GROWING A GLOBAL
NATURAL RESOURCES
ROYALTY COMPANY
2018
Annual Report & Accounts
ANGLO PACIFIC GROUP PLC
CONTENTS
01
02
03
04
06
08
08
12
14
16
18
19
20
22
30
31
48
GROUP OVERVIEW
Anglo Pacific at a glance
Natural resources royalties explained
Our portfolio
Chairman’s statement
STR ATEGIC REPORT
Chief Executive Officer’s statement
5 years of growth
Market overview
Our business model
Our strategy
Our strategy in action
Environmental, Social & Governance
Principal risks and uncertainties
Key Performance Indicators
Business review
Financial review
55
55
56
60
61
64
65
78
80
81
81
87
88
89
90
91
92
93
131
131
131
132
GOVERNANCE
Corporate governance report
The Board
Nomination Committee
Audit Committee
Remuneration Committee
Directors’ remuneration report
Directors’ report
Statement of Directors’ responsibilities
FINANCIAL STATEMENTS
Independent auditor’s report
Consolidated income statement
Consolidated statement of comprehensive income
Consolidated and Company balance sheets
Consolidated statement of changes in equity
Company statement of changes in equity
Consolidated statement of cash flows
and Company statement of cash flows
Notes to the consolidated financial statements
OTHER INFORMATION
Shareholder statistics
Corporate details
Forward-looking statements
PERFORMANCE MEASURES
Throughout this report a number of financial
measures are used to assess the Group’s
performance. The measures are defined as follows:
Portfolio contribution
Portfolio contribution represents the funds received or
receivable from the Group’s underlying royalty related assets
which is taken into account by the Board when determining
dividend levels.
Portfolio contribution is royalty related revenue (refer to
note 6) plus royalties received or receivable from royalty
financial instruments carried at fair value through profit or loss
(‘FVTPL’) and principal repayment received under the Denison
financing agreement (refer to note 22). Refer to note 36 to
the financial statements for portfolio contribution.
Operating profit/(loss)
Operating profit/(loss) represents the Group’s underlying
operating performance from its royalty interests. Operating
profit/(loss) is royalty income, less amortisation of royalties
and operating expenses, and excludes impairments,
revaluations and gain/(loss) on disposals. Operating profit/
(loss) reconciles to ‘operating profit/(loss) before
impairments, revaluations and gain/(losses) on disposals’
on the income statement.
Adjusted earnings per share
Adjusted earnings represents the Group’s underlying
operating performance from core activities. Adjusted
earnings is the profit/(loss) attributable to equity holders,
plus royalties received from financing instruments carried
at fair value through profit or loss, less all valuation
movements, and non-cash impairments, amortisation
charges, share based payments, finance costs, any
associated deferred tax and any profit or loss on non-core
asset disposals. Adjusted earnings divided by the weighted
average number of shares in issue gives adjusted earnings
per share. Refer to note 13 to the financial statements
for adjusted earnings/(loss) per share.
Dividend cover
Dividend cover is calculated as the number of times adjusted
earnings per share exceeds the dividend per share. Refer to
note 14 to the financial statements for dividend cover.
Free cash flow per share
Free cash flow per share is calculated by dividing net cash
generated from operating activities, plus proceeds from
the disposal of non-core assets and any cash considered as
repayment of principal, less finance costs, by the weighted
average number of shares in issue. Refer to note 35 to the
financial statements for free cash flow per share.
F O R M O R E I N F O V I S I T
www.anglopacificgroup.com
01
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T H E G L O B A L N AT U R A L R E S O U R C E S R OYA LT Y C O M PA N Y
OUR AIM IS TO BE THE LEADING
INTERNATIONAL ROYALTY
AND STREAMING COMPANY,
WITH A DIVERSIFIED PORTFOLIO
FOCUSED ON BULK COMMODITIES,
ENERGY STORAGE RELATED
MINERALS AND BASE METALS
Anglo Pacific Group PLC (‘Anglo Pacific’, the ‘Company’ or the ‘Group’) is the only listed company
on the London Stock Exchange focused on royalties in the natural resources sector.
Our strategy is to accelerate our rate of growth by investing in natural resources royalties and
metal streams, focusing primarily on high-quality, lower polluting products from operations that
are run in an ethical and responsible manner, to generate stable, diversified, long-term cash flows.
It is an objective of the Company to pay a significant portion of our income to shareholders
as dividends.
OUR INVESTMENT CRITERIA FOR DELIVERING GROWTH...
31
HIGH-QUALITY
AND LOW-COST
ASSETS
34
ATTRACTIVE
RETURNS
36
STRONG
OPERATIONAL
MANAGEMENT
TEAMS
38
LONG-LIFE
ASSETS
40
DIVERSIFICATION
OF ROYALTY
PORTFOLIO
42
ESTABLISHED
NATURAL
RESOURCES
JURISDICTIONS
44
PRODUCTION
AND
EXPLORATION
UPSIDE
POTENTIAL
APG_AR18_26.03.19_FRONT_PROOF_7Anglo Pacific Group PLC 2018 Annual Report & Accounts
02
G R O U P O V E R V I E W
ANGLO PACIFIC AT A GLANCE
KPIs
KEY HIGHLIGHTS 2018
PRIMARY LISTING
PRODUCTION POTENTIAL
ROYALT Y REL ATED REVENUE
£46.1m
46.1
19.7
39.6
8.7
3.5
2014
2015
2016
2017
2018
ADJUSTED EARNINGS PER SHARE
18.02p
2.47
-1.97
9.76
16.82
2014
2015
2016
2017
2018
DIVIDEND COVER
2.3x
LONDON STOCK
EXCHANGE
(LSE: APF)
SECONDARY LISTING
TORONTO STOCK
EXCHANGE
(TSX: APY)
18.02
ASSETS IN PRODUCTION
by value
OVER 92% OF OUR
PORTFOLIO BY
VALUE, ACROSS
5 COMMODITIES IS
IN PRODUCTION
SIGNIFICANT,
ORGANIC GROWTH
IN THE CURRENT
PORTFOLIO FROM
KESTREL, NARRABRI
AND SALAMANCA
GLOBAL ROYALT Y ASSETS
14 PRINCIPAL
ROYALTY AND
STREAMING
RELATED ASSETS
ACROSS 5
CONTINENTS
1.6
2.4
2.3
SHAREHOLDER RETURNS
F TSE 350 MINING INDEX VS. ANGLO PACIFIC GROUP 2008-2018
(Rebased to 100)
0.0
2014
0.4
2015
2016
2017
2018
FREE CASH FLOW PER SHARE
22.28p
23.62
22.28
10.65
7.93
2.93
2015
2014
2016
2017
2018
250
200
150
100
50
0
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8
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1
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1
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9
0
1
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1
0
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.
0
1
1
0
1
0
.
ROYALT Y ASSETS ACQUIRED
DIVIDEND PER SHARE
.
1
1
1
0
1
0
.
.
2
1
1
0
1
0
.
.
3
1
1
0
1
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£39.3m
45.0
16.2
8.00p
39.3
8.45
29.4
8.00
11.9
11.9
12.6
10.5
7.00
7.00
2014
2015
0.0
2016
2017
2018
2014
2015
6.00
2016
2017
2018
2014
2015
2016
2017
2018
M O R E D E TA I L S O N PAG E 3 0
.
7
1
1
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1
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.
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6
1
1
0
1
0
.
.
4
1
1
0
1
0
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.
5
1
1
0
1
0
.
DIVIDENDS
£14.4m
.
8
1
1
0
1
0
.
.
9
1
1
0
1
0
.
FTSE 350 Mining Index
Anglo Pacific Group
14.4
APG_AR18_26.03.19_FRONT_PROOF_7Anglo Pacific Group PLC 2018 Annual Report & Accounts 03
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DIVERSIFIED PORTFOLIO OF ROYALTIES
COMMODIT Y EXPOSURE
by asset value at 31 December 2018
55% of the royalty portfolio is
now non coking coal, reducing
the Group’s reliance on Kestrel
GEOGR APHIC EXPOSURE
by asset value at 31 December 2018
99.1% of the portfolio
is in established natural
resources jurisdictions
Coking coal
Iron ore
Thermal coal
Uranium
Vanadium
Gold
Other
45%
19%
16%
10%
6%
2%
2%
Australia
Canada
Brazil
Spain
Other
64.8%
25.8%
6.0%
2.5%
0.9%
STAGE OF PRODUCTION
by asset value at 31 December 2018
92.6% of the portfolio is
producing royalties
Producing
Development
Early-stage
92.6%
1.4%
6.0%
NATURAL RESOURCES ROYALTIES EXPLAINED
A natural resources royalty is a
non-operating interest in a project
that provides the royalty holder with
the right to a proportion of revenue,
profit or production.
Historically, royalties originated as a
result of the sale of a mineral property,
allowing the seller to retain some
ongoing economic participation in
the property. However, an increasing
number of royalties are now created
directly by operators and developers
as a source of finance. A royalty holder
is not generally obligated to contribute
towards operating or capital costs,
nor environmental or reclamation
liabilities.
T YPES OF ROYALTIES
The Group’s royalties are mostly revenue or
production-based royalties. Typically, these
royalties are either Gross Revenue or Net
Smelter Return royalties, each of which can
be described as follows:
GRR : GROSS REVENUE ROYALT Y
A GRR entitles the royalty holder to a fixed
portion of the gross revenues generated
from the sales of mineral production from a
property. In calculating a GRR payment,
deductions, if any, applied by the property
owner to reduce the royalty payment are usually
minimal, and GRRs are therefore the simplest
form of royalty to account for and implement.
NSR : NET SMELTER RETURN
ROYALT Y
NSR royalties entitle the holder to a fixed portion
of the net revenues received from a smelter or
refinery from the sales of mineral production
from a property, after the deduction of certain
offsite realisation costs. Typical realisation costs
include those related to transportation,
insurance, smelting and refining. These
deductions are generally higher in base metals
mines due to the semi-finished product, such as
concentrate, often being produced at the mine
site, when compared to precious metals mines,
which produce a nearly-finished product on site.
PRIMARY VERSUS SECONDARY
ROYALTIES
Primary royalties are entered into between a
royalty company and the property owner
directly, where the property owner grants a
royalty to the royalty company in return for one
or more up-front cash payments from
the royalty company. In contrast, secondary
royalties are existing royalties that are acquired
from a third party with no payment made to the
owner of the underlying property.
METAL STREAMS
A metal stream is an agreement that provides, in
exchange for an upfront payment, the right to
purchase all or a portion of one or more metals
produced from a mine, at a price determined for
the life of the stream.
Streams, whilst providing similar outcomes for
Anglo Pacific, are not royalties because they do
not constitute an interest in land and there is an
ongoing cash payment required to purchase the
physical metal. However, a stream holder is not
ordinarily required to contribute towards
operating or capital costs, nor environmental or
reclamation liabilities.
INNOVATIVE STRUCTURES
Our primary focus is on royalty and streaming
transactions, however, we will also review
alternative structures that deliver superior
long-term cash flows. An example would be the
Denison financing arrangement executed in
2017 which was structured as a long-term loan
with a separate stream element, deriving income
from a tolling agreement on the McClean Lake
uranium mill, which processes ore from the world
class Cigar Lake uranium operation in Canada.
We will always look for ways of gaining exposure
to tier one natural resource projects and
sometimes this will involve creative thinking and
structuring to support our main objective of
acquiring royalties and streams.
