Ecora Royalties PLC

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 of 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 top line royalty and stream interests helped us generate a highest ever levels of it 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 a recent acquisition of a royalty portfolio from south 32 for 885 million dollars in july so in summary angle pacific has delivered strong financial performance a significantly 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, Mark. Good morning, everybody. If we can turn to the financial highlight slide, please. So yeah, I echo Mark'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 six months of 2022 surpassed the whole of 2021. So phenomenal achievement from the portfolio in that period. These record results were largely driven by pricing, as volumes in the first six months were largely consistent with the 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 Mark 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 four times on 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 times 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 threat facing other industries, the dividend is very well protected going forward. If we turn to slide six, 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 driven by 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's a real compounding impact for Kestrel. So this drove earnings from that royalty alone to be $70 million in the first six months. Although coking coal prices have traded off a little bit from these highs in Q3 thus far, the announcement recently of the new higher Queensland royalty rates which Mark 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 Boise's Bay, which generated almost $14 million of revenue, again, void by very strong cobalt prices in the period. Now, we think of our total volume deliveries, about two-thirds 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 Mark again later on will outline why there are 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 favourable. We're hopeful of near-term volume increases from Mantos as they continue their de-bottlenecking 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 favourable judgment. on this case in the first half of the year, which will result in backdated royalty payments and interests to come. But as the operator has chosen to appeal the decision, we are not currently recognising 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 percent, reflecting a pullback in the iron ore price, which has kind of endured into the third quarter of the year. But as part of the Boise Bay transaction, we reduced our stake in this asset by about 75 percent. So the impact here is not as material as it would have been a year and a half 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 McLean Lake, this was operational throughout the first half of this year, resulting in combined contribution of 2.6 million. You might remember that this operation had 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 Comarco post half year of its intention to operate the 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 of 2022 produced an outstanding performance from the portfolio and sets the full year up. very nicely for another record here 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 Mark will touch on these a little bit later. If we can move to the next slide, which is a summary of our income statements. 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 borrowings, 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 Boise Bay transaction. So overall, profit after tax was just under $100 million, and excluding the non-cash and valuation items in the income statement, such as the $42 million Kestrel 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 28 cents in the period, four times higher than the comparative period. Turning to slide eight, 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 Kestrel 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 two 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 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 nine, 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 six months. Absent the SAD32 acquisition we announced recently, we'd be in a net cash position at the end of this quarter, which really is a remarkable achievement given that we drew $123.5 million to finance the Boise State acquisition, and that was only 15 months ago. The SAD32 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 one 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 SAD32 acquisition. Looking into the short term, we'd expect the ANCOA $20 million financing is probably going to be made in early 2023. And given that and the deferred consideration payments associated with SAD32, we think our net debt should, based 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 in 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 US 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 US dollar equivalent of 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 Mark to provide an update on the company.

