BUSINESS REVIEW

The biggest impact on our earnings for 2021 is yet to come, with recent significant increases in the spot price of both coking coal (up 88% in the last three months) and thermal coal (up 80%) which lagged wider commodity increases and did not benefit the results in H1 21.

The highlight of the first half of 2021 was the transformational $205m acquisition of the Voisey's Bay cobalt stream. This acquisition dealt immediately with the two largest challenges facing the Group: that our hitherto cornerstone asset was approaching the latter stages of mining within the Group's royalty land; and that the majority of our revenue was derived from coal (although the vast majority of this was coking coal rather than thermal coal).

The acquisition firmly demonstrated how we are executing on our strategy of pivoting the business towards 21^st century materials which will be vital for the decarbonisation of energy, essential to meet climate change targets. With perhaps a little over two years of significant revenue left to come from Kestrel, and the company considering strategic alternatives with respect to its thermal coal royalty, for which we have received a number of expressions of interest, the business could be materially coal free within the next three years.

The impact of the Voisey's Bay cobalt stream acquisition is evident on our balance sheet. As at 30 June 2021, 62% of our asset value is now derived from battery and base metals, a significant increase on the 22% at 31 December 2020. Importantly, coal now only represents 19% of our asset value, with the thermal coal portion decreasing to just 10%. Although the transition on our earnings profile will take a little longer to come through, it was nonetheless very encouraging that over 53% of our portfolio contribution was derived from non-coal income - a significant move from the 29% for 2020 as a whole.

Commodity prices

Commodity prices have enjoyed a significant run thus far in 2021, although for coking and thermal coal these gains have only come in the last three months and so are not reflected in our H1 21 earnings. Coking coal is up 120% in the year to date, 88% of this coming in the last three months. Thermal coal is similar with 102% and 80% respectively. Both commodities are trading at 52-week highs and this gain will come through the H2 21 numbers. Vanadium is the next most significant increase at 79% and 25% respectively. Cobalt, which is now our largest component of asset value, is up 57% and 20% respectively.

Commodity prices are benefitting from two main factors: likely global coordination of infrastructure spending; and the threat of inflation as economies reopen following Covid-19. There is also likely to be a bigger push towards decarbonisation of energy, which will require significant government spending, in order to achieve climate change targets, which many scientists now seem to agree is likely to have an even shorter runway towards irreversible damage.

Whilst commentators are not quite predicting a new super cycle, it does seem reasonable to believe commodity prices will be well supported in the medium term.

Coal, both coking and thermal, was the noticeable outlier across commodities during H1 21. This was largely due to the ongoing disruption to the markets caused by the ban on Australian imports into China as a result of ongoing tensions between the two countries. This resulted in some Australian coal being diverted onto the seaborne market where exporters became price takers at the time when other Asian markets were only opening up again following Covid-19 and so steel manufacturing remained low.

In the meantime, China became largely self-sufficient in terms of coking coal. This happened when demand for steel in China post Covid-19 really picked up and the price of domestic coking coal exceeded $300/t when the price of Australian coking coal tumbled to just over $100/t. Consequently, although the iron ore price traded at decade level highs, the other ingredient for steel manufacturing, coking coal, was in reverse.

 It now looks like this market imbalance has adjusted. Supply restrictions in China, mainly led by ESG issues on internal production, has seen imports begin to rise again. Other Asian markets, noticeably India, are returning to more normal levels. As such, prices have now rebounded and are currently at ~$220/t, with many commentators seeing coking coal well supported above $150/t. A similar dynamic has taken place in the thermal coal market.

Given the significant movement in commodity prices over the last three months, it looks like H2 21 for the Company could show increased contribution from our portfolio as spot prices remain for most of our commodities firmly ahead of consensus predictions for H2 21. Tailwinds around government construction and climate infrastructure investment, the continued move towards the decarbonisation of energy and the threat of inflation post Covid-19 could see commodities continue to outperform into the medium term.

Cobalt

The Group's largest asset by value is now the Voisey's Bay cobalt stream.

Cobalt has several uses based on its functional properties. The largest cobalt demand source is for use in lithium-ion batteries contained in electric vehicles and consumer electronics. Industrial end market demand for cobalt alloy metal is the second largest source of demand, which includes usage in jet and gas turbine engines. Cobalt is also used in catalysts, pigments, magnets and medical grade alloys. In most applications, substitution of cobalt would result in a reduction of performance.

