, something which not many other business models can report at the moment. Finance costs reduced in the period as we had lower average volumes. And also, we had some one-off finance costs in the first half of last year associated with the refinancing of our borrowing facility associated with the Voisey's Bay transaction. So overall profit after tax was just under $100 million. And excluding the noncash valuation items in the income statements such as the $42 million cash flow royalty revaluation, our adjusted earnings in the period were around $60 million, which is a record for the group and producing adjusted earnings per share of $0.28 in the period, 4x higher than the comparative period. Turning to Slide 8. This is a snapshot of our balance sheet at 30th of June. And clearly, this predates the most recent $185 million acquisition that we undertook. So this slide is probably a bit out of date. We'll look at the cash and debt position on the next slide, but it's worth noting that the cash for royalty valuation increased in the period due to both higher pricing inputs going forward, but also now the new higher royalty rate. The majority of the value of this asset will be realized in the next 2 years as volumes from Kestrel really start to step down at the beginning of next year as we start to see the transition into and out of the private royalty area. But that said, with current coking coal prices of around $250 a tonne, these are still significantly above the long-term average, and we're really well placed here to capture meaningful contributions from the royalty as it moves towards the end of its economic life. Turning on to Slide 9. Similar to the balance sheet. This slide is a bit out of date given the recent acquisition. But you can clearly see the impact of our strong first half results, dropping right through to the bottom line and deleveraging in the first 6 months. Absent the South32 acquisition we announced recently, we cash position at the end of this quarter, which really is a remarkable achievement given that we drew $123.5 million to finance the Voisey's Bay acquisition. And that was only 15 months ago. The South32 acquisition, we structured this in a way really to preserve balance sheet strength and financing flexibility for the short to medium term. So the day 1 cash payment of $48 million brought total net debt to just under $70 million on completion. And this number has come down to about $50 million currently following the receipt of the monthly Kestrel installments. With coking coal prices where they are about $250 a tonne and obviously the new Queensland royalty rate as well. We'd expect that the portfolio should generate sufficient free cash flow to largely finance the $9.6 million quarterly deferred consideration payments associated with the South32 acquisition. Looking into the short term, we'd expect to incur $20 million financing is probably going to be made in early 2023. And given that and the deferred consideration payments associated with South32, we think our net debt should base on current spot prices remain under $100 million in 2023 and reducing thereafter, and this is all with moderate gearing levels. So with our new refinance facility, which provides up to $200 million for growth, we have a $23 million residual stake in LIORC and around $8 million of treasury shares. We're now in very good shape from a balance sheet and financing perspective with around $180 million of liquidity today to finance further growth. Slide 10 is our capital allocation policy. And it's worth remembering that we've now acquired $400 million of royalties and streams in the past 16 months. And as of right now, we only have $50 million of net debt in the business. So our balance sheet remains in a very strong position to add further growth. On growth, we continue to see very good opportunities to continue adding further royalty and streams to the portfolio like we've been doing recently. And as I mentioned just now, as part of the South32 acquisition, we modified the borrowing facility, which preserved the $150 million headline number, which eliminated the $25 million step down, which was due to take place this month. And we've also agreed a $50 million accordion feature with the banks, which will be available for further investments. And this is really important to us because it enables us to act very quickly and opportunistically to continue growing our business. Our quarterly dividend remains unchanged. I think the next payment is due at the end of this month. It's fully covered and importantly, protected from the impact of inflation. And as I mentioned earlier, our 7p annual dividend is currently well covered from our core portfolio, which now excludes Kestrel due to its short-term nature. We do intend to switch to a U.S. dollar-denominated dividend in the second half of the year, just to bring this in line with our presentation currency. So we'll be providing the U.S. dollar equivalent to 7p per share. But we'll provide more details in due course in relation to the mechanics of this. So that's it from the financing perspective, having run through the record numbers and outlining our current healthy liquidity position. I'll hand back to Marc to provide an update on the company.