APG_AR18_26.03.19_FRONT_PROOF_7Anglo Pacific Group PLC 2018 Annual Report & Accounts
04
G R O U P O V E R V I E W
OUR PORTFOLIO
14 PRINCIPAL ROYALTY AND
STREAMING RELATED ASSETS
OVER FIVE CONTINENTS
7 PRODUCING ... pages 32-43
ROYALTY
KESTREL
MARACÁS
MENCHEN
NARRABRI
McCLEAN
LAKE MILL
COMMODITY
OPERATOR
LOCATION
ROYALTY RATE AND TYPE
BALANCE SHEET CLASSIFICATION
COKING COAL
KESTREL COAL PTY LTD
AUSTRALIA
7 – 15% GRR 1
INVESTMENT PROPERTY
VANADIUM
THERMAL &
PCI COAL
LARGO
RESOURCES
WHITEHAVEN
COAL
BRAZIL
2% NSR
AUSTRALIA
1% GRR
URANIUM
ORANO
CANADA
TOLLING REVENUE
ROYALTY
INTANGIBLE
ROYALTY
INTANGIBLE
LOAN & ROYALTY
FINANCIAL INSTRUMENT
LABRADOR
IRON ORE ROYALTY
CORPORATION (‘LIORC’)
IRON ORE &
IRON ORE PELLETS
IRON ORE COMPANY
OF CANADA (‘IOC’) /
RIO TINTO
CANADA
INDIRECT INTEREST
IN 7% GRR
ROYALTY FINANCIAL
INSTRUMENT
EL VALLE-BOINÁS /
CARLÉS (‘EVBC’)
GOLD, COPPER
& SILVER
FOUR MILE
URANIUM
ORVANA
MINERALS
QUASAR
RESOURCES
SPAIN
2.5 – 3% NSR 2
AUSTRALIA
1% NSR
ROYALTY FINANCIAL
INSTRUMENT
ROYALTY
INTANGIBLE
3 DEVELOPMENT... page 45
ROYALTY
SALAMANCA
COMMODITY
URANIUM
OPERATOR
BERKELEY
ENERGIA
LOCATION
SPAIN
GROUNDHOG
ANTHRACITE
ATRUM COAL
CANADA
PIAUÍ
NICKEL & COBALT
BRAZILIAN NICKEL
BRAZIL
4 EARLY-STAGE ... pages 46-47
ROYALTY RATE AND TYPE
BALANCE SHEET CLASSIFICATION
1% NSR
1% GRR OR
US$1.00/t
1% GRR
ROYALTY
INTANGIBLE
ROYALTY
INTANGIBLE
ROYALTY FINANCIAL
INSTRUMENT
ROYALTY
PILBARA
CAÑARIACO
COMMODITY
IRON ORE
COPPER, GOLD
& SILVER
OPERATOR
LOCATION
ROYALTY RATE AND TYPE
BALANCE SHEET CLASSIFICATION
BHP
CANDENTE
COPPER
AUSTRALIA
PERU
1.5% GRR
0.5% NSR
ROYALTY INTANGIBLE
ROYALTY INTANGIBLE
RING OF FIRE
CHROMITE
NORONT RESOURCES
CANADA
1% NSR
ROYALTY INTANGIBLE
DUGBE 1
GOLD
HUMMINGBIRD
RESOURCES
LIBERIA
2 – 2.5% NSR 3
ROYALTY FINANCIAL
INSTRUMENT
1. Kestrel: 7% of the value up to A$100/tonne, 12.5% of the value over A$100/tonne and up to A$150/tonne, 15% thereafter.
2. EVBC: 2.5% escalates to 3% when the gold price is over US$1,100 per ounce.
3. Dugbe 1: 2% except where both the average gold price is above US$1,800 per ounce and sales of gold are less than 50,000
ounces, in which case it increases to 2.5% in respect of that quarter.
APG_AR18_26.03.19_FRONT_PROOF_7Anglo Pacific Group PLC 2018 Annual Report & Accounts
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ANGLO PACIFIC HAS AN
INCREASINGLY DIVERSIFIED
PORTFOLIO, THROUGH A RANGE OF
COMMODITY AND GEOGRAPHIC
EXPOSURE
McCLEAN LAKE MILL
8.5
LIORC
15.6
EVBC
1.6
GROUNDHOG
0.3
SALAMANCA
1.0
DUGBE 1
0.5
MARACÁS MENCHEN
5.5
RING OF FIRE
1.5
CAÑARIACO
0.4
PIAUÍ
0.4
% OF PORTFOLIO BY ASSET VALUE
at 31 December 2018
KESTREL
44.5
NARRABRI
16.3
PILBARA
3.5
FOUR MILE
0.5
H OW A R E O U R A S S E T S P E R F O R M I N G ? S E E PAG E S 3 2 - 4 7
APG_AR18_26.03.19_FRONT_PROOF_7Anglo Pacific Group PLC 2018 Annual Report & Accounts
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G R O U P O V E R V I E W
CHAIRMAN’S STATEMENT
ANOTHER RECORD YEAR OF
REVENUE FOR ANGLO PACIFIC
RESULTING IN HIGHER DIVIDENDS
FOR OUR SHAREHOLDERS
+16%
Our royalty related revenue increased
by 16% from £39.6m to £46.1m
8
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+21%
Operating profit increased
from £30.6m to £37.1m
15.97p
Basic earnings per share
15.97p (2017: 5.88p)
18.02p
Adjusted earnings per share
18.02p (2017: 16.82p)
£36.9m
Cash flow from operations
decreased from £37.3m to £36.9m
22.3p
Free cash flow per share 22.3p
(2017: 23.6p)
PATRICK MEIER
2018 has been another strong year
for Anglo Pacific with record revenue
flowing through to earnings and cash
flow. We expect 2019 to be an even
stronger year for the Group, certainly
in terms of volume growth, following
the new owner of Kestrel announcing
plans to increase production by 40%
in 2019. Taking the above into account,
we have recommended a 14% increase
in the dividend to 8p per share for the
year. We enter 2019 in a very strong
financial position with a renewed focus
on growing our royalty portfolio and
remain confident that our offering
will continue to be appealing in what
remains a very capital constrained
sector.
It is perhaps timely to reflect on the
mining industry, which is the focus of our
investments. The recent tragic and fatal
collapse of a tailings dam in Brazil is a stark
reminder of the complex and challenging
nature of mining and the need for the
highest standards in respect of safety and
the environment. The scale of the incident
will, rightly, result in enhanced scrutiny
on operators from regulatory bodies,
governments, NGOs, lenders and investors
in relation to safety and the use of best
practice techniques, particularly when
operating in close proximity to communities.
Such issues are a top priority for Anglo Pacific
when undertaking due diligence, as outlined
in our own discussion on principal risks
later in this report. We take comfort from our
track record thus far in the environmental,
social and governance (‘ESG’) credentials
of the operators we have supported. We will
continue to do our utmost to be a force
for positive action as we make investment
decisions and work with the operators of
the assets in our portfolio.
It’s easy to forget the substantial positive
contribution made by mining to society as
a whole. The metals and minerals extracted
are essential for our everyday existence in
the developed world and also help the
developing world advance and lift people
out of poverty. As an industry, mining needs
to do a better job at educating on, and
communicating the benefits of the extractive
sector. As an investor and believer in the
sector, we will do our part as best we can.
APG_AR18_26.03.19_FRONT_PROOF_7Anglo Pacific Group PLC 2018 Annual Report & Accounts
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PERFORMANCE IN 2018
The Group saw its total portfolio contribution
increase by 16% to £49.4m, buoyed by
resilient commodity prices and a strong
contribution from our most recent
acquisitions. The Company executed £39.3m
of royalty related acquisitions in 2018 which
added £2m to income in the second half.
The acquisitions were financed by drawing on
the Group’s borrowing facility, with the Group
returning to a net cash position post year end.
In addition, we took the opportunity to upsize
and extend our borrowing facility on more
favourable pricing terms, which now, when
combined with existing cash resources,
provides for ~£78m (~US$100m) of liquidity
to finance growth opportunities.
The higher commodity prices and revenues
during the year translated directly into higher
profits and cash generation. Operating profit
increased to £37.1m from £30.6m in 2017.
Basic earnings per share were 15.97p
compared with 5.88p in 2017. Stripping out
non-cash items, we present an adjusted
earnings measure (refer to note 13 to the
accounts) which, we believe, more closely
reflects the performance within management’s
control. On this basis adjusted earnings per
share were 18.02p (2017: 16.82p).
DIVIDENDS
In light of the continued growth in our
income, strong dividend cover and the
prospect for further growth in 2019 we have
recommended a 25% increase in the final
dividend to 3.125p which, if approved by
shareholders at the 2019 AGM, would result in
total dividends for 2018 of 8p per share, a 14%
increase on the 7p paid in 2017. We feel that
this level of dividend rewards the continued
support of our shareholders whilst allowing us
to employ cash in growth opportunities. As
we operate in a cyclical and often volatile
sector, we have kept the quarterly dividend
level of 1.625p unchanged and we will assess
the total dividend level for 2019 when we
announce our Q4 2019 trading update.
This implies dividend cover of around 2.5x,
which is approximately the level we are
targeting for 2019. Our intention is to continue
to reinvest the bulk of our retained income in
growth at this favourable stage of the cycle.
CORPOR ATE CULTURE
AND GOVERNANCE
Anglo Pacific seeks to maintain the highest
standards in all areas of its business. I believe
this starts at the top and the Board sees it as a
key part of its responsibility to set the right
guidelines for the Group to operate to the
highest ethical standards. We hold an annual
strategy day and in 2018 included sessions on
strategy, ESG, risk and board effectiveness. We
work with industry experts where appropriate
who bring an objective and impartial insight
to how the Group approaches these areas.
While we acknowledge that we are not
directly responsible for the operation of the
underlying assets in our portfolio, we are
committed to making the pursuit of best
practice in ESG a high priority.
BOARD
We were pleased to announce the appointment
of Vanessa Dennett to our Board in November,
following an extensive search process.
Vanessa brings with her a wealth of transaction
experience in the mining industry having held
senior roles within Anglo American plc. Her
commercial experience in negotiating and
structuring transactions, investment process
and corporate governance complements the
finance and operational expertise of the Board.
Vanessa has already made positive
contributions to the Board and has proved a
very helpful sounding board to our executive
team and we look forward to her continued
participation in the coming years.
The Directors possess different skills and, I
believe, operate effectively in bringing a
diversity of approach and experience to the
overall activities of the Board and committees
in determining strategy and providing
guidance and oversight to management.
As the Group develops, we will continue to
evaluate the composition of the Board and
refresh when appropriate.
STR ATEGIC REPORT
Our 2018 strategic report, from pages 8 to
54 was reviewed and approved by the Board
on 26 March 2019.
MARKET BACKGROUND
Against a background of increasing signs of
a global slowdown, concerns surrounding
China’s debt burden and the US China trade
war, along with rising US treasury yields, it was
perhaps not surprising to see equity values fall
at the end of 2018. Although we believe that
small and mid-cap mining companies were
underrated before this bearish sentiment, it
suggests that the availability of capital to
finance new mining projects will become
even more scarce and the cost will increase
accordingly.
This should provide Anglo Pacific with
opportunities to add attractive assets to its
portfolio, especially as we, in turn, are not
necessarily dependent on the equity markets
to raise capital to finance such opportunities
given our access to liquidity and the prospect
for significant organic growth in 2019.
OUTLOOK
We expect 2019 to produce healthy organic
growth from our royalty portfolio. This should,
subject to prevailing commodity prices, result
in another strong year of earnings and cash
generation.
We believe there will be continued demand
for royalty and alternative financing in the
mining sector in 2019, given the shortage and
rising cost of capital facing the sector. Anglo
Pacific is firmly focused on growth and will
continue to add to our portfolio of royalties.
2019 should be a busy year and I have no
doubt that the dedicated, hardworking and
experienced team led by Julian Treger is well
placed to deliver our growth targets. I would
like to thank the Board, the executive team
and staff for their continued diligence and
hard work.
N.P.H. MEIER
Chairman
26 March 2019
APG_AR18_26.03.19_FRONT_PROOF_7Anglo Pacific Group PLC 2018 Annual Report & Accounts
08
S T R A T E G I C R E P O R T
CHIEF EXECUTIVE OFFICER’S STATEMENT
ANGLO PACIFIC CONTINUED
TO DELIVER ON ITS STRATEGY IN
2018 WITH £39.3m IN FURTHER
ACQUISITIONS
PORTFOLIO CONTRIBUTION
(£m)
49.4
42.6
20.0
8.9
3.7
2014
2015
2016
2017
2018
ROYALT Y ACQUISITIONS
(£m)
45.0
16.2
39.3
29.4
2014
2015
0.0
2016
2017
2018
DIVIDENDS
(£m)
14.4
11.9
11.9
12.6
10.5
2014
2015
2016
2017
2018
JULIAN TREGER
Anglo Pacific Group PLC 2018 Annual Report & AccountsAPG_AR18_26.03.19_FRONT_PROOF_7 09
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Anglo Pacific continued to deliver on
its strategy in 2018. Our portfolio
generated a record contribution of
£49.4m, representing a 16% increase
on 2017. This is very pleasing especially
as the consensus at the beginning of
the year was forecasting a decline.
The business and financial reviews on pages
31 to 54 outline in detail the performance of
our business over the past 12 months. I would
like to highlight that Maracás Menchen, the
vanadium royalty which we acquired in 2014,
is now our second largest royalty by revenue
having generated £5.9m in royalties during
2018 compared to £2.0m in 2017.
We expect further organic growth to come in
2019, driven by plans for a 40% increase in
volumes from Kestrel along with a full year of
revenue from our investment in LIORC. The
accelerated volumes expected from Kestrel
should have a positive impact on free cash
flow, but will also bring forward the point at
which mining will leave the Group’s private
land. As such, the imperative is now firmly on
reinvesting this cash flow to replace Kestrel’s
income in the medium-term, and this is our
firm focus for the year ahead.