Thank you, Kevin. Turning to slide 12, please, operator. This slide 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 at the time of that transaction. 75% of our exposure is approximately to base metals and copper, nickel, cobalt, which is exactly where we would like the portfolio to be positioned for the next decade. And furthermore, we have seen our caulking coal exposure tick up to slightly over 10%, as Kevin mentioned, as a function of the revised Kestrel royalty rates and near-term or 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 uh should be a peak level running down to uh close to materially nil um in the the next few years such that close to 90 plus of our exposure will be to future facing commodities on the slide 13 we've summarized historical commodity prices because we think that it's we wanted to highlight that despite the in some of our key commodities underlying our portfolio in the past, say, six to eight week period, prices themselves still do remain at very healthy levels, especially if you look back to, say, 2020 or earlier. Coal King Coal, for example, at $250 per ton is actually double the average of Coal King Coal price in 2020. And at cobalt price at $25 per pound, that, first of all, remains well above the price we assumed for the calendar year 2022 at the time of our Boise 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 1st of July this year, as Kevin mentioned, we saw the introduction of a number of new royalty rates when coal prices exceed $175 per ton in Australian dollar terms. The right hand side of the page, we've illustrated the impact on a per ton basis of royalty revenue to Anglo Pacific Group from the prior regime to the current regime. At a plus or minus the current spot price of $250 per ton, What this means is that all else being equal per ton of coal sold, Angle Pacific would expect incrementally U.S. dollars, approximately $10 more per ton. And if in a more bullish scenario, assuming $400 per ton on an illustrative basis, that would mean almost $30 more per ton or almost double what we would have received from that royalty. So as you can see here, there is significantly more torque and demand 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, Boise's Bay, is now, as reported by Vale, beginning a transition from the Ovoid open pit 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 to Anglo-Pacific under our stream, expected to be roughly flat year on year 2022 to 2023, ramping up thereafter up to 2.6 thousand tons of cobalt produced by Boise's Bay of Man in 2025. PoE is one that we've highlighted on almost every call we've had 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 PoE's starter plant. Second, we saw the completion of a bankable feasibility study with some details to be released publicly by President Nicolau later this quarter. And third, we've seen the group initiate financing activities. So all in all, one that we're monitoring exceptionally carefully over the next 12 months. At MANTOS, Kevin's already mentioned the near completion of the de-bottlenecking 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 two sources of potential upside. And those two 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 tons. And second, Capstone is currently evaluating potential to extend the life of the copper cathode production. Capstone has announced that a pre-feasibility study in relation to both these initiatives was completed in Q2, and that they're proceeding to advance basic engineering which is expected to complete in Q4 this year. Turning to look at West Musgraves, the first piece of news here since we last updated you on West Musgraves is that Oz Minerals has received all regulatory approvals required to proceed with construction, and they're currently finalizing agreements with local communities and effective peoples. Oz Minerals has restated that it's targeting a final investment decision later this year, So that is one that we anticipate in H2. More generally in relation to Oz Minerals, Oz Minerals has announced that it 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 or 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 Westmost Grade 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, or in the first half of 2023, an updated feasibility study that'll include the wider uh district synergies at nkoa the project is progressing well although it's probably likely that the cp is triggering our 20 million dollar investment will be met in h1 of next year rather than q4 at maracas largo continues the construction of an ilmanite 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 six months, we've certainly seen a strengthening 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 Sun 32. 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 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 relate to what we view as world class projects with well regarded operators, with strong development track recorders, strong sustainability credentials and all located in OECD jurisdictions. On slide 17, we've highlighted here We've highlighted here an interesting dynamic where the key strategics 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 nine years. And we are really proud and delighted to show that The acquisitions completed over the past eight 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 two to three years, based on the existing producing assets and 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 five 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 deliver 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 year and a half, we retain balance sheet flexibility with firepower in excess of $150 million. And furthermore, strong balance sheet to underpin, which should hopefully underpin investor confidence in a baseline dividend that's level of 7P. So to clued 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. um but uh should we see a high quality development stage opportunity with a ticket size of 20 to 30 million dollars that that may all be something that we that we would pursue so thank you very much for joining us today on the presentation um and we're happy to begin the q a session great thank you very much guys um 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 a 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 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, Owen. Could you please repeat the question? Sorry. So it's Andrew from PI. Is there any imminent news about the acquisition of an accretive paying royalty?

Thank you for the question. As I mentioned earlier, we would anticipate that the next transaction of material size would likely be in relation to a producing or near production royalty. That being said, we don't generally comment publicly as to the near-term nature or medium or long-term nature of our pipeline. I think it's clear, one point that should be clear, however, is that we are constantly reviewing opportunities. And to round that answer out, I would also highlight the fact that our portfolio today has a fairly significant amount of organic growth potential. As I mentioned earlier, when highlighting some of the, the near term, uh, key catalysts and across our royalty buck, which includes both producing assets, but also development stage assets.

Great. Well, our last question is from Andrew or sorry, it's from Adrian Bowman in AB. What are your thoughts on carbon credits slash sequestration royalties? Is this something Anglo-Pacific might pursue in the future? Thank you for the question.

The carbon space is incredibly dynamic at the moment, and in some ways on the carbon capture side, for example, the United States almost transformed overnight with the latest inflation legislation that was passed. quite recently. We've we've monitored the space and at this time are strategically focused on on on our core area of strength, which is fundamentally to acquire future facing metal royalty and stream acquisitions. We may consider carbon streaming And while, of course, any carbon stream would need to stand its own two legs on its own merits, that probably would be more in terms of the context of maintaining carbon neutrality for Anglo-Pacific Group, rather than as purely an economic investment on its own, simply to position the portfolio towards carbon exposure. But that can change. It's something that we're monitoring, but not something that we're actively pursuing at this time.

We've had another question. It's from David Cromey from Fort William Merchant Securities Limited. David asks, given the likelihood of continuing pressure on base metal prices in the current economic environment, will Anglo-Pacific consider such rather than future metals?

So we would very much include base metals in within the remit of the nomenclature of future-facing commodities. When we think about future-facing commodities, we're considering two groups. The first, those groups that are directly required as part of the electrification of energy consumption, or in other words, decarbonization. And second, commodities or mine projects that have relatively... cleaner, purer, greener operational footprints or products. So I think it's worth just highlighting that base metals are absolutely within this remit and in that context underpin our strategy to position our portfolio with approximately 75 exposure to copper, nickel and cobalt.

But that's been all the questions we've had today. So, Mark, I'll pass back to you for any closing remarks.

Well, thank you very much, everyone, for joining us today on this half year results. We are. It's been a really strong half year. And while there's no shortage of interesting developments across the commodity sector already, only a few months into the second half of the year, We look forward to having and showing what we're on track for a record 2020-22.