Thank you, Kevin. Turning to Slide 12, please, operator. We repeat this slide, as it reflects our asset base as of the half year period. Pro forma for the South32 royalty acquisition, not a material change from when we last showed this slide when -- at the time of that transaction, 75% of our exposure is approximately to base metals and copper and nickel, cobalt, which is exactly where we would like the portfolio to be positioned for the next decade. And furthermore, we have seen our coking coal exposure tick up to slightly over 10%. As Kevin mentioned, is a function of the revised Kestrel royalty rates and near-term, short-term met coal price outlook. That being said, this does represent a milestone for the group, where over the next few years, that 13% is -- should be a peak level running down to close to materially mill in the next few years, such that close to 90% plus of our exposure will be to future-facing commodities. On Slide 13, we've summarized historical commodity prices because we think that it's -- we wanted to highlight that despite the pull back in some of our key commodities underlying our portfolio in the past, say, 6- to 8-week period, prices and sales still do remain at very healthy levels especially if you look back to, say, 2020 or earlier, coking coal, for example, at $250 per tonne is actually double the average of coking coal price in 2020, and cobalt price at $25 per pound, but first of all, remains well above the price we assumed in for the calendar year 2022 at the time of our Voisey's Bay acquisition. But furthermore, there's a really positive outlook for electric vehicles where we've seen, for example, in the first half of the year, 50% increase in EV sales, which is quite remarkable. And furthermore, recently, the Chinese State Reserve Bureau has announced that it could look to expand its strategic cobalt stockpile during the second half. So if that happens, we would also anticipate some fairly positive price support. But to make this point in a simpler way and to echo what Kevin has already said, we don't expect in the second half of the year, the same level of record performance from the portfolio. But certainly, we do expect a strong showing in the context of prior years. Slide 14 provides a bit more detail and sensitivity to the revised Kestrel royalty rates. As Kevin mentioned, this royalty is quite unique in that it's ratcheted, but another feature of the royalty, which is quite unique, is that our royalty entitlement is derived from the rates set by the Queensland government. And so therefore, as of first of July this year, as Kevin mentioned, we saw the introduction of a number of new royalty rates when coal prices exceed $175 per tonne in Australian dollar terms. On the right-hand side of the page, we've illustrated the impact on a per tonne basis of royalty revenue to Anglo Pacific Group from the prior regime to the current regime, plus or minus the current spot price of $250 per tonne. What this means is that all else being equal per tonne of coal sold Anglo Pacific could expect incrementally U.S. dollars approximately $10 more per tonne. And if in a more bullish scenario, assuming $400 per tonne. On an illustrative basis, that would mean almost $30 more per tonne or almost double what we would have received from that royalty. So as you can see here, there is significantly more torque and a fantastic tailwind as we approach the end of this royalty's life. Turning to Slide 15. The next 12 months are going to be quite busy across a number of our assets in our portfolio, some really key milestones and catalysts to highlight here today. First of all, Voisey's Bay is now as reported by Vale beginning a transition from the Ovoid open pits to the underground operations. That's expected to last the next 12 to 18 months. And therefore, volumes on 2023 are expected to be in terms of delivered volumes Anglo Pacific under our stream expected to be roughly flat year-on-year 2022 to 2023, ramping up thereafter up to 2,600 tonnes of cobalt produced by Voisey's Bay per annum in 2025. Piaui is 1 that we've highlighted on almost every call we've had in the past years. So we've seen some big milestones here already and expect more to come later this year. First of all, we saw first production at Piaui's starter plant. Second, we saw the completion of a bankable feasibility study with some details to be released to publicly by and nickel later this quarter. And third, we've seen the group initiate financing activities. So all in all, 1 that we're monitoring exceptionally carefully over the next 12 months. At Mantos, Kevin has already mentioned the near completion of the debottlenecking project. But turning ahead at the time of the acquisition of this royalty, we did flag, and we're quite excited by the prospect of 2 sources of potential upside. And those 2 are really now coming to light, and we expect further visibility and daylight into how and what that might look like in the next 12 months. First, there's the potential to further increase the production capacity of the sulfide concentrator plant from 7.3 million to 10 million tonnes. And second, the Capstone is currently evaluating the potential to extend the life of the copper cathode production. Capstone has announced that a prefeasibility study in relation to both these initiatives was completed in Q2 and that they are proceeding to advance basic engineering which is expected to complete in Q4 this year. Turning to look at West Musgrave. The first piece news here since we last updated you on West Musgrave is that OZ Minerals has received all regulatory approvals required to proceed with construction, and they are currently finalizing agreements with local communities and effective peoples. OZ Minerals has restated that is targeting a final investment decision later this year. So that is 1 that we anticipate in H2. More generally, in relation to OZ Minerals they have -- OZ Minerals has announced that it had received an indicative proposal from BHP to acquire all shares in OZ Minerals. And as a third-party royalty company, we aren't in a position to comment or speculate on that approach OZ Minerals response or any of the specifics. But we would point out, however, that we see this as a positive validation of our investment case, underlying our recent West Musgrave royalty acquisition, both in terms of the quality of the project, but also the assets longer-term upside potential. At Santo Domingo, we expect in early 2023 in the first half of 2023, an updated feasibility study. That will include the wider district synergies. At Incoa, the project is progressing well, although it's probably likely that the CP is triggering our $20 million investment will be met in H1 of next year rather than Q4. At Maracas Largo continues the construction of an ilmenite byproducts plant, and that's progressing on track for first production in 2023 based on Largo's disclosure. And turning now to look more generally at some of our uranium exposure. In the past 6 months, we've certainly seen a strength in the uranium market fundamentals, but most recently, we've seen a pretty material strengthening in the near to long-term outlook, where we note that in the past 24 hours, a reported change in Japan's energy policy, which would see a near-term restart of a number of idled reactors in 2023 and beyond that, the possibility of extending the life of the existing fleet as well as the construction of new next-generation technology reactors. So all in all, that is quite positive for our uranium exposure. On Slide 16, last month, we announced the acquisition of a high-quality portfolio of advanced stage development, nickel and copper royalties from South32. In a nutshell, without going into too much detail, this transaction allowed for the recycling of the significant cash flow generated largely by our coking coal royalty into copper and nickel which as everyone who has been tracking Anglo Pacific will be aware that, that is straight down the fairway in terms of delivering on our stated strategy. Kevin mentioned already that the transaction structure with specifically designed to maintain balance sheet strength and flexibility to keep growing the business. And certainly, the last point, but not to be diminished these were the key royalties in this acquisition related to what we view as world-class projects with well-regarded operators with strong development track record, strong sustainability credentials on all located in OECD jurisdictions. On Slide 17, we've highlighted here an interesting dynamic where the key strategic challenge at Anglo Pacific in the past has certainly been to replace the Kestrel royalty. That's really been the core of our business development strategy for the past 9 years. And we are really proud and delighted to show that the acquisitions completed over the past 8 years have transformed not only our commodity exposure, but also our medium-term income profile, such that as the Kestrel royalty runs off in the next 2 to 3 years, based on the existing producing assets and growth in medium-term growth in Anglo Pacific's royalty book. We have a line of sight on income of $100 million, excluding Kestrel. So turning now to Slide 18 to summarize. Our portfolio has performed exceptionally well in the first half of the year. And while commodity prices have indeed pulled back, we do remain well above lows that we've seen in the last 5 years, such that we do -- in a historical context, our portfolio appears well positioned for a strong second half. And we continue the virtues of the royalty and streaming model to continue to shine in the context of the strong inflationary pressures seen across the mining sector. The revised royalty rate at Kestrel is an exceptionally helpful tailwind prior to the royalties runoff, which will see us continue to recycle met coal royalty cash flows to delever the balance sheet and should we see opportunities into future facing commodity royalty and stream acquisitions. In the medium and long term, the structural demand trends for future-facing commodities remains very, very strong. And all the while having now completed almost $400 million of acquisitions in the last circa 1.5 years, we retain balance sheet flexibility with firepower in excess of $150 million. And furthermore, a strong balance sheet to underpin which should hopefully underpin investor confidence in a baseline dividend at level of 7p. So to conclude on our pipeline. At the moment, we're seeing equity valuations, which are quite challenging for both mine developers but also producers. These equity valuations are particularly depressed in this high inflationary environment. And that suggests that we may see opportunities to put capital work with good projects or producing assets. And that being said, we think it's likely that our next acquisition of meaningful scale will be a producing royalty or very close to production. But should we see a high-quality development stage opportunity with a ticket size of $20 million to $30 million. That may all be something that we would pursue. So thank you very much for joining us today on the presentation. And we're happy to begin the Q&A session.