TR ACK RECORD AND
EXPERIENCED TEAM
We have demonstrated our ability to
successfully identify accretive royalty related
assets over the past five years, having acquired
royalties over the Narrabri and Maracás mines,
together with an indirect interest in the royalty
over the Iron Ore Company of Canada (‘IOC’)
mines through our investment in LIORC.
In addition we have gained exposure to the
Cigar Lake operation through a toll milling
agreement. We have also added some
longer-term growth opportunities to the
portfolio through our investment in the
Piauí and Cañariaco royalties.
The investment of ~£130m into the Group’s
portfolio over the past five years could,
subject to commodity prices, generate a
sustainable £15m of annual revenue before
development upside. This is a good start,
but we feel now is the time to accelerate
our rate of growth, and are in a strong financial
position to do so, with ~£78m (~US$100m) of
liquidity available to us.
The success of these investments has been
achieved through the application of our
investment criteria (detailed on page 18)
which aims to ensure that our new royalties
are over projects which should continue to
operate throughout the cycle. More recently
we have also targeted high-quality, lower
polluting products in the belief that these
should command more of a premium over
time. It is gratifying to see this belief realised
from the returns on our investments in
LIORC (iron ore pellet), Narrabri (low ash, high
energy thermal coal) and Maracás Menchen
(vanadium).
Executing the Group’s strategy and
applying our investment criteria is our very
experienced senior management team,
which has remained largely unchanged over
the past five years and whose skill set covers
all of our key diligence areas namely geology,
corporate finance, structuring and tax.
The skills of the management team are
augmented by those of our Board, who
bring a variety of further operational, M&A,
corporate finance and corporate governance
experience to the Group.
The combined breadth and depth of the
senior management team and Board’s
knowledge and experience has allowed the
Group to assess a wide range of potential
transactions across multiple jurisdictions and
commodities. Given our growth ambitions,
we are allocating more resources to our
investment team in order to develop our
pipeline and execute on deals in the year
ahead.
Our people are our key assets and staff related
expenses make up 64% of the Group’s total
cost base. We operate in a very scalable
business and it is interesting to note that our
costs are virtually identical to those in 2014
even though our income has increased by
~12.5 times over that period.
LIORC INVESTMENT
The highlight of our acquisition strategy in
2018 was the purchase of our 4.29% stake in
Labrador Iron Ore Royalty Corporation
(LIORC), a publicly quoted royalty pass-
through vehicle listed in Toronto.
We increased our exposure to iron ore as we
believe the industry dynamics have improved
well beyond the general market perception
and prices will be stronger for longer. Further,
LIORC is focused at the high-quality end of the
iron ore market and enjoys a favourable
premium for its product. We also expected
LIORC to produce yields of around ten percent
which is very respectable for a mine in a
premier jurisdiction operated by a major like
Rio Tinto.
We are pleased to report that in 2018 the
income we received from LIORC exceeded
our initial expectations and that the current
market value of the investment is significantly
above our cost.
ENVIRONMENTAL , SOCIAL
& GOVERNANCE
Although Anglo Pacific is not an operator, our
role as a financier and supporter of the mining
sector has put us in a position to appraise
hundreds of royalty transactions each year
and allowed us to see the full spectrum of ESG
practices within the industry.
We have seen the mining industry be at the
forefront of technological innovation through
developments such as driverless trucks and
trains. It has produced the commodities
necessary to manufacture many products
and gadgets today considered to be
indispensable, together with providing the
energy required to power the modern world.
Many mining operations also uplift the
communities in which they are located by
providing employment, infrastructure,
long-term development opportunities and
increased prosperity.
Anglo Pacific Group PLC 2018 Annual Report & AccountsAPG_AR18_26.03.19_FRONT_PROOF_7
10
S T R A T E G I C R E P O R T
CHIEF EXECUTIVE OFFICER’S STATEMENT
continued
GIVEN OUR TRACK RECORD
TO DATE, WE ARE CONFIDENT
THAT WE CAN DELIVER ON OUR
GROWTH AMBITIONS
The industry must communicate these
benefits more effectively, and investment
into the sector must be encouraged in order
to provide those minerals and commodities
which will continue to be needed. Projects
and operations involving higher-quality,
cleaner products which are operated to the
highest possible standards of environmental
and social responsibility are likely to attract
capital in the first instance, and it is these
projects which Anglo Pacific has looked to
support in the recent past.
There is no doubt that the world will transition
to more sustainable forms of energy
generation but, in the short to medium-term,
a quicker solution to a cleaner world is the use
of higher-quality, lower polluting commodities;
be it their chemical properties or the way in
which they are extracted, operated and
rehabilitated.
Given our exposure to such a diverse range
of projects, and our track record of investing
in those which would clearly fit in with the
above criteria, we see a role for Anglo Pacific
in being a conduit for investors who might
otherwise not have a mandate to invest in the
underlying mining projects directly. This is an
initiative which we hope to be thought leaders
in and explore in further detail during 2019.
We will, of course, continue to hold ourselves
accountable to such standards in our own
investment activity.
KESTREL
The change in ownership of Kestrel during
the year was a significant event for Anglo
Pacific as it remains our dominant source
of revenue. A consortium of EMR Capital, a
well-known mining financier based in
Australia, and Adaro Energy, a leading
Indonesian producer of coal with over 26
years of experience in operating coal mines,
completed their acquisition of the operation
in Q3 2018. We discuss this further from a
risk perspective on page 22 of this report.
The price which the consortium paid,
US$2.25bn, was 50% higher than some
commentators had been predicting. This
signalled that the new owners would be keen
to significantly increase production in the
short-term. Indeed, Adaro suggested that
they could, over a period of time, double
production at Kestrel.
Having taken over operational control
during Q3 2018, the new owners have begun
work on their expansion plans. They have
now stated that they are forecasting a 40%
uplift in production volumes for 2019, which
is far in excess of the levels which were
previously achieved by Rio Tinto. This would
be quite timely for Anglo Pacific as it coincides
with a period in which virtually all mining will
be taking place within the Group’s private
royalty land, suggesting that there could be a
material uplift in royalty income commencing
in 2019, subject to commodity prices
remaining stable.
We have actively engaged with Kestrel’s new
operations team to better understand their
plans for expanding production, and have
undertaken a site visit to see for ourselves
how they plan to achieve this and, although
this seems on paper to be a stretch target, it is
encouraging to see that the operating team
are motivated to achieve this. We have also
met with representatives from Adaro in
Indonesia and look forward to a constructive
and cordial working relationship with them
going forward.
With the anticipated increase in production
and our continued belief that the market for
cleaner coal, such as that produced at Kestrel,
will remain strong for the foreseeable future
it is clear that Kestrel will remain the Group’s
largest source of royalty income. It is worth
noting however, that over the past five years,
according to analysts who follow our
Company, the proportion of our net asset
value (NAV) attributed to Kestrel has fallen
from 72% to 48% demonstrating our success
in diversifying our asset base year by year
and reducing our reliance on Kestrel.
MARKET BACKGROUND
Given our track record to date, we are
confident that we can deliver on our growth
ambitions. The mining sector continues to
suffer from a scarcity of capital, particularly
in the small to mid-cap segment, which is
an area where we have seen a lot of deal flow
in the past.
Conventional bank debt remains hard
to come by for junior developers, and US
dollar denominated debt has become more
expensive following a series of increases in
the US bank rate imposed by the Fed during
2018, as part of their reduction in quantitative
easing.
Rising US interest rates have also impacted
on the equity markets as the US 10-year
treasury yield increased noticeably during
2018 and exceeded US inflation for the first
time since the financial crisis. With the
risk-free rate increasing, the premium
required to invest elsewhere has also risen,
resulting in the price of equities coming
under pressure as the rate of return on safe
haven investments rose.
Anglo Pacific Group PLC 2018 Annual Report & AccountsAPG_AR18_26.03.19_FRONT_PROOF_7 11
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With a strong balance sheet, significant free
cash flow generation and access to some
~£78m (~US$100m) of liquidity we are now in
a position whereby we can act quickly and
opportunistically should circumstances
demand.
OUTLOOK
2019 will be an interesting year for the global
economy, with the threat of a slowdown in
GDP growth in the US and potential recession
in parts of Europe, the sustainability of
Chinese growth given its debt levels and, of
course, the ongoing uncertainty in relation to
Brexit.
Despite the uncertainty facing the global
economy, the outlook for the year ahead is
positive for Anglo Pacific. We reported record
income in 2018 and, absent significant
volatility in commodity prices, we expect
2019 to show further organic growth from
the portfolio.
With our dividend well covered, we expect to
generate significant cash flow over the course
of the year and with ample liquidity available,
we are in a strong financial position to add to
the growth that Anglo Pacific has delivered
over the last five years.
J. A . TREGER
Chief Executive Officer
26 March 2019
The equity markets have also experienced a
fundamental change over the past few years,
with the growth of index funds leading to
capital allocation being concentrated toward
the largest companies. In the past we would
have seen mining funds raise significant
amounts of capital to invest in the sector.
These funds had the expertise, discipline,
patience and understanding needed to select
and support new mining projects. The
popularity of indexation is one factor which
has caused this to change, with capital flowing
to index funds, which by their nature tend to
be passive and liquidity driven, often following
algorithms rather than using industry
expertise to evaluate and back investment
decisions.
For mining, this has meant that any capital
in the sector is predominantly being invested
in the likes of Rio Tinto or BHP. This would not
ordinarily be a problem if the majors were
using this capital to invest in growth, which in
the past would have led to investments and
M&A at the junior end of the market. However,
the majors now appear to be ex-growth,
scarred by their acquisition sprees towards
the end of the last decade. As such, equity
capital flowing into the majors is now being
distributed back to their shareholders
through special dividends and share buy
backs, which means in many instances
capital is ultimately leaving the sector.
Given the scarcity of conventional debt and
equity, and with mezzanine private equity
financing solutions often being prohibitively
expensive or dilutive we would expect to see
the demand for royalty financing to remain
robust in the near-term, and our pipeline
reflects this.
Anglo Pacific Group PLC 2018 Annual Report & AccountsAPG_AR18_26.03.19_FRONT_PROOF_7
12
S T R A T E G I C R E P O R T
5 YEARS OF GROWTH
WE HAVE DEMONSTRATED OUR
ABILITY TO SUCCESSFULLY
IDENTIFY AND ACQUIRE ACCRETIVE
ROYALTY RELATED ASSETS OVER
THE PAST FIVE YEARS, INCREASING
THE SIZE AND DIVERSIFICATION
OF OUR PORTFOLIO
We have deployed ~£130m into acquisitions and returned
~£56m to shareholders as dividends over the last five years.
J. A . TREGER
Chief Executive Officer
2016
£19.7m
royalty related revenue
9.76p adjusted earnings per share
2015
£8.7m
royalty related revenue
2.47p adjusted earnings per share
£41m equity placing
US$30m revolving credit facility
2014
£3.5m
royalty related revenue
(1.97p) adjusted loss per share
£10m equity placing
US$15m revolving credit facility
Total acquisitions during the year
£45.0m
Total acquisitions during the year £16.2m
MAR ACÁS MENCHEN
Cost
Cumulative income to date
% of acquisition cost
£15.6m
£9.6m
62%
NARR ABRI
Cost
Cumulative income to date
% of acquisition cost
£45.0m
£15.8m
35%
APG_AR18_26.03.19_FRONT_PROOF_7Anglo Pacific Group PLC 2018 Annual Report & Accounts 2018
£46.1m
royalty related revenue
18.02p adjusted earnings per share
US$60m revolving credit facility + US$30m accordion
2017
£39.6m
royalty related revenue
16.82p adjusted earnings per share
£13m equity placing
US$30m revolving credit facility + US$10m accordion
13
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Total acquisitions during the year
LIORC
Cost
Cumulative income to date
% of acquisition cost
£39.3m
£38.4m
£1.9m*
5%
Total acquisitions during the year
£29.4m
MCCLEAN L AKE
Cost
Cumulative income to date
% of acquisition cost
£28.3m
£8.2m
29%
* cummulative income from LIORC represents income
received in H2 2018 following completion
Anglo Pacific Group PLC 2018 Annual Report & AccountsAPG_AR18_26.03.19_FRONT_PROOF_7
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S T R A T E G I C R E P O R T
MARKET OVERVIEW
THE RISE OF INDEXATION
MONEY IS HAVING A FURTHER
IMPACT ON AN ALREADY CAPITAL
CONSTRAINED SECTOR
Stabilisation
Prices over the past two years have
resulted in balance sheet stabilisation
Prices over the past two years have
resulted in balance sheet stabilisation
and an increase in shareholder returns.
