After graduating with a BA from Harvard University and an MBA from Harvard Business School, Julian Treger launched his career working for Lord Rothschild as an in-house corporate financier managing a portfolio of public and private equity investments.
Treger went on to co-found Active Value Advisors Ltd. to invest in undervalued, predominantly U.K.-listed companies, where he advised on more than $900 million of funds over a 12-year period. Along the way, he co-founded Audley Capital Advisors LLP, an investment advisory firm, managing value-oriented, special situations investment strategies through hedge fund and co-investment vehicles, with a focus on the natural resources sector.
Treger shifted gears in 2013, and in October joined a royalty company called Anglo Pacific Group (TSX: APY; LSE: APF) as CEO. Anglo Pacific is the only royalty company listed in the U.K., and Treger wasted little time making his mark. His strategy: to renew Anglo Pacific’s focus on acquiring royalties on bulk mined materials — such as coal and iron ore used in the steelmaking industry and on base metals like copper — rather than on the more competitive precious metals.
“What I inherited was a portfolio built largely around coking coal, some iron ore, some uranium, a bit of copper and a bit of gold and silver,” Treger explains in a telephone interview from his office in London. “When I looked at it I figured that it’s probably more difficult for us to compete with the Royal Golds and the Silver Wheatons, which are much bigger and have higher rates and lower yields, and are able to outbid us.”
While Treger says that doesn’t mean Anglo Pacific will never again invest in gold and silver royalties, he stresses that they “would have to be exceptional for us to do so.” He also points out that gold and silver represent just 12% of the mining sector by value, while coal represents 50%, iron ore 20% and copper 10%, and emphasizes that the bulk and base metal sector is undersupplied by royalty companies.
“Bulk and base metals are capital intensive and they need a lot of financing, which plays well to the royalty model . . . we think we can put money to work and generate higher returns in the non-gold and silver space,” he says. “I’d rather play in an area where there is very little competition. We should be able to do royalties at much higher rates. We are looking to generate internal rates of return in the low- to mid-teens from new royalty investments, and I think we can achieve that in the bulk and base metal space.”
Treger’s other goal is to acquire near-term royalty streams on projects that are either close to production or in production. In June, Anglo Pacific picked up a 2% net smelter return royalty (NSR) for US$22 million on all mineral products sold from the Maracas vanadium project in eastern Brazil, which is owned and operated by Largo Resources (TSXV: LGO; US-OTC: LGORF).
The Maracas mine is expected to start production before September, and Glencore Xstrata (LSE: GLEN) has already signed an off-take agreement for all of the vanadium produced at the mine in its first six years of production. Average annual production is forecast to be 25.1 million lb. (11,400 tonnes) of vanadium-oxide equivalent over a 29-year mine life. According to Largo, Maracas is the highest-grade undeveloped vanadium deposit in the world, and the deposit contains measured and indicated resources of 24.6 million tonnes grading 1.11% vanadium oxide, with inferred resources of 30.4 million tonnes averaging 0.83% vanadium oxide.
Edward Sterck of BMO Capital Markets estimates that the Maracas vanadium royalty “is expected to become [Anglo Pacific’s] second largest by income by 2017, representing 7% of the total over a mine life of 29 years.” The analyst points out that Anglo Pacific has a US$15 million (£10 million) revolving credit facility that “has been earmarked for acquisitions with a 24-month time frame to production.”
Treger notes that his plans for the company also involve doing as many royalty deals as he can in the next few years to take advantage of the downturn in the mining sector and the difficulty many companies face raising funds.
“We think there’s a window of a couple of years during which there is limited financing and opportunities to fund companies and get good returns, so we will try to do as much as we can during that window,” he says. “But obviously we’re not blind to quality considerations, and they need to fulfill our criteria as well.” In addition to being close to or in production, he explains, they must be high-quality assets with good margins in good jurisdictions that have long mine lives, and where there is upside in terms of exploration opportunities.
Another area of interest involves secondary royalties, where Anglo Pacific would buy a pre-existing royalty from a company or individual. Treger says secondary royalties will keep being attractive, and that they “are something we’ll look at when there are more inflows into the mining sector, and the primary royalty model becomes more competitive.”.
In the meantime, the portfolio of royalties he inherited on producing assets include a 7% royalty (based on current coking coal prices) from Rio Tinto’s (NYSE: RIO) Kestrel coal mine in Queensland, which made up 93% of Anglo Pacific’s total royalty income in 2013. The company also has a 1% gross revenue royalty (GRR) on Zamin Resources’ Amapa iron-ore mine in northern Brazil; a 2.5% net smelter return interest, escalating to 3% for gold prices in excess of US$1,100 per oz., in the producing El Valle–Boinas Carles gold and copper mines in northern Spain operated by Orvana Minerals (TSX: ORV; US-OTC: ORVMF); and a 1% gross revenue royalty (GRR) on Beadell Resources’ Tucano gold mine in Brazil, which produces an iron ore by-product. (Anglo Pacific holds the royalty on the iron ore.)
In terms of royalty projects in the development pipeline, Anglo Pacific has a 1% net smelter return royalty (NSR) on the Four Mile uranium project in Australia owned by Quasar Resources (75%) and Alliance Resources (25%), which is expected to generate its first sales this mid-year. BMO Research estimates that the Four Mile royalty, acquired in 2009, will contribute 3% of Anglo Pacific’s total royalty income by 2016.
Other royalties on development projects include Hummingbird Resources’ Dugbe 1 gold project in Liberia (in exchange for US$15 million, Anglo Pacific is entitled to a 2% NSR from any gold-mine sales within 20 km of the project); a 1% NSR in the Black Thor, Black Label and Big Daddy chromite deposits owned and operated by Cliffs Natural Resources (NYSE: CLF) in the Ring of Fire region of northern Ontario; a 2.5% NSR in Minera Gold’s Engenho gold mine in Brazil, 70 km from Belo Horizonte; a 1% GRR on London Mining’s (US-OTC: LIIGF; LSE: LOND) Isua iron-ore project in Greenland; a 1% NSR in Berkeley Resources’ (US-OTC: BKLRF) Salamanca uranium project in Spain; a 3% GRR on output from Columbus Copper’s (TSXV: CCU; US-OTC: EMNGF) Bulqiza chromite project in Albania; and a 2% NSR interest in Indo Mines’ (US-OTC: IMIOF) Jogjakarta iron sands project in Indonesia.
At press time Anglo Pacific’s shares traded at $3.10 per share within a 52-week range of $2.50 to $4. The company has 116 million shares outstanding.
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