Great. Thank you very much, guys. Our first question is from Cameron Needham from Bank of America. Cameron asks, how are you thinking about some of the potential jurisdiction risks in Chile, specifically in relation to the Santo Domingo royalty?

Thank you, Cameron. Capstone has disclosed publicly a fair amount of detail in relation to a stability agreement agreed with the Chilean government. We'd be happy to provide further detail, if that's helpful. I think our takeaway from that information and that disclosure from Capstone at this time is that arrangement should provide a base level of support for that project.

Great. And our second question is from Stephen Reeves from SCR Holdings. Stephen asks many successful companies like yourselves are making excellent profits at the moment. And in these inflationary times are raising dividends as a result. Given Anglo's profits are likely to start to fall back to more normal levels, if you keep the dividend flat, is there not a risk the share price will start to fall back?

Well, thank you very much for the question. It's difficult to speculate as to what may or may not happen in the future given of a number of factors that beyond the ongoing run rate of dividend. I think what we would say, though, is echoing the comment made by Kevin earlier, in terms of capital allocation, our first priority is always remains to ensure that our balance sheet is in a very strong position. Second of all, at this time, we continue to see really attractive opportunities. That being said, we will maintain our very disciplined approach to growth. But at the moment, we see an opportunity to continue to scale the business and buy a value-accretive royalty and stream transactions.

Our next question is from Andrew in PI. Is there any imminent news about the acquisition of an accretive paying royalty -- accretive paying royalty, apologies.

Apologies, Julian. Could you please repeat the question?