It is becoming more evident that
indexation capital is now really beginning
to impact equity markets in general and
the mining sector in particular. In the past,
dedicated mining funds could raise capital
and use their considerable expertise to
support those projects which had strong
commercial fundamentals. It appears that it
has become much more difficult for such
funds to raise new finance as capital is being
diverted to index funds that, by their very
nature, track and invest in the larger end of
the market. This is reflected by the lack of
equity capital market activity in the last year
where there have been very few notable
fundraisings for mining companies.
This diversion from active fund
management to algorithm trading
is becoming more prevalent in capital markets
and it is increasingly difficult for smaller
companies to access this pool of capital.
Unfortunately, for most of the non-precious
metal companies in the mining industry,
this has led to capital flowing to those
organisations that are ex-growth and
returning capital. This capital, it would appear,
is not being reinvested in the sector and
therefore ultimately results in net capital
outflows which is impacting on future
growth and supply. This should present
opportunities for royalty and streaming
companies to fill some of the gap.
CAPITAL CONSTR AINED SECTOR
Reflecting this rise in indexation, capital
remained scarce throughout 2018.
The positive momentum in commodity prices
at the beginning of 2018 looked to create a
more favourable outlook for equity support
in the sector. However, the slowdown in the
Chinese economy, not helped by a trade war
with the US, impacted on sentiment once
again for the mining sector.
Although the total number of IPOs in the
sector was up in 2018, the value of those
IPOs was down by ~20%, and significantly
more for secondary raisings which raised
~60% less value. Most of the activity in the
market came out of Australia, heavily front
loaded to the beginning of 2018 – as noted
above, the market lost momentum quite
quickly in H1 2018.
The noticeable outlier in the year was
the TSX, where there were no IPOs in 2018,
although it did raise the largest amount for
secondary equity issuances, but the value of
such raisings was down on the previous year.
The decline in Canadian support for mining
companies was perhaps impacted by the
channelling of resources towards other ‘hot’
sectors such as marijuana and
cryptocurrencies. This demand gap from
traditional sources of capital was too large
to be taken on by royalty and streaming
companies and investment suffered as a
consequence. Any capital which was raised
was subject to higher cost as the interest
rate environment in the US pushed up the
risk-free rate of return.
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COKING COAL (US$/t)
350
300
250
200
150
100
50
12.15
06.16
12.16
06.17
12.17
06.18
12.18
VANADIUM (US$/kg)
160
140
120
100
80
60
40
20
0
12.15
06.16
12.16
06.17
12.17
06.18
12.18
THERMAL COAL (US$/t)
140
120
100
80
60
40
20
12.15
06.16
12.16
06.17
12.17
06.18
12.18
IRON ORE (US$/t)
100
90
80
70
60
50
40
12.15
06.16
12.16
06.17
12.17
06.18
12.18
GOLD (US$/oz)
1400
1350
1300
1250
1200
1150
1100
1000
12.15
06.16
12.16
06.17
12.17
06.18
12.18
COPPER (US$/lbs)
3.50
3.00
2.50
2.00
12.15
06.16
12.16
06.17
12.17
06.18
12.18
Anglo Pacific Group PLC 2018 Annual Report & AccountsAPG_AR18_26.03.19_FRONT_PROOF_7
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US$3.2bn
in royalty or stream transactions
ROYALT Y AND STREAMING
ACTIVIT Y IN 2018
The mining industry had US$119bn of
financing transactions in 2018, a 7%
decrease on 2017. Of this total amount, a
significant portion was from asset sales rather
than from the more conventional forms of
financing (equity and bank loans). Equity
raises were at their lowest levels since 2014.
Of the above US$119bn of financing
transactions entered into in 2018,
US$3.2bn came from royalty or stream
transactions. The largest transaction in the
industry was the Voisey’s Bay cobalt stream
by the joint venture of Wheaton Precious
and Cobalt 27 for ~US$700m. Of the
remaining transactions, the majority were
in relation to precious metals.
Royalty and streaming finance, in our
view, works best when it is invested
alongside equity or debt. Without equity
support there is too much of an investment
gap for our industry to plug which perhaps
explains why the portion of financing from
this source was around 2.5% of the overall
financing solution for the natural resources
sector in 2018.
Opportunities
For Anglo Pacific we continue to see good
opportunities to deploy capital
M& A ACTIVIT Y SET TO RISE IN 2019
OUTLOOK
Towards the end of 2018 and at the
beginning of 2019 we have seen large
scale M&A returning to the sector,
particularly in the precious metals space. This
was led by Barrick Gold with the acquisition
of Randgold Resources and the attempted
takeover of Newmont Mining. Although the
takeover of Newmont is unlikely to proceed,
the M&A will now take the form of a joint
venture involving selected operations in
Nevada.
It would appear that elsewhere in the
sector, ongoing trade tension between the
US and China has been creating too much
volatility and uncertainty to allow for clear
decision making in board rooms for M&A in
the base metals and bulk materials sector.
Despite this, the EY Global Capital
Confidence Barometer revealed that 58%
of mining executives intended to pursue M&A
in 2019 compared with 46% across all sectors.
The same executives felt that the M&A
environment would improve in the year ahead.
Recent activity in M&A does suggest
that, given global economic uncertainty,
management teams consider M&A to
represent a less risky means of achieving
growth versus higher-risk capital investments
in their own development projects. The
perceived under-rating of the mining sector
in general will likely support M&A activity as it
can be cheaper to buy projects rather than
build them.
Overall, our view is that the industry
continued to underinvest in growth
opportunities throughout 2018 and that
this will impact prices further in the future.
Higher commodity prices have not resulted
in a supply response in many commodities,
reflecting a lack of participation from those
who have historically supported development
projects in the past.
Balance sheet repair amongst the bigger
players in the mining sector is now
largely complete and the focus, for the time
being, has switched to shareholder returns
rather than growth, certainly outside of the
precious metals space.
At present, many boards are not prepared
to allocate capital to development projects
given the uncertainty surrounding the
global economy and China in particular.
This should in time lead to higher commodity
prices as a lack of investment in new projects
will limit new supply to the market. In a sector
which continues to be underrated, the
attraction of share buy backs at a discount
to NAV represents a more de-risked way of
generating shareholder returns than investing
in development assets. Recent history is
littered with examples of development
projects being besieged by unexpected
technical issues and capex blowouts which
have impacted shareholder value and
management reputation.
For Anglo Pacific we continue to see good
opportunities to deploy capital but are
mindful of the limit to which our capital can
finance projects through to production.
We are exploring opportunities at each stage
of the project life from development through
to construction and into ramp up.
A rekindling of M&A in the sector
should help as royalties and streams can
form part of the financing solution for some
of these transactions, either at the point of
transaction or to de-lever shortly after.
Conventional sources of capital are scarce,
but we are believers in the long-term need
for high-quality mining projects which are
operated to the highest standards of social
and environmental practice. Ultimately, quality
should command more of a premium and we
will continue to look to partner with such
operators to bring these projects forward.
Anglo Pacific Group PLC 2018 Annual Report & AccountsAPG_AR18_26.03.19_FRONT_PROOF_7
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S T R A T E G I C R E P O R T
OUR BUSINESS MODEL
We seek to create long-term value for all stakeholders by
generating superior cash returns from a diverse and growing
portfolio of royalty and streaming investments, and other
innovative structures in the natural resources sector.
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CREATING VALUE FOR
OUR SHAREHOLDERS
AND COUNTERPARTIES
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HOW WE CREATE
VALUE FOR OUR
SHAREHOLDERS
Our track record demonstrates how management has created
value to date by adhering to exacting investment criteria and
conducting rigorous due diligence. We adopt a strong focus
on operations producing high-quality, lower polluting products
which are operated ethically and responsibly. We will look to
leverage this experience and our reputation in the market
to execute our strategy over the coming years.
HOW WE CREATE
VALUE FOR OUR
COUNTERPARTIES
An investment by Anglo Pacific, after conducting thorough
due diligence, can be seen as an endorsement of the project,
which can provide other stakeholders with greater confidence
and possibly result in a re-rating for the operator.
GENERATING LONG-TERM CASH RETURNS
The Group is seeking to grow its portfolio of cash-generative
royalties and streams by investing in producing or near-term
producing assets with long time horizons. Given the relatively
low overhead requirements of the business, the Group believes
cash flow to shareholders can be maximised through economies
of scale, which would allow for growth in the portfolio without
significantly increasing our cost base.
LOWER RISK THROUGH TOP-LINE, REVENUE
PARTICIPATION
Revenue-based royalties limit the Group’s direct exposure to
operating or capital cost inflation of the underlying operations,
as there is no ongoing requirement for the Group to contribute
to capital, exploration, environmental or other operating costs
post investment.
LOWER VOLATILITY THROUGH COMMODITY
AND GEOGRAPHIC DIVERSIFICATION
The Group is building a diversified portfolio of royalties across
a variety of different commodities and geographic locations.
This diversification reduces the dependency on any one asset
or location and any corresponding cyclicality. A fully diversified
portfolio can help to reduce the level of income volatility,
stablising cash flows which contribute towards investment
returns and dividend payments.
EXPOSURE TO INCREASES IN MINERAL
RESERVES AND PRODUCTION
Royalty holders generally benefit from improvements made to
the scale of a project. Exploration success, or lower cut-off
grades as a result of rising commodity prices, can serve to
increase economic reserves and resources. Increased reserves
will extend a project’s life, or facilitate an expansion of the existing
operations. Any subsequent increases in production will
generally result in higher royalty payments, without the
requirement of the royalty holder to contribute to the cost
of expanding or optimising the operation.
EXPOSURE TO COMMODITY PRICES
Royalties and streams provide exposure to underlying
commodity prices. Anglo Pacific offers the opportunity for
investors to gain exposure to commodities which do not have
a liquid Exchange Traded Fund (ETF) without having to invest
in the underlying operation.
WE SERVE AS A PARTNER TO THE
OPERATORS
Royalties and streams reduce the upfront capital financing
required to fund the development of a project. These are
generally structured as asset (or even by-product) specific,
often leaving the remaining assets of the operator
unencumbered for raising additional finance.
AN ALTERNATIVE FORM OF FINANCING TO
CONVENTIONAL DEBT AND EQUITY
Compared to the issuance of new equity, royalties and streams
do not depend on the prevailing state of the capital markets
but are rather the result of bilateral negotiations. Royalties and
streams are not dilutive, unlike the issuance of new equity.
In addition, royalties and streams are not regarded as debt nor
do they encumber assets.
PRIMARY ROYALTIES
ALTERNATIVE FORM OF FINANCE TO
CONVENTIONAL DEBT PROVIDING GREATER
FLEXIBILITY AND WHICH DOES NOT IMPACT
ON CREDIT RATINGS
Royalties and streams do not typically levy interest, nor do they
typically require principal repayments or have a maturity date.
More importantly, unlike conventional debt arrangements where
interest payments tend to start immediately or are capitalised
until cash payments can be made from a project’s cash flow,
most royalties are payable only once the project comes into
production and is generating sales. In addition, many forms
of debt, such as project finance, include restrictive covenants
and may require commodity price hedges to be put in place.
These are not only typically costly in terms of fees, but can also
limit the operator’s exposure to upside in the prices of their
core commodities.
SECONDARY ROYALTIES
SOURCE OF LIQUIDITY FOR HOLDERS
OF EXISTING ROYALTIES
The value of a royalty is realised over the duration of the project’s
life. Often royalty owners may have a need to free up cash in
order to recycle capital. There is a limited secondary market for
royalties and Anglo Pacific can be a source of valuable liquidity
for private royalty holders.
INNOVATIVE STRUCTURES
Our primary focus is on royalty and streaming transactions, however, we will also review alternative structures that deliver
superior long-term cash flows. An example would be the Denison financing arrangement executed in 2017 which was
structured as a long-term loan with a separate stream element, deriving income from a tolling agreement on the
McClean Lake uranium mill, which processes ore from the world class Cigar Lake uranium operation in Canada. We will
always look for ways of gaining exposure to tier one natural resource projects and sometimes this will involve creative
thinking and structuring to support our main objective of acquiring royalties and streams.
Anglo Pacific Group PLC 2018 Annual Report & AccountsAPG_AR18_26.03.19_FRONT_PROOF_7
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S T R A T E G I C R E P O R T
OUR STRATEGY
Our strategy is to accelerate our rate of growth by investing in
natural resources royalties and metal streams, focusing primarily
on high-quality, lower polluting products from operations that are
run in an ethical and responsible manner, to generate stable,
diversified, long-term cash flows.
PRODUCING
ROYALTIES
Near-term production
Cash flow accretive
AIM
STRATEGY
CRITERIA
OUTCOME
Our aim is to be the leading
international royalty and
streaming company, with a
diversified portfolio focused
on base metals, energy
storage related minerals
and bulk commodities.
Our strategy is to accelerate
our rate of growth by
investing in natural resources
royalties and metal streams,
focusing primarily on
high-quality, lower polluting
products from operations
that are run in an ethical
and responsible manner, to
generate stable, diversified,
long-term cash flows.