Whilst electric and hybrid vehicles are much more commonplace on the roads these days, sales represent only approximately 6% of the total global light vehicle sales. Car manufacturers have set ambitious near-term targets towards eliminating the production and sale of combustion engine vehicles, supported by strong electric and hybrid vehicle sales growth of ~160% in H1 21 compared to the same period last year. While this growth comes in the context of a global rebound in all automobile sales, the share of electric vehicles has effectively doubled to 6.7% with demand dominated by China and Europe. It is likely that future public transport and state vehicles will be transitioned towards hybrid and electric status as governments seek to meet their climate change targets. This movement towards the electrification of the automobile industry, coupled with an ever-increasing urgency to contain climate change, will see a surge in demand for commodities supporting the decarbonisation of energy consumption.

Cobalt is a key raw material to support the decarbonisation of global vehicle fleets. While nickel-based lithium-ion battery technological developments have resulted in a reduction in cobalt loadings relative to nickel, lithium and manganese, cobalt is essential in preventing nickel-based lithium-ion batteries from experiencing thermal runaway and catching fire. Therefore, thrifting of cobalt in lithium-ion battery chemistries must be balanced against safety considerations. In addition, any further thrifting is likely to be insignificant compared to the additional volume of batteries required to meet likely future demand for electric vehicles.

Alternative battery technologies have and will arise, although for the foreseeable future nickel-based cobalt bearing battery technologies are expected to continue to offer significant advantages in terms of power density which yields performance, travel distance, and charging cycle life benefits.

Around 75% of the world's output comes from the Democratic Republic of Congo ("DRC").  Over time, we think it is likely that cobalt sourced from outside the DRC, in our case Canada, could command a premium as end buyers may seek to mitigate supply chain ESG risks.

Results

Total portfolio contribution for the first half was $23.0m, down 4% on H1 20 and resulting in adjusted earnings per share of 5.5c. However, the outlook for the second half looks very positive, with the key commodities underlying our portfolio now at twelve-month highs and appearing well supported at these levels. As such, we are expecting a stronger performance in the second half from the portfolio.

Earnings were impacted by the financing for Voisey's Bay, which saw us dispose of 77% of our LIORC stake, removing this revenue from H1 21, whilst revenue from Voisey's Bay only commenced in Q2 21.  

As noted above, income from Voisey's Bay only really commenced in Q2 21 but we are very pleased with the way in which the stream is now operating, and how it has been fully integrated into the business. We have processed 14 deliveries, with a further 12-15 possible shipments in the remaining months of 2021. Four of these shipments were paid on account at the closing of the transaction and so were registered for the vendors' account and do not show as revenue in our income statement.

Continuing the theme of materials aligned to battery storage and electric vehicles, our copper and vanadium exposure, which made up 18% of overall portfolio contribution, benefitted from a higher pricing environment in H1 21. The outlook for copper continues to look very attractive as a result of post-Covid-19 pandemic economic recovery, copper supply constraints, as well as the continued drive for the electrification energy consumption which should support copper prices into the medium term. The current copper price of ~$4.23/lbs remains well in excess of our copper price forecasts at the time of acquiring the Mantos Blancos copper royalty in H2 2019.

The vanadium price has also shown significant gains in the year to date, up 80% on a spot basis and our royalty is now benefitting from higher prices as Largo Resources have commenced the sale of their higher purity V-Pure product which is being produced for battery end users. This is coinciding with higher volumes following plant enhancements during H1 21.

Although now a much smaller proportion of overall revenue, dividends from LIORC were up 250% in the period to C$2.75 adding $2.3m to our earnings in H1 21 and we continue to have exposure to the gold price through our EVBC royalty which extended its reserves based mine life by 5 years.

We ended the first half with net debt of just under $109m, reflecting the financing of the Voisey's Bay acquisition in March 2021. Despite these higher levels of borrowings, our leverage ratio remained under 2.5x and, in the absence of any further acquisitions, should fall to approximately 2.0x by the end of the year, which provides plenty of headroom given that leverage to 3.5x is permitted under the new facility.

Our residual stake in LIORC is currently valued at around $33.0m. Along with $29.0m of undrawn borrowings and around $8.25m in treasury shares, the Group has ~$70.0m of financing flexibility in order to undertake new acquisitions.

