Mr. Julian Treger reports
ANGLO PACIFIC GROUP PLC
PURCHASE OF A 4.25% SHAREHOLDING IN LABRADOR IRON ORE ROYALTY CORP.
Anglo Pacific Group PLC
has acquired a 4.25-per-cent shareholding in Labrador Iron Ore Royalty Corp. at an investment cost of
approximately $50-million (U.S.) ($65.5-million; 38 million British pounds). Labrador Iron Ore is listed on the Toronto Stock Exchange and
has a market capitalization of approximately $1.5-billion.
Labrador Iron Ore is structured as a passive flow-through entity for a 7-per-cent gross revenue royalty and a 10-cent-per-tonne commission on all iron ore products sold by the Iron Ore Company of Canada (IOC). In addition,
Labrador Iron Ore has a 15.1-per-cent equity position in IOC. Labrador Iron Ore has a policy of paying quarterly cash dividends to the
maximum extent possible subject to the maintenance of appropriate levels of working capital. Labrador Iron Ore declared
dividend payments of $169.6-million in 2017 and currently has an historical 2017 dividend yield of approximately 11 per cent.
IOC is operated by Rio Tinto, with mining and processing operations located in the area of Labrador City,
Canada. IOC is one of Canada's largest iron ore producers and is among the top five global producers of
seaborne iron ore pellets. IOC also sells an iron ore concentrate product based on the 65-per-cent-iron index. The
current differential between the Platts indices for 65-per-cent-iron concentrate and 62-per-cent-iron concentrate has widened
to approximately $27 (U.S.) per tonne, the highest spread in recent years.
Anglo Pacific views this investment as an attractive addition to its portfolio, providing exposure to the
premium end of the iron ore concentrate and high-margin pellet markets, on terms that are immediately
accretive. Anglo Pacific will report Labrador Iron Ore dividends received, which are financed by the 7-per-cent gross revenue royalty receipts
proceeds and IOC dividends paid to Labrador Iron Ore, as royalty-related revenue, reflecting the long-term nature of the
investment.
Highlights of the transaction:
-
Indirect exposure to a 7-per-cent gross revenue royalty over a world-class producing mine;
- Expected to be immediately accretive to adjusted earnings and cash flow per share;
- Further diversifies Anglo Pacific's income profile, commodity and geographic exposure;
-
Labrador Iron Ore cash flow paid out as shareholder dividends to the maximum extent possible;
- Exposure to high-quality 65-per-cent-iron-ore concentrate and higher-margin pellet products;
-
Iron ore exposure increased to 20 per cent from 5 per cent and Kestrel coking coal exposure reduced to
41 per cent from 49 per cent of the company's royalty-related assets;
- Increased North American footprint and exposure to Tier 1 mining jurisdictions;
- IOC produces premium products with low alumina, silica and phosphorous content;
- Environmental policy in China is driving structural change in the Chinese steel industry and
demand for high-quality iron ore products;
- Attractive market outlook for high-grade iron ore concentrates and pellets;
-
Long IOC mine life with extension potential;
- Reserves support an approximately 25-year mine life at planned IOC production rates;
- IOC has sufficient mineral inventory to support future expansion options;
- Operated by mining major Rio Tinto in a premier mining jurisdiction;
- IOC has been producing for over 50 years, demonstrating its ability to operate through the
cycle;
- Future optionality;
- Liquid asset with potential for underlying growth as well as flexibility to sell down or
increase indirect exposure to Labrador Iron Ore's 7-per cent gross revenue royalty and stake in IOC.
IOC has ore reserves sufficient for approximately 25 years at current production rates with additional
resources of a greater magnitude. IOC's primary products include standard and low-silica-acid pellets, flux
pellets, direct-reduction pellets and iron ore concentrates. Saleable products are railed 418 kilometres by a wholly
owned IOC subsidiary to port facilities located in Sept-Iles, Que. From there, the products are shipped to
markets throughout North America, Europe, the Middle East and the Asia-Pacific region.