Executing our strategy
will result in additional
cash producing assets,
and a stronger portfolio
with long-term upside
potential and an ability
to pay dividends to our
shareholders.
Achieving our strategy
through acquisitions which
satisfy these criteria
• High-quality and low-cost
assets
• Attractive returns
• Strong operational
management teams
• Long-life assets
• Diversification of royalty
portfolio
• Established natural
resources jurisdictions
• Strong ESG credentials
• Production and exploration
upside potential
DEVELOPMENT
ROYALTIES
Higher returns
CRITERIA
HOW WE DELIVER GROW TH
SEE PAGES 31, 34, 36, 38, 40, 42 & 44
Anglo Pacific Group PLC 2018 Annual Report & AccountsAPG_AR18_26.03.19_FRONT_PROOF_7 19
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LABRADOR
OUR STRATEGY IN ACTION
LABRADOR IRON ORE ROYALTY CORPORATION (LIORC)
TRANSACTION CONSISTENT
WITH ANGLO PACIFIC’S
INVESTMENT CRITERIA
LIORC was immediately accretive to earnings and cash
flow per share.
STAGE
COMMODITY
OPERATOR
LOCATION
PRODUCING
IRON ORE & IRON ORE PELLETS
IRON ORE COMPANY OF CANADA (‘IOC’) / RIO TINTO
CANADA
ROYALTY RATE & TYPE
INDIRECT INTEREST IN 7% GRR
BALANCE SHEET CLASSIFICATION
ROYALTY FINANCIAL INSTRUMENT
STRUCTURE
LIORC is a flow-through vehicle for the revenue it earns, primarily from its 7% GRR
and C$0.10 per tonne commission on all iron ore products produced, sold and shipped
by Iron Ore Company of Canada (‘IOC’).
Given LIORC’s primary sources of revenue, we consider our 4.29% equity interest in
LIORC to be akin to a part ownership of the royalty.
MEETING OUR INVESTMENT CRITERIA
AT TR ACTIVE RETURNS
Annualising the dividends of £1.9m received
since the acquisition was completed in H2
2018, implies a yield of 10%
OPER ATED BY MINING MA JOR RIO
TINTO IN CANADA , AN ESTABLISHED
MINING JURISDICTION
The IOC mines have been producing for
over 50 years, demonstrating its ability to
operate through the cycle
LOW- COST, LONG MINE LIFE WITH
EXTENSION POTENTIAL
IOC is well positioned on the iron ore industry
cost curve
Reserves sufficient to support a 25-year
mine life at planned IOC production rates
IOC has sufficient mineral inventory to
support future expansion options
PREMIUM PRODUCT WITH LOW
ALUMINA , SILICA AND PHOSPHORUS
CONTENT
High-quality product with low levels of
impurities meeting Chinese environmental
policies and attracting a price premium
Rio Tinto and IOC have extensive ESG
credentials, both being long-established
operators
DIVERSIFIES PORTFOLIO
The investment in LIORC is immediately
cash generative, and diversifies royalty
related revenue
High-quality iron ore as well as higher
margin pellet products
Increases the number of producing assets
to seven across seven commodities in four
continents
M O R E D E TA I L S I N T H E B U S I N E S S R E V I E W O N PAG E 3 9
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S T R A T E G I C R E P O R T
ENVIRONMENTAL, SOCIAL & GOVERNANCE
OUR APPROACH
While Anglo Pacific does not control any of the assets in which it has
an interest, we are committed to supporting and financing responsible
mining, promoting a cleaner future by reducing our coal exposure,
investing in lower-risk jurisdictions in projects with higher-quality, less-
polluting commodities and with partners that operate to the highest
possible standards of environmental and social responsibility.
INVESTING RESPONSIBLY
We believe that responsible investment and long-term success go hand-in-hand.
Our strategic and operational decisions are informed and guided by best international
ESG practices for the mining industry as well as our internal due diligence processes.
DUE
DILIGENCE
THIRD-PARTY
OPERATOR
COMPLIANCE
ADOPTING A
LEADERSHIP ROLE
HIGH-QUALITY,
LESS-POLLUTING
PORTFOLIO
OUR APPROACH
To be a responsible investor,
it is important that we
understand our partners’
approach to ESG and
compliance processes.
OUR APPROACH
We want to be at the
forefront of change. As a
natural resources royalty
and streaming business,
we look to encourage and
promote best practice.
OUR APPROACH
We pride ourselves on
developing a diversified
portfolio, focusing on
higher-quality, less-polluting
projects and commodities.
OUR RESPONSE
• Engaging with operators
OUR RESPONSE
• Participating in thought-
to understand and
monitor their processes
to ensure they are in line
with best industry
practices
• Monitoring and auditing
our current portfolio
on an ongoing basis
leadership and roundtable
discussions with sector
participants, our peers
and the companies we
invest in
OUR RESPONSE
• Using our stringent
investment criteria,
we look to invest in
higher-quality, less-
polluting projects and
commodities
OUR APPROACH
As we make investments,
we think it is important to
take an informed and critical
approach to what we invest
in. Our bespoke due diligence
process allows us to fully
investigate, assess and
benchmark each potential
investment against a
stringent list of criteria.
OUR RESPONSE
• Conducting a robust
due diligence process
• Benchmarking against
our own rigorous criteria
as well as best practice
in the industry
• We have policies and
procedures in place to
ensure that all Directors,
officers and employees
do not offer, give or
receive bribes or
inducements whether
directly or indirectly
Anglo Pacific Group PLC 2018 Annual Report & AccountsAPG_AR18_26.03.19_FRONT_PROOF_7 21
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OUR FOCUS
The Group seeks to address environmental, social and governance
issues by investing and acting responsibly.
As a listed Company on both the London and Toronto stock exchanges,
we strive to make a positive long-term impact. This includes operating
to the highest ethical and ESG standards, reducing our carbon footprint
and promoting diversity within the business.
ACTING RESPONSIBLY
We operate solely within one office in London and have 10 employees, so in terms
of our own environmental impact, the Company’s carbon footprint is relatively small.
However, it is important that we do what we can to reduce it. We also pride ourselves
on maintaining high standards of conduct in all areas of our business.
BUSINESS ETHICS
AND COMPLIANCE
EMPLOYMENT
PRACTICES
ENVIRONMENTAL
RESPONSIBILITY
COMMUNITY
IMPACT
OUR APPROACH
We are committed to adhere
to high ethical standards of
conduct and ensure such
standards also apply to our
investments.
OUR APPROACH
As a small highly qualified
team, we want to make
sure our workplace is safe,
inclusive, diverse and that
we support our people.
OUR APPROACH
We are committed to
minimising the impact
of our activities on the
environment.
OUR APPROACH
We are hoping to work in
partnership with charities
and local communities in
and around our London
office.
OUR RESPONSE
• We already support a
number of our employees
who engage in pro bono
community work and plan
to extend this program to
the whole team
OUR RESPONSE
• Maintaining high ethical
standards and code of
conduct
• Reviewing, updating
and promoting internal
compliance policies
and statements
• Encouraging employees
to report any potential or
apparent misconduct in
accordance with the
Group's internal
whistle-blowing policy
• We have policies and
procedures in place to
ensure that all Directors,
officers and employees
do not offer, give or
receive bribes or
inducements whether
directly or indirectly
OUR RESPONSE
• We undertake office risk
assessments and review
our health and safety
policies annually
• Implementing policies
and best practice which
promote diversity,
support mental health
and wellness and provide
flexible working
• We have nominated a
member of the Board to
take responsibility for
employment relations
• As at 31 December 2018,
50% of the Group's
employees were female.
In terms of the Company's
Board of Directors, there
were six Directors, five of
whom were male and one
of whom was female
OUR RESPONSE
• We are a relatively small
organisation with 10
employees, which mean
that any emission sources
within our operational and
financial control, such as
business travel, purchase
of electricity, heat or
cooling, are not material
in their impact
• We are working towards a
more energy efficient office
and making improvements
to our waste and recycling
practices
• We monitor the Group's
business travel and where
possible we encourage
the use of video
conferencing and other
remote technologies
Anglo Pacific Group PLC 2018 Annual Report & AccountsAPG_AR18_26.03.19_FRONT_PROOF_7
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S T R A T E G I C R E P O R T
PRINCIPAL RISKS AND UNCERTAINTIES
We seek to ensure that our investors understand our
business model and how an investment in Anglo Pacific
is different from investing in an operating company.
BACKGROUND
Risk assessment and management are
integral to every aspect of the Group’s
business model and how it executes on its
strategy. We seek to ensure that our investors
understand our business model and how an
investment in Anglo Pacific is different from
investing in an operating company, albeit we
address operating risk closely through our
due diligence procedures. The Board is
responsible for identifying, understanding
and managing these risks. The Audit
Committee is then tasked with overseeing
how risk is being managed on a regular basis.
RISK APPETITE AND VIABILIT Y
The Company is once again voluntarily
complying with provision C2.2 of the 2014
Combined Code, which requires a statement
on viability to be made in this report, including
the determination and consideration of
stress tested ‘severe but plausible’ scenarios.
This analysis was performed for a three-year
period, consistent with the Group’s medium-
term planning horizon and the term of its
borrowing facility.
The viability statement, and underlying
supporting papers, is intended to intertwine
risk disclosure and going concern into a more
meaningful discussion about the financial
impact of principal risks. Risk can never be
fully eliminated, but can be mitigated to a level
which the Directors are prepared to accept as
necessary to execute the Group’s strategy.
Although the ultimate success of Anglo
Pacific will depend on its ability to continue
to add value enhancing royalties and streams
to its portfolio, the focus of the viability
statement is on the existing business of the
Group and the ability of the current royalty
portfolio to generate sufficient cash to meet
the Group’s outgoings, including the dividend.
Under our ‘severe but plausible’ case the
Group remains debt free and retains access
to its US$60m revolving credit facility.
The Directors’ risk appetite is therefore
capped with reference to an acceptable and
supportable level of borrowings relative to the
Group’s income profile over the next three
years on a ‘severe but plausible’ basis.
INTER ACTION WITH STR ATEGY
Risk is often perceived purely as a negative
and associated with loss or prevention. In fact,
for Anglo Pacific, the acceptance of a certain
level of risk is part and parcel of its business
model and is necessary in order to generate
investment returns and can often present
opportunities for growth. It is the point at
which the Board determines to accept a higher
or lower appetite for risk that is important in
the context of the Group’s risk framework i.e.
the Board should anticipate or acknowledge
that an event has occurred which has altered
the previously held position on risk.
There will always be certain risks inherent
in our business model which have to be
tolerated. For example, the potential impact
of climate change threatens most businesses.
For mining operations, the risk of flood, rising
sea levels at ports and other extreme and
volatile weather in remote locations could
adversely impact on the ability of a mine to
operate effectively. Whilst this may be more
relevant to the future, the Group has a certain
number of long-life and development
royalties which could potentially be impacted
if climate change is not addressed over the
coming decades.
The Group’s risk framework is designed to
identify when the risk environment changes
and there could be an impact on the Group’s
business model or strategy, in addition to
providing the basis for continuous and robust
monitoring and management of risk.
RISK IN ACTION – OPER ATOR
DEPENDENCE / CHANGE OF CONTROL
The key risk which the Group faced during
2018 was the change in control of Kestrel, the
Group’s principal royalty.
Although the Group had limited interaction
with the then operator, Rio Tinto, management
and many stakeholders took comfort from
the fact that the Group’s cornerstone royalty
was operated by a world-renowned
Anglo-Australian multi-billion-dollar public
company who frequently published their
performance and intentions for the operation.
We will discuss below why the change of
control at Kestrel is now considered by Anglo
Pacific to have presented an opportunity
rather than a threat, but this does highlight a
recent example of a previously recognised
principal risk occurring and the way in which
the risk tolerance inherent in the ownership
of the royalty played out.
A significant part of our diligence process
focuses on counterparty risk. For Anglo
Pacific this includes looking at the experience
and track record of management as much as
looking at the capital structure.
We normally target long-life royalties, often
with the potential to have a mine life spanning
several decades. As such, it is highly unlikely
that any one management team will remain in
situ. Although it is likely that a management
team will remain in place for a period post
investment, there always remains a risk that
key staff could leave or that the operation will
be sold to a new owner who might have a
different skill set or ambition for the mine.
Sometimes it is possible to build change of
control protection into royalty documents
but at other times it is not and this risk must
be tolerated by the Board. In such instances,
we will seek to mitigate or accept such risk
by ensuring that the project has excellent
technical credentials, is well placed on the
cost curve and is in reputable jurisdictions.
We are also proactive in engaging with
management when possible and try to
undertake a site visit at least once every
other year.