Capital markets and opportunities

Although the outlook for commodities remains favourable, the state of the markets continues to challenge those looking to advance projects at the junior end of the scale. The major mining companies in the non-precious space have undoubtably benefitted enormously from the boom in iron ore prices, although capital allocation seems to be directed towards dividends rather than reinvestment in growth. This has seen yields on offer increasing significantly, which is perhaps a sign that the sector continues to be downgraded by the market. Some of this is naturally down to ESG and recent mining controversies.

We have also observed that it has become increasingly difficult to own coal in a public vehicle, with some coal operations changing hands recently at highly subsidised prices by vendors. To this extent we have reviewed our own portfolio and, despite Narrabri producing one of the lowest ash and sulphur thermal coal products in a highly regulated mining jurisdiction, we have decided to explore whether it is in our shareholders' best interests to continue to own this asset. We have commenced discussing a potential sale with a number of a parties and, although this is at an early stage in the process, we are encouraged by the level of interest to date.

What is clear though is that the need for the supply of key strategic minerals to deliver the technology required to meet climate change targets is going to increase. We will also likely see an increase in integrated investment into the mining sector as end users and governments, look to secure the supply of certain materials and reduce dependence on China for rare earths and batteries. We have seen this taking place already in our Piauí project in Brazil, where the US Government have invested directly into the project. We have also seen electric vehicle manufacturers and technology companies funding directly into mining operations.

 This does seem to suggest that the need for alternative forms of finance to produce essential materials for the decarbonisation of energy will continue, and this should continue to include space for royalty and streaming companies. The business model seems to be getting more widespread recognition and acceptance into the capital structure of junior and mid-tier mining companies. We have also seen two royalty and streaming companies list on the LSE over the last year and, although most are focused on precious metals or specific commodities, we have seen the emergence of a number of start-up companies in this space. We are not, and have never been complacent, and continue to work hard to add additions to our business and build on the considerable progress we have made over the last number of years

People

As announced separately today, our Chief Executive Officer, Julian Treger has indicated that he wishes to step down as CEO in due course, to pursue other opportunities. His intention is to leave Anglo Pacific at the end of March 2022 and a search is underway to appoint his successor. He has assured the Board that he remains fully committed to his role in the meantime and has a number of ambitions to achieve in the Company before departing.

Julian joined Anglo Pacific as Chief Executive in October 2013, at a time when revenue from Kestrel was in decline and previous investments had not borne fruit. Under his leadership, the Company has embarked on a strategy to recycle coal cash flows into 21^st century materials. Julian will leave behind an impressive investment legacy, deploying $450m, with a further $90m of optionality through the Incoa and Piauí projects. He will no doubt continue to be successful in his future endeavours.

In the meantime, we have a very experienced team in place and have made a number of promotions over the past few years. Kevin Flynn, who joined as Chief Financial Officer in 2012 joined our Board at the beginning of 2020. Marc Bishop Lafleche, who joined the Company in 2014, was made Chief Investment Officer in late 2020. Alice England, who joined as Head of Legal in 2019 became General Counsel this year.  Jason Gray, the Group's Financial Controller since 2010 has also taken on the role as Company Secretary as announced in late 2020. Supported by a highly experienced Board, we believe there will be no disruption to our business or the ability to generate deal flow in the upcoming transitionary period.

The Board has also recently been strengthened by the appointment of Varda Shine, who brings with her a wealth of financial expertise and relevant mining connections through her former executive role at De Beers Trading Company and in her non-executive roles at Lonmin and Petra Diamonds. We look forward to working with Varda on delivering the next phase of growth for the Company. Varda will also take over the role of Remuneration Committee chair effective from 1 September.

Finally, we would once again like to take the opportunity to thank our employees. For large parts of 2021 we have had to once again work remotely and for the team to be able to undertake a transaction such as Voisey's Bay whilst facing the challenges of working away from the office and the personal interaction with colleagues is a huge reflection on the talented and dedicated team that we have in place. We look forward to delivering further growth in the near-term.

PORTFOLIO REVIEW

Other than a period of care and maintenance at the McClean Lake Mill in Q1 21, all of the Group's underlying producing royalty and streaming assets remained in operation throughout the first half of 2021 with no material Covid-19 disruptions.

We would expect to see another steady performance from our portfolio in terms of volumes in the second half of the year.

PRODUCING ASSETS

Voisey's Bay ($2.4m net of cost of sales, 10.5%)

The Group received attributable cobalt delivers of approximately 154,000 pounds to 30 June 2021 and has subsequently received a further 154,000 pounds to date, which is in-line with our expectations. Revenue for H1 21 was impacted by the timing of deliveries in the middle of the year with a number of cobalt deliveries occurring in July. Overall, FY 21 cobalt deliveries appear to remain broadly in line with that assumed at the time of the cobalt stream acquisition.