Industrial action resulted in the suspension of IOC operations between March 27, 2018, and May 28, 2018. A
new five-year collective agreement is now in place and the ramp-up to normal IOC production rates was
achieved by the end of June, 2018.
In June, 2018, Labrador Iron Ore directors announced the intention to call a special meeting to seek shareholder approval
to change Labrador Iron Ore articles in order to permit new royalty acquisitions, which would require 75-per-cent shareholder
vote in favour. The Labrador Iron Ore board has stated that an acquisition would only proceed in the event it is in line
with Labrador Iron Ore's existing income distribution and balance sheet objectives. At this time, the special meeting date
has not been called and no date has been set.
IOC's 2017 sales totalled 19.0 million tonnes, comprising 10.4 million tonnes of iron ore pellets and 8.6 million tonnes of iron ore concentrate.
Production in 2017 was 10.5 million tonnes of pellets and 8.5 million tonnes of iron ore concentrate for sale. Rio Tinto reported IOC
2017 gross revenue of $1.9-billion (U.S.), earnings before interest, tax, depreciation and amortization (EBITDA)
of $800-million (U.S.) for an EBITDA margin of approximately 41 per cent.
The transaction was financed with cash on hand and a 17.3-million-British-pound drawdown on the company's revolving
credit facility. Anglo Pacific expects to be in a net cash position by year-end 2018 absent any other royalty
acquisitions.
Commenting on the investment, Julian Treger, chief executive officer of Anglo Pacific Group, said:
"This transaction continues Anglo Pacific's growth trajectory and is in line with Anglo Pacific's stated strategy
of diversifying its sources of income and commodity exposure.
"The transaction is expected to be immediately accretive to adjusted earnings and free cash flow per share,
and, based on Anglo Pacific's current shareholding and Labrador Iron Ore broker consensus 2019 dividend forecasts
(Bloomberg), the company expects to receive between $4.7-million [and] $5.7-million of royalty-related revenue during
the 2019 calendar year via Labrador Iron Ore dividends.
"China currently produces half of the world's steel and the Chinese government's current environmental
policies aimed at reducing pollution are driving structural changes in the Chinese steel industry, which in turn
are driving the demand for high-quality iron ore products. Sinter usage, which is high in China relative to North
American and European steel industries, is amongst the largest generator of emissions within the Chinese
steel sector's production process. Going forward, we expect sustained demand for high-grade iron ore
concentrates with low alumina and silica contents and an increase in pellets usage within the typical Chinese
blast furnace load mix.
"IOC is a top five global producer of seaborne iron ore pellets, has a reserve based mine life in excess of two
decades, and has both production expansion and mine life extension potential. This investment ticks the boxes
of our royalty investment criteria and positions Anglo Pacific to benefit from the positive outlook for high-quality iron ore products as well as from pellet premiums, which we expect to remain elevated in the near
term."
Analyst call
There will be an analyst presentation by conference call at 9:30 a.m. British Summer Time on Aug. 16, 2018. The presentation
will be hosted by Julian Treger (chief executive officer), Kevin Flynn (chief financial officer) and Marc Bishop Lafleche (head of development).
Dial-in details for the call are as shown in the attached table.
Location you are dialling in from Number you should dial
United Kingdom (toll-free) 0-800-358-9473
United Kingdom (local) 44-0-333-300-0804
Participant access code:
13129694 followed by the number sign
About Anglo Pacific Group PLC
Anglo Pacific Group is a global natural resources royalty and streaming company. The company's
strategy is to develop a leading international diversified royalty and streaming company with a portfolio
centred on base metals and bulk materials, focusing on accelerating income growth through acquiring
royalties and streams on projects that are currently cash flow generating or are expected to be within the
next 24 months, as well as investment in earlier-stage projects. It is a continuing policy of the company to
pay a substantial portion of these royalty and stream revenues to shareholders as dividends.
We seek Safe Harbor.
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