A change of control was increasingly likely
at Kestrel given Rio Tinto’s general coal
divestment plans and a renewed focus on
their iron ore operations. It appeared that
Kestrel had become non-core for Rio Tinto.
Any sale of Kestrel was always likely to result in
a bidding war given its high-quality sought-
after product, its production track record,
recent investment and its location in Australia.
Anglo Pacific Group PLC 2018 Annual Report & AccountsAPG_AR18_26.03.19_FRONT_PROOF_7 23
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ACTIVIT Y DURING 2018
The Board considered risk formally on two
occasions during 2018, in line with its policy.
This occurred at the time of the Group’s AGM
in May and at the annual strategy session in
November.
The discussion focused mainly on the
following areas:
Demand for royalties: in light of a dearth
of royalty financings over the past 12 months,
in line with the scarcity of capital inflows into
the sector generally, the Board considered
whether this represents a structural change
in the market or the Company’s business
model. The Board concluded that the pipeline
remained robust and that further opportunities
are likely to present themselves considering
the increase in the cost of capital across the
wider sector. Not only is this capital becoming
more expensive, but it is also becoming
scarcer and this should put Anglo Pacific in a
strong position to service this gap given its
access to liquidity of its own.
Operator dependence: this was especially
relevant considering the change of control at
Kestrel but also due to operational issues
which occurred and over which the Group has
no influence such as the underperformance
at Narrabri and the permitting issues facing
Berkeley Energia at Salamanca. The Board
concluded that this remains a principal risk
for the Group and that more action needed
to be taken to engage with operational
management and undertake site visits.
To this extent, the Company has since been
to site at Kestrel and Narrabri, and met with
the management of Berkeley Energia on
several occasions during 2018.
Furthermore, we took comfort from the fact
that the Australian government is very
protective of their natural resources and have
strict foreign ownership rules. In conclusion,
it was always probable, but not certain, that
the asset would pass to a credible new owner
who would uphold their obligations to all
stakeholders, including Anglo Pacific as
royalty holders.
We were encouraged, therefore, to learn
that a joint venture between EMR Capital (a
well-known Australian natural resources fund)
and Adaro Energy (a significant global coal
operator and producer based in Indonesia)
had paid US$2.25bn to acquire the operation
in August 2018, a price which was some 50%
higher than many commentators had
expected to be achieved. This price implied
that the new owners had identified significant
potential to increase production and
efficiency in order to justify this price.
The Group immediately sought to establish a
relationship with the new owners and ensure
that the royalty and information rights were
acknowledged and upheld, whilst seeking to
gain an understanding of their plans for the
near-term. Our relationship has started very
positively. All of the information which we
received previously has come on time, along
with the monthly payments, and we were
welcomed to site in February 2019 where we
were granted access to key personnel and
given information which we requested in
order to better estimate the timing and value
of future production.
It was pleasing to see the announcement
by Adaro Energy in February 2019 that they
are targeting a 40% increase in volumes
from Kestrel in 2019. With a new, focused,
experienced and motivated ownership
structure it appears that change of ownership
provides Anglo Pacific with a catalyst for
growth through accelerated cash flow
and goes to support our observation that
sometimes, for investment companies,
risk can present opportunities rather than
representing something negative.
BREXIT AND TR ADE WARS
There is no doubt that the global economy
faces many challenges and uncertainties.
Although Anglo Pacific is a UK domiciled plc,
the impact of Brexit on the business operating
as normal is limited. None of our material
royalty contracts originate within the EU or
are governed by European law, our borrowing
facility is under English law and we have no
material employment or other contracts in EU
countries. Our income from EVBC is paid from
a Spanish operation, but its rate of withholding
tax is determined by a tax treaty between both
countries and not through an EU treaty. We do
not have operations in the EU, other than our
treasury function which operates in Ireland,
but its main activity is providing finance to
jurisdictions outside of the EU.
The one area which could impact the Group is
in relation to our shareholders and whether
Brexit would have any adverse consequences
in the way in which they manage and operate
their funds. This could lead to pressure to sell
down positions or failure to attract new
subscriptions which might make raising new
equity more challenging for the Company
should it need to. This risk is somewhat
mitigated in the short-term by the Group’s
ability to draw down on its borrowing facilities
to finance growth opportunities but should
a more structural change happen in the
UK fund industry then there could be an
impact on how we finance further growth.
However, in the meantime, there should be
no material impact on how we continue to
operate the business.
The trade wars going on between the US
and China do, however, have the potential to
impact more on the Group’s prospects as it
could affect commodity prices as we have
observed in the case of copper. Anglo Pacific
accepts commodity price risk as part of its
business model, as this is what our
shareholders invest in us for, and the only
mitigant here is to continue to diversify our
portfolio by commodity and geography as we
have been doing. We are not alone in facing
the risk posed by trade wars, although we are
perhaps in a better position to handle the
short-term impact as we do not have the cost
base associated with mining operations.
Anglo Pacific Group PLC 2018 Annual Report & AccountsAPG_AR18_26.03.19_FRONT_PROOF_7
24
S T R A T E G I C R E P O R T
PRINCIPAL RISKS AND UNCERTAINTIES
continued
Stakeholder support: under this broad
category, the Board considered a wide range
of issues which could impact on the Group
such as coal sentiment (prohibitive to some
stakeholders, despite quality/differentiation of
product), ethical investing and the risk of scale
being ever more important to shareholders
(i.e. the ability to either acquire a meaningful
stake through available liquidity or to sensibly
exit a position without impacting on the share
price). Stakeholder support is very fluid and is
not something which can easily be managed
as market forces and best practice determine
market standards. This will be framed by
reputational issues in being seen to associate
with the mining industry. Ultimately, the Board
believes in the future of the mining sector
that it finances and believes that the need
for premium, lower-polluting, ethically run
operations will be vital to both the developed
and developing world. We have aligned our
portfolio to premium products from mines
which are responsibly operated and will
continue to focus on these projects. The
Group will need the support of all stakeholders
to achieve its ultimate ambitions of building
a world class portfolio of natural resources
royalties and streams, and backing projects
whose products will continue to be needed to
either power the world in an environmentally
responsible way or to facilitate technological
invention.
Overall, it was concluded that the risks which
were identified as principal in the 2017 Annual
Report had not changed, but the way in which
they might impact on the business has. Some
changes to the risk register have been made
and these are outlined in the table below.
The Group’s template for recording its
principal risks has remained the same as
in previous years and is briefly described
on page 25.
The template focuses on a ‘prediction vs
control’ concept. This acknowledges that
the impact of market events (in the top right
quadrant) on the Group’s prospects, both
pre and post-acquisition, are both difficult to
predict and, once occurred, are difficult to
control. It is risks that fall into this category
which are primarily outside of management’s
ability to either manage or mitigate, other
than by monitoring.
Some risks which are easier to predict (i.e.
operational and financial) can still be difficult
to control, whilst the risks in the bottom two
quadrants can be more effectively managed.
2018
Rank
Risk
Risk
Category
Examples
1
2
3
4
5
6
7
8
9
CATASTROPHIC
EVENT
DEMAND FOR
ROYALTIES
OPERATOR
DEPENDENCE
Market
• Prolonged disruption to mining at key royalties (incident such as the recent
tailings dam collapse in Brazil)
• Material change in mining legislation / nationalisation
Market
• Continued price recovery followed by equity demand
Financial
• Honouring royalty obligations
• Change of control and smooth transition
• Remaining focused on maximising the returns of the project
STAKEHOLDER
SUPPORT
Operational
• Reputational profile of mining industry
• Changing attitudes towards coal
• Need for liquidity / subscale
INCREASED
COMPETITION
PIPELINE /
SUPPLY
INVESTMENT
APPROVAL
FINANCING
CAPABILITY
Strategic
• Some precious metal royalty companies considering branching out into
Strategic
Strategic
Financial
other commodities
• Lack of suitable opportunities
•
Ineffective marketing
•
Incorrect valuation judgement on jurisdiction / commodity / price /
counterparty / tax
• Ability to finance acquisitions
• Dependence on equity raising
OPERATIONAL
MANAGEMENT
Operational
• Monitoring performance of portfolio
Internal controls / cost controls / FX
•
10
MANAGEMENT
PERFORMANCE
Operational
• Focused and motivated to deliver strategy
2017
Rank
1
2
5
10
8
7
3
9
4
6
Anglo Pacific Group PLC 2018 Annual Report & AccountsAPG_AR18_26.03.19_FRONT_PROOF_7 25
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The table opposite demonstrates how there
will always be a level of risk tolerated by the
Board in executing the Group’s strategy. It also
identifies techniques which management
should be looking to implement when
addressing risks which have some element
to either control or predict.
CONCLUSION
Monitoring risk is an ongoing process and not
an annual exercise. In order to better govern
this, the Board determined it appropriate
that the risk matrix above be reviewed by
the Board on a quarterly basis, with a more
fulsome discussion on strategy and risk to
occur twice a year. This, it is intended, should
allow reporting against the green and amber
risks along with a discussion where there have
been changes in the market circumstances
in the red quadrant.
Taking into account the quantitative
analysis performed around each risk
identified above and having tested
these scenarios under a ‘severe but
plausible’ set of criteria, the Directors
conclude that they have a reasonable
expectation that the Group will be able
to continue in operation and meet its
liabilities as they fall due over the
period of their assessment.
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FINANCIAL
MARKET
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CATASTROPHIC
EVENT
OPERATOR
DEPENDENCE
FINANCING
CAPABILITY
OPER ATIONAL
STAKEHOLDER
SUPPORT
OPERATIONAL
MANAGEMENT
MANAGEMENT
PERFORMANCE
ROYALTY
DEMAND
STR ATEGIC
PIPELINE
INCREASED
COMPETITION
INVESTMENT
APPROVAL
EASY TO PREDICT
HARD TO PREDICT
Risk
Characteristics
Management / mitigation
2019 Action points
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• Difficult to predict
outside of the short-term
• Tend to be driven by
market forces or extreme
localised events
Limited ability to manage or
mitigate other than through
on-going monitoring
Remain vigilant in
monitoring the market
• Easier to predict
through regular cash
flow projections, pipeline
review and operator
updates
• Harder to control as
dependent on
counterparties
Increasing control is
important, with regular
dialogue with lenders and
shareholders (both existing
and potential) considered
important in anticipating the
availability of finance
Dialogue with counterparties
is also equally important to
discover any early warning
signs of underperformance
Continue to focus on
operator performance
and promote the
business with existing
lenders / equity investors
and seek alternative
means of financing
• Easier to control as the
Board can influence
strategic direction based
on market conditions
• Deal-flow is harder to
predict
Increasing prediction of
strategic risks (deal-flow)
is a core focus. The Group
increased its marketing
initiatives significantly
in 2018
Use the Group’s
strengthened balance
sheet to increase
deal-flow during 2019
• Risks for which good
governance and
internal controls should
limit any financial or
reputational loss
Board Committees, along
with the internal controls,
are designed to mitigate
and prevent loss due to
operational events or
mismanagement
Zero-tolerance for risk
escalation i.e. ensure that
operational risk remains
in the ‘green quadrant’
Anglo Pacific Group PLC 2018 Annual Report & AccountsAPG_AR18_26.03.19_FRONT_PROOF_7
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S T R A T E G I C R E P O R T
PRINCIPAL RISKS AND UNCERTAINTIES
continued
Risk
Possible cause
Mitigation
Management comment and actions
CATASTROPHIC EVENT
• Mine collapse
MONITOR
LIKELIHOOD : REMOTE
IMPACT : HIGH
A significant event which
causes revenue to halt from
one of the Group’s key
income producing royalties
would have a profound
impact on the Group’s
prospects.
• Environmental disaster
• Natural disaster
• Destruction of infrastructure
• Resource nationalisation
• Resource contamination
• Failure by royalty
counterparty to
make payments
• Climate change
These risks, by their nature,
are difficult to predict or
influence. The Board monitors
its portfolio and underlying
performance regularly.
By continuing to focus on investing
in well-established mining
jurisdictions with stable political and
geological history, along with
investing in good operations and
management, the Group can reduce
the likelihood of the occurrence of
this risk.
We undertake a thorough
assessment and full diligence of
environmental and ethical risk as
part of our investment process.
LIKELIHOOD :
MEDIUM / LOW
Demand for royalties and streams can
never be predicted, but demand is
usually greater when the underlying
market conditions are challenging for
small/mid-sized operators.
Capital remains scarce in the sector
and whatever capital there is has
increased in cost during 2018. This
should result in a more favourable
financing environment for Anglo
Pacific in 2019.
LIKELIHOOD :
MEDIUM / LOW
The Group has a significant global
network of brokers, advisors and
consultants who constantly bring
deal-flow. In addition, our significant
management and Board industry
expertise and network enables us to
identify opportunities internally.