The average cobalt price for the Company's attributable cobalt deliveries is approximately $22.20/lbs year to date. With spot cobalt prices currently at $23.25/lbs, we would expect a stronger financial performance from the stream in H2 21.

In June, the Reid Brook deposit at the Voisey's Bay Mine Expansion Project in Northern Labrador produced its first ore. The project involves developing two underground mines - Reid Brook and Eastern Deeps - and is expected to reach an annual production rate of 40,000 tons of nickel in concentrate by 2025, with about 20,000 tons of copper and 2,600 tons of cobalt as by-products. The project is 66% complete, with executed capital expenditures of $1.3bn and Eastern Deeps start-up expected for 2022.

Kestrel ($9.6m, 43%)

Kestrel is moving eastwards in its mine plan, gradually moving towards the boundary of Anglo Pacific's private royalty land. Mining conditions as the longwall moves eastwards are expected to be more difficult and as a result volume on an annual basis are expected to reduce slightly, along with some isolated areas not subject to the Group's royalty.

2020 saleable coal production was 5.66mt with a target of 5.74mt for 2021. Volumes within the Group's land were down ~20% in H1 21, and despite a planned longwall changeout during Q3 21 we are expecting a strong finish to the year.

As noted in the Business Review, despite coal prices currently trading at twelve-month highs, prices were for the most part of H1 21 significantly impacted by the continued ban on Australian imports into China. Although Kestrel coal largely goes to India, South Korea and Japan, the removal of a key export market at a time when other Asian markets remained subdued due to Covid-19 led to prices on the seaborne market collapsing. The average price achieved at Kestrel fell by 19% in H1 21, which also lowered the weighted average royalty rate.

With guidance remaining at 5.74mt, we are expecting our income from Kestrel in 2021 to be weighted more towards the second half. With a recovery in pricing levels since June 2021 this bodes well for our revenue in 2021 as a whole as more volumes should be sold at higher prices which will attract a higher average royalty rate.

Mantos Blancos ($2.8m, 12.5%)

Volumes from Mantos were relatively consistent over the first half of the year, with 21.6kt of payable copper - a 15% increase on H1 21. Along with the benefit of higher volumes also came the benefit of a higher copper price. The price achieved increased by 47% compared to H1 20 and 28% in the year to date. As noted in the business review, copper is one commodity which should benefit significantly from planned global infrastructure investment going forward.

The commissioning of a new ball mill and associated processing infrastructure to increase annual sulphide ore throughput capacity to 7.3 Mtpa from 4.3 Mtpa continues to be underway, and upon completion is expected to increase annual copper production to approximately 52,000 tonnes.

LIORC ($2.3m, 10%)

The Iron ore price has fallen off slightly over the last few weeks, with recent weaker steel demand in China, price levels remain elevated at $172/t with pellet premiums at $54/t. These levels are still significantly in advance of price levels this time last year which were around $115/t and $39/t. IOC produces both products.

The Group monetised 77% of its position in LIORC, during Q4 20 and Q1 21 realising ~$83.0m, to part finance the Voisey's Bay cobalt stream acquisition. The residual stake is currently valued at ~$33m based on current share price and exchange rates.

Income from LIORC increased by 2.5x in H1 21 compared to H1 20. This is partly due to higher iron ore prices but also due to planned capex at IOC in H1 20 which restricted the special dividend component associated with the quarterly distributions. As such, dividends declared for H1 21 were C$2.75 per share compared to just C$0.80 in H1 20 (C$2.25 in H2 20). Broker consensus for dividends for H2 21 are ~C$1.90.

Maracás Menchen ($1.5m, 6.5%)

The H1 21 to H1 20 comparison is not like for like, as H1 20 included a $1.3m charge in relation to the Glencore offtake termination arrangement.

Volumes were up 22% on H1 21 as Largo completed their latest plant expansion plan meaning that monthly nameplate capacity is expected to increase to 1,100 tonnes of V₂O₅. Largo has guided 2021 V₂O₅ production of 12,000 to 12,500 tonnes. Largo is also commissioning a V₂O₃ plant and is targeting production in Q3 21. This should see a greater portion of vanadium products being sold to the battery markets rather than to steel end users going forward.