The Group is confident that it has
not lost out on in considering any
material deals which it would have
undertaken during 2018, and is
invited to participate in bidding
processes on a regular basis.
•
Improvement in
commodity prices
•
Inflows into mining funds
• Availability of debt
• Demand for commodities
• Global GDP growth
MONITOR
The Group monitors the market
closely and pays close attention
to trends and commentary.
Secondary royalties are less
sensitive to market conditions
and are generally available
through the cycle.
Ineffective marketing / PR
INCREASE DEAL-FLOW
•
•
Insufficiently networked
• Size / financing credibility
The Group devotes a
considerable amount of
management time to marketing
and attending trade shows
and conferences with a view to
identifying opportunities in
addition to generating new
ideas from desk research and
industry discussions.
Misjudging the following:
• Geology & technical process
• Long-term commodity price
assumptions
• Country risk
• ESG issues
• Time to production
• Counterparty covenants
• Economic viability
(project or counterparty)
• Tax regime
THOROUGH DUE
DILIGENCE
LIKELIHOOD :
MEDIUM / LOW
The Group has considerable
in-house technical, financial and
tax expertise to identify potential
fatal flaws and uses consultants
to assist with due diligence.
The Board also has significant
mining, financial and investment
experience and constructively
challenges management on the
due diligence process.
The current management team has
demonstrated a track record of
successful investments to date.
The Board was strengthened during
the year by the appointment of
Vanessa Dennett who brings a
wealth of experience of M&A
diligence and process.
Anglo Pacific has strict and exacting
investment criteria.
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LACK OF DEMAND
FOR ROYALTIES
IMPACT : HIGH
In order to execute its
strategy, the Group needs to
acquire further royalties and
streams to ultimately replace
the income from Kestrel.
Demand for royalties
and streams can change
depending on
macroeconomic conditions
at any point in the cycle.
PIPELINE / SUPPLY
IMPACT : HIGH
The Group needs to be
working several potential
deals at any one point
which requires constant
replenishment of
opportunities in its deal
pipeline.
INVESTMENT
APPROVAL
IMPACT : MEDIUM
Anglo Pacific’s success will
depend on the performance
of the royalty related assets
acquired matching or
exceeding expectations at
the point of acquisition.
The governance and due
diligence process adopted
by the Group when looking
at each unique investment is
key to reduce the risk of
making a bad investment.
Anglo Pacific Group PLC 2018 Annual Report & AccountsAPG_AR18_26.03.19_FRONT_PROOF_7
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INCREASED
COMPETITION
IMPACT : MEDIUM
Anglo Pacific does not
compete with the
well-established precious
metals royalty companies,
instead focusing on the base
and bulk sector.
Competition can always
arise, and Anglo Pacific is not
complacent in driving the
growth of its business.
STAKEHOLDER
SUPPORT
IMPACT :
MEDIUM / LOW
Anglo Pacific needs to be
well supported by all
stakeholders including:
• Shareholders
• Lending banks
• Brokers
• Analysts
• Employees
• Media
OPERATIONAL
MANAGEMENT
IMPACT : LOW
Inadequate attention to
detail in managing the
business
Risk
Possible cause
Mitigation
Management comment and actions
• Recovery in the mining
CONTINUE TO SCALE
sector
•
Inflows into private equity
funds
• Low bond yields entice life
assurance / pension funds
• Change of focus by
precious metal peers
Anglo Pacific has considerable
first mover advantage in a
capital-intensive business
model, with a highly cash
generative portfolio to leverage
and facilitate growth.
It also has considerable
contacts throughout the sector
to generate deal-flow along with
expertise in terms of appraising
and valuing royalty transactions.
LIKELIHOOD : MEDIUM /
LOW
Some direct competition exists
but this has not had a material
impact on our growth to date.
With a focus on non-precious
metals and being a permanent
capital vehicle, management
considers itself well placed to be
an attractive partner for small/
medium-sized operators.
CLOSE DIALOGUE
WITH STAKEHOLDERS
LIKELIHOOD :
MEDIUM / LOW
• Reputational
consequences of mining
disasters / poor standards
of social responsibility
• Underperformance
• Deviation from strategy
• Alterations to dividend
• Excessive risk-taking
• Poor communications
Anglo Pacific keeps in close
contact with all stakeholders.
We spend a considerable
amount of time working with
our bankers, brokers and
analysts, explaining our
strategy, progress and
development plans which
gives us a gauge for what the
likely market reaction to our
plans will be.
We remain close to lenders
and brokers to anticipate
demand for any increase in
debt / equity capacity.
We regularly conduct roadshows to
see major shareholders, engage
with retail investors through private
client broker networks and often
visit potential new investors, both in
Europe and North America.
We actively encourage participation
at our AGM, which gives
shareholders of all sizes the
opportunity to ask questions to our
entire Board and management.
Some events or changes in
investment mandates might curtail
the ability of institutions to invest in
the sector. At Anglo Pacific we do
not agree that all mining activity is
detrimental, and will continue to
differentiate between high-quality
products operated in a responsible
manner.
LIKELIHOOD : LOW
Management are committed
to the highest standards of internal
control, in running the Company to
the standards which would be
expected of a FTSE listed
organisation in order to maximise
shareholder returns.
• Monitoring accuracy of
royalty payments
• Monitoring newsflow
impacting counter-parties
•
Insufficient interaction
with counterparties
• Lax cost control
• Managing risky investment
processes
• Appropriateness and
functioning of internal
controls
• Leadership
MAINTAINING HIGH
STANDARDS
The Group undertakes a
thorough budgeting process
each year which highlights the
reasons for variances.
Costs are reported against
budget on a monthly basis to
identify timely instances of any
unexpected expenditure.
Management is focused on
close monitoring of the royalty
portfolio.
Management performance is
monitored by the Board.
Anglo Pacific Group PLC 2018 Annual Report & AccountsAPG_AR18_26.03.19_FRONT_PROOF_7
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S T R A T E G I C R E P O R T
PRINCIPAL RISKS AND UNCERTAINTIES
continued
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Risk
Possible cause
Mitigation
Management comment and actions
MANAGEMENT
PERFORMANCE
IMPACT : LOW
Ensuring that management
is performing to the
standards expected of them
for the benefit of all
stakeholders.
• Underperformance
PERFORMANCE REVIEW
LIKELIHOOD : LOW
• Unmotivated
• Uncommitted
• Lack of focus
Anglo Pacific is a small organisation
in terms of headcount where
everybody has to perform to the
highest standards.
Any underperformance would be
readily evident and dealt with by the
CEO and Board promptly.
The Remuneration Committee
undertakes a thorough review
of performance each year, with
any rewards being granted
strictly upon demonstrated
meeting of pre-agreed
objectives.
In addition, the Board
undertakes an annual
self-assessment to identify any
skills gaps or the way in which
the Board works together.
COMMODITY AND
OTHER PRICING RISK
IMPACT : HIGH
The Group’s results are
determined by other pricing
inputs which could result in
unrealised losses at each
reporting date.
• The Group’s asset values are
underpinned by the forward
commodity price outlook
at each reporting date. A
decline in these prices could
result in further impairment
or revaluation charges
• The Group has a portfolio
of certain publicly quoted
equity investments which
are marked to market at
each reporting date
The Group uses independent
third-party consensus prices
at each reporting date in
assessing for impairment.
The Group’s equity portfolio
has largely been divested,
meaning any future impairment
should be much less material
to the Group.
LIKELIHOOD : HIGH
The Group is exposed to commodity
prices and a significant decrease
in commodity prices is likely to result
in further impairment charges.
At this stage the Board does not
hedge against specific commodity
risk, and will continue to review
this position in light of commodity
prices.
FINANCING
CAPABILITY
IMPACT :
MEDIUM / HIGH
The Group is dependent on
access to capital in order to
finance its growth ambitions
Certain of the Group’s assets
are pledged as security for
the Group’s borrowing
facility – failure to comply
with the terms of the
borrowing facility could
result in the loss of control
of key assets.
• Sudden adverse change in
equity market conditions
HIGH-QUALITY
DEAL-FLOW
LIKELIHOOD :
MEDIUM
• The Group’s cost of capital
makes executing accretive
deals more challenging
• Production issues or
significant price volatility
could adversely impact
on the Group’s borrowing
capacity
• Execution risk through
inadequate immediate
access to finance
• Sudden adverse events
result in a loss of income
and impacts on the banking
covenants
It is management’s view that
high-quality, accretive deals
should always be capable of
being financed. We regularly
meet with advisors, shareholders
and lenders to discuss the types
of deals we are looking at to
gauge their support.
We will look to finance
non-income producing royalties
primarily from our internal
resources. This does leave the
Group exposed to unexpected
loss of revenue to repay
borrowings. We run regular
forecasts and sensitivity analysis
to ensure that we are not over
leveraged and in compliance
with our banking covenants.
We took advantage of our record
year of revenue in 2018 to refinance
our borrowing facility to capture
more of the Group’s debt capacity.
As part of this refinancing we
brought a third bank, Scotia Bank,
into the syndicate who bring
considerable knowledge and
experience of the Canadian royalty
financing sector to the syndicate.
With access to ~£78m (~US$100m)
of liquidity we are well placed to
finance growth opportunities from
our balance sheet in 2019.
Anglo Pacific Group PLC 2018 Annual Report & AccountsAPG_AR18_26.03.19_FRONT_PROOF_7 29
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Mitigation
Management comment and actions
DIVERSIFY
DEPENDENCE
LIKELIHOOD :
MEDIUM
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• Market conditions
• Poor ESG record
• Overleveraging
•
Inaccurate royalty
calculations
• Non-payment / disputes
• Change in dividend policy
by LIORC
OPERATOR
DEPENDENCE
IMPACT : MEDIUM
The Group is dependent on
the operators of the mines
over which it has royalties to
continue to honour royalty
contracts and make timely
and accurate royalty
payments, and to continue
to operate and finance their
business in a sensible and
responsible manner.
The best way the Group can
mitigate dependence on any
one operator is to continue to
expand and diversify its royalty
portfolio to ensure that it has a
well-balanced source of income.
The Group has audit rights over
certain of its royalties which it
generally exercises on the
identification of any unexpected
royalty outcome.
The Group tries to insert
change of control clauses into
its new royalty agreements
to help ensure its exposure is
to counterparties of good
reputation.
The Board approved a
currency hedging policy which
looks to enter into forward
contracts sufficient to acquire
the majority of the GBP required
to meet the Group’s dividend
and overhead cost.
Under the policy, the Group
can hedge up to 70% of the
next quarter’s income, 60% of
the second quarter followed
by 30% and 25% thereafter.
The Group operates controlled
treasury policies which spreads
the concentration of the Group’s
cash balances amongst
separate financial institutions
with sufficiently high credit
ratings.
The Group has a good relationship
with most of the underlying
operators.
Site visits conducted over the
past 12 months include Kestrel
and Narrabri, two of the top three
sources of the Group’s revenue,
and will target other visits in the
next 12 months.
LIKELIHOOD : MEDIUM
Commodity price risk is the
primary risk and the objective is
to keep foreign exchange as a
secondary risk.
LIKELIHOOD : LOW
The risk of counterparty default is
assessed when entering into new
royalty agreements. The Directors
are of the view that the royalties,
which represent the majority of the
Group’s receivables, are at relatively
low risk of default due to the nature
of the operators involved.
LIKELIHOOD : LOW
Although interest rates, particularly
in the US, have risen over the past
12 months, further expectations
for rate increases have reduced
somewhat. The Group can borrow
in a multitude of currencies and
take advantage of lower rates
accordingly.
• Cash flow risk associated
with dollar derived income
and costs (including
dividend) largely payable
in GBP
• Translation risk of having a
presentational currency in
GBP but assets denominated
in other currencies
• Financing risk when raising
equity in GBP to fund dollar
denominated acquisitions
• Continued uncertainty
arising from Brexit
• Royalty payment default
• Bank collapse
FOREIGN
EXCHANGE RISK
IMPACT :
MEDIUM / LOW
That foreign exchange
movements adversely
impact on the Group’s cash
flow projections.
CREDIT RISK
IMPACT : LOW
That there is a risk of default
by those owing the Group
money or those institutions
holding the Group’s cash
reserves.
INTEREST
RATE RISK
IMPACT : LOW
That an increase in interest
rates could adversely impact
on the Group’s prospects.
• The Group is exposed to the
US and UK LIBOR rate as part
of its bank facility
The Group has a relatively
low level of borrowings and,
as such, interest rate risk is
not considered material
when assessing the Group’s
longer-term prospects.