In addition to volume increases, vanadium pricing is also up in the year to date, with Largo noting an average price of $8.19 in Q2 21, 33% higher than Q2 20. The current spot price is now closer to $10/lbs. We would expect to see average pricing achieved exceeding the benchmark V₂O₅ price as purer V₂O₃ is produced for the battery market, suggesting the possibility of upside to come from this royalty going forward.

Narrabri ($1.1m, 5%)

Sales volumes were down 49% in H1 21 as a result of well documented challenges faced by Whitehaven in navigating around the localised fault in the deposit along with undertaking repairs to the longwall infrastructure. Pricing was also impacted due to quality deterioration from coal mined in the fault.

These factors led to Whitehaven reducing fiscal year ending 30 June 2021 guidance from ~6.5Mt to ~4.7Mt. However, they remain optimistic that once they have moved outside of the offending panel, that mining rates will begin to increase again.

In the meantime, thermal coal prices should significantly benefit revenue in H2 21. The average price realised in Q2 21 was $91/t whereas the spot Newcastle thermal coal benchmark price is in excess of $165/t.

EVBC ($1.6m, 7%)

The previously announced new reserves report published by Orvana support an EVBC reserves based mine life of at least five years, with the possibility of further mine life extension thereafter. The current gold price, in advance of $1,700oz, should ensure that this is economical to produce. This is a significant fillip for the Group's royalty, which has already delivered in advance of 3x payback since 2011.  

Revenue in H1 21 is up 33%, reflecting continued elevated gold prices and, although volumes were down in Q1 21, Orvana has not altered their guidance for FY 21 and so the royalty should continue to add meaningful cash flow in H2 21.

Denison financing arrangement (McClean Lake Mill) ($1.2m, 5.5%)

Revenue from the financing arrangement was impacted by the McClean Lake Mill being placed on care and maintenance in Q1 21. This was for a period of four months but has now returned to full operations. Ordinarily this generates in the region of C$0.4-0.6m per month for the Group.

Four Mile

We remain in dispute with Quasar in relation to the level of charges which are being applied against the royalty revenue. The Company believes that its royalty revenue should be considerably higher as Quasar, in our view, treat the contract as akin to a profit interest, whereas the Company remains of the view that this is an NSR and that refining or processing costs should not be allowable deductions.

The Company has applied to the courts in Australia and has a trial date scheduled for October this year. The Company remains committed to pursuing this matter in full. We are hopeful that there will be some tangible progress made in relation to this case over the coming months.

Amapá

We note the recent announcements by Cadence Minerals as to the shipment of iron ore from the stockpiles at the Santana port and the subsequent receipt of proceeds. We have yet to receive any correspondence from the operator in relation to the royalties due on these sales. We have written to the operator, and Cadence Minerals, to inform them of the contractual obligations and will have no issue in escalating this matter through legal avenues.

Finance Review

The results for H1 21 and going forward will be presented in US dollars following the Voisey's Bay acquisition. This reflects the fact that most of our revenue is now received in dollars, with the rest being derived from US dollar pricing. Furthermore, our borrowings are drawn in US dollars with only our operating costs and dividend based on British pounds. This is now in line with how most of the mining sector reports its financial performance.

Results

Results for the first half of 2021 were impacted by the disruption in the coal markets caused by the ongoing Chinese import ban on Australian coal. This, coupled with weaker demand in other Asian markets as a result of Covid-19 led to a period of depressed prices on the seaborne market.

Just as H1 20 was impacted by a number of one-off items, H1 21 does not paint a full picture. This is largely due to the financing strategy for the Voisey's Bay stream acquisition, which saw us dispose of 77% of our position in LIORC by the end of February 2021 before the record date for the Q1 21 LIORC dividend. As the transaction closed at the end of March, we ended up with the full impact of the forgone revenue from LIORC in H1 21 whilst the stream only contributed for one quarter.

There were also some timing differences in the first half, with certain cobalt deliveries expected in June deferred to July 2021. Revenue in H1 was also impacted by the mining difficulties faced by Whitehaven at Narrabri, but we expect these to now be in the past and a smoother profile going forward, notwithstanding longwall changeovers.

The remainder of the portfolio benefitted from higher commodity prices and, whilst coking and thermal coal prices are currently more than double their levels from the beginning of the year, this increase largely only took effect in the last month of the second quarter and as such will not benefit our revenue until H2 21.

We would expect, based on current commodity price levels, a significant increase in contribution from our portfolio to come in H2 21.