Anglo Pacific Group PLC 2018 Annual Report & AccountsAPG_AR18_26.03.19_FRONT_PROOF_7
30
S T R A T E G I C R E P O R T
KEY PERFORMANCE INDICATORS
Measuring our progress
Royalty related revenue reflects the revenue from the Group’s underlying
royalty and streaming assets on an accruals basis, including the interest earned
on royalty financing arrangements and the dividend income received from
the Group’s investment in LIORC (refer to note 2(c) for further details).
Adjusted earnings per share excludes any non-cash valuation movements,
impairments, amortisation and share-based payment expenses.
It also adjusts for any profits or losses which are realised from the sale of equity
instruments within the mining and exploration interests.
Valuation and other non-cash movements such as these are not considered
by management in assessing the level of profit and cash generation available
for distribution to shareholders. As such, an adjusted earnings measure is
used which reflects the underlying contribution from the Group’s royalties
during the year.
Adjusted earnings divided by the weighted average number of shares in issue
gives adjusted earnings per share (refer to note 13 for further details).
It is a policy of the Group to pay a significant portion of its royalty income as
dividends. Just as important as maintaining the dividend is maintaining the
quality of the dividend. Dividend cover is calculated as the number of times
adjusted earnings per share exceeds the dividend per share (refer to note 14
for further details).
In any period where there is an adjusted loss, the dividend cover will be reported
as nil.
The structure of a number of the Group’s royalty financing arrangements, such
as the Denison transaction completed in February 2017, result in a significant
amount of cash flow being reported as principal repayments, which are not
included in the income statement. Management have determined that free
cash flow per share is a key performance indicator, as the Board considers the
free cash flows generated by its assets when recommending dividends.
Free cash flow per share is calculated by dividing net cash generated from
operating activities, plus proceeds from the disposal of non-core assets and any
cash considered as repayment of principal, less finance costs by the weighted
average number of shares in issue (refer to note 35 for further details).
The Group’s strategy is to acquire cash or near-cash producing royalty related
assets which will be accretive and in turn enable dividend growth. The graph
shows how much the Group invested in royalty acquisitions in each period.
ROYALT Y REL ATED REVENUE
£46.1m
46.1
19.7
39.6
8.7
3.5
2014
2015
2016
2017
2018
ADJUSTED EARNINGS PER SHARE
18.02p
18.02
9.76
16.82
2.47
-1.97
2014
2015
2016
2017
2018
DIVIDEND COVER
2.3x
1.6
2.4
2.3
0.0
2014
0.4
2015
2016
2017
2018
FREE CASH FLOW PER SHARE
22.28p
23.62
22.28
10.65
7.93
2.93
2015
2014
2016
2017
2018
ROYALT Y ASSETS ACQUIRED
£39.3m
45.0
16.2
39.3
29.4
2014
2015
0.0
2016
2017
2018
Anglo Pacific Group PLC 2018 Annual Report & AccountsAPG_AR18_26.03.19_FRONT_PROOF_7 S T R A T E G I C R E P O R T
BUSINESS REVIEW
Anglo Pacific Group PLC 2018 Annual Report & Accounts
31
HOW WE DELIVER GROWTH
HIGH-QUALITY AND
LOW-COST ASSETS
The Group is focused on ensuring that new royalties
are over high-quality and low-cost operations.
This helps ensure longevity of cash flows by reducing
the risk of mining operations ceasing to be
economically viable. Within its existing portfolio, the
Group has exposure to low cash cost assets in the
Kestrel and Narrabri mines. Both Kestrel and Narrabri
operate in the lowest quartile on the cost curve in
comparison to similar mines.
Lowest quartile
The Kestrel and Narrabri mines,
over which the Group holds
royalties, operate in the lowest
quartile on the cost curve in
comparison to similar mines
M O R E D E TA I L S O N PAG E S 3 2 & 3 7
APG_AR18_26.03.19_FRONT_PROOF_7
32
S T R A T E G I C R E P O R T
BUSINESS REVIEW
KESTREL
STAGE
COMMODITY
OPERATOR
LOCATION
PRODUCING
COKING COAL
KESTREL COAL PTY LTD
AUSTRALIA
ROYALTY RATE & TYPE
7 – 15% GRR
BALANCE SHEET
CLASSIFICATION
INVESTMENT
PROPERTY
WE SEE THE CHANGE
OF OWNERSHIP
AT KESTREL AS A
POSITIVE EVENT FOR
ANGLO PACIFIC
Kestrel saleable tonnes
of 4.8Mt in 2018
4.8Mt
BRISBANE
We have enjoyed a very good start to our
relationship with the new owners and
operator, which included being welcomed
to site in February 2019 to see for ourselves
the progress and plans being made for the
operation.
We see the change of ownership at Kestrel
as a positive event for Anglo Pacific.
PERFORMANCE
The Group received record royalty income
from Kestrel in 2018, for the second year in
a row. Total revenue in 2018 was £32.6m, a
13.5% increase on the previous record of
£28.8m in 2017. This increase is all the more
impressive given that it was achieved from
the same level of annual production (~4.8Mt)
within the Group’s private royalty land and
was also impacted by a stronger pound when
reporting the revenue in sterling.
The increase in revenue in 2018 was a result
of higher coking coal prices, which has a
compounding benefit on the weighted
average royalty rate, given the ratchet
outlined above. At the beginning of 2018,
the consensus for premium hard coking coal
prices in 2018 was US$150/t on average,
whereas actual contract prices averaged
US$207.50/t. This pricing is not necessarily
the pricing achieved from Kestrel which is at
a slight discount to the premium hard coking
coal price, but is indicative of the increases
we have seen.
The coking coal price remained resilient due
to a combination of weather-related events
and industrial action in Australia impacting on
supply along with an ever-increasing demand
for premium coking coal for use by the steel
industry.
WHAT WE OWN
Kestrel is an underground coal mine located
in the Bowen Basin, Queensland, Australia.
The Group owns 50% of certain sub-stratum
lands which, under Queensland law, entitle it
to coal royalty receipts from the Kestrel mine.
The vast majority of sales from the operation
are to Japan and South Korea with ~2% going
into the Chinese market.
The royalty rate to which the Group is entitled
is prescribed by the Queensland Mineral
Resources Regulations. These regulations
currently stipulate that the basis of calculation
is a three-tiered fixed percentage of the
invoiced value of the coal as follows:
Average price per tonne for period
UP TO AND INCLUDING A$100
Rate
7%
OVER A$100 AND UP TO
AND INCLUDING A$150
MORE THAN A$150
FIRST A$100
BALANCE
7%
12.5%
FIRST A$100
NEXT A$50
BALANCE
7%
12.5%
15%
CHANGE OF OWNERSHIP
As was widely reported and commented
on during the course of 2018, Rio Tinto sold
its interest in the Kestrel mine to a joint
venture between EMR Capital (an Australian
private equity firm) and Adaro Energy (a
major blue-chip coal mine operator based
in Indonesia). The sale completed in
August 2018.
The total consideration paid by the new
owners was US$2.25bn, which Anglo Pacific
considers a ringing endorsement of the
quality of the operation and the potential
for significant volume growth at Kestrel,
as recently indicated by Adaro. Such
acceleration would, in our view, likely shorten
the number of years of significant volumes
from within the Group’s private royalty land
to around four years. We would then expect
a further period of two years where there
would be a meaningful contribution before
mining eventually begins to leave the
Group’s private royalty land.
Anglo Pacific Group PLC 2018 Annual Report & AccountsAPG_AR18_26.03.19_FRONT_PROOF_7
33
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VALUATION
The Kestrel royalty was independently valued
at A$198.2m (£109.8m) and accounts for 41%
of the Group’s total assets as at 31 December
2018 (2017: A$180.2m; £104.3m; 41%). Having
generated £32.6m of income from Kestrel
during the year, the increase in valuation of
£5.5m means that resource depletion has
been more than compensated for by the
uplift in forecast private royalty tonnage for
2019, as provided by the operator, together
with an upward revision in forward price
assumptions, with the consensus suggesting
that the long-term price for coal has increased
by 34% compared to the pricing assumptions
used at the end of 2017 as discussed above.
The independent valuation of Kestrel was
undertaken by a Competent Person in
accordance with the Valmin Code (AusIMM,
2005), which provides guidelines for the
preparation of independent expert valuation
reports. The Group monitors the accuracy of
this valuation by comparing the actual cash
received to that forecasted. The value of the
land is calculated by reference to the
discounted expected royalty income from
mining activity, as described in note 16.
As the asset has a nominal cost base, the
carrying value almost entirely represents the
valuation surplus. The Group recognises a
deferred tax provision against the valuation
surplus and, as such, the net value on the
balance sheet is £76.9m (2017: £75.2m).
KESTREL MINE PLAN, SHOWING
AREA BEING MINED COMPARED
TO PRIVATE LAND BOUNDARY
Area already
mined
K E S T R E L N O R T H
( h i s t o r i c m i n e )
Royalty area
K E S T R E L S O U T H
( c u r r e n t m i n e )
Area being mined
in 2019
OUTLOOK
The outlook for 2019 remains positive, both
in terms of volume and price. The December
2018 consensus price for coking coal in 2019
is US$177.80/t on average. This is a significant
increase (+34%) on the price expectation for
2019 at the beginning of 2018.
Of more significance was the announcement
by Adaro Energy, a 48% joint venture partner
in the Kestrel operation, in their Q4 2018
trading update on 11 February 2019 that
the operation is targeting a ~40% increase
in volume in 2019, driven by improved
efficiencies. This would increase volumes
from Kestrel to ~6.7Mt in 2019, of which the
vast majority of mining would be from
within Anglo Pacific’s private royalty land.
Although Anglo Pacific does not operate
the mine, should these volumes be achieved,
then, subject to prevailing coal prices,
this would lead to a significant increase in
revenue from Kestrel for the third year
in a row.
KESTREL ROYALTY RELATED REVENUE (£m)
28.7
32.6
1.7
2014
3.6
13.1
2015
2016
2017
2018
COAL ROYALTY VALUATION (£m)
117.1
82.6
116.9
104.3
109.8
2014
2015
2016
2017
2018
Anglo Pacific Group PLC 2018 Annual Report & AccountsAPG_AR18_26.03.19_FRONT_PROOF_7
34
HOW WE DELIVER GROWTH
ATTRACTIVE RETURNS
The Group acquires royalties and streams at costs of
capital which reflect the Group’s views of appropriate
returns. Given the lack of capital flowing into the sector,
this cost of capital is increasing.
The £38m acquisition of a 4.29%
equity stake in LIORC, completed
in H2 2018, generated £1.9m in
royalty related revenue implying
an annualised yield of ~10%
Anglo Pacific Group PLC 2018 Annual Report & AccountsAPG_AR18_26.03.19_FRONT_PROOF_7 35
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S T R A T E G I C R E P O R T
BUSINESS REVIEW
continued
MARACÁS GENERATED YET
ANOTHER YEAR OF RECORD
REVENUE RESULTING IN
ROYALTY INCOME OF £5.9m
FOR ANGLO PACIFIC
WHAT WE OWN
The Group has a 2% NSR royalty on all mineral
products sold from the area of the Maracás
Menchen project to which the royalty interest
relates. The project is located 250km
south-west of the city of Salvador, the capital
of Bahia State, Brazil, and covers an area in
excess of the current permits which offers
the Group the potential for exploration upside.
Maracás Menchen is 99.97% owned and
operated by TSX listed Largo Resources
Limited (‘Largo’).
PERFORMANCE
Maracás generated yet another year of record
revenue for Anglo Pacific Group. Royalty
related revenue of £5.9m was almost triple the
amount earned in 2017, predominantly due
to significantly higher vanadium (V₂O₅) prices.
In addition, Largo recorded a 6% increase in
production during the year to 9,830t.
The V₂O₅ price was a standout performer in
the commodity sector in 2018, increasing
from ~US$8.50/lbs at the beginning of the
year to ~US$26.00/lbs at the end of 2018.
The price peaked around US$34.00/lbs in late
2018, although it has subsequently retreated
to around US$18.00/lbs as at January 2019.
The reason for the increase in price during
2018 was twofold. Firstly, the impact of
vanadium operation closures in 2015 and
2016, mainly at Evraz Highveld in South Africa,
resulting in a considerable amount of stock
flooding the market. It has taken some time for
this to work its way through the system, but it
appeared that the supply demand balance
shifted back towards the operators at the end
of 2017. Furthermore, considerable by-product
supply from China was taken offline in 2017
due to safety and environmental shut downs.
This coincided with new steel usage
regulations in China, stipulating that a higher
rebar standard needed to apply to steel
usage in the construction industry following
infrastructure collapses in the past few years.
V₂O₅ is one such strengthening agent and
Chinese steel producers suddenly needed
to increase stock levels.
The second driver of vanadium pricing is its
new found use in large scale energy storage
equipment. This gives the product a second
use. Largo has confirmed that its vanadium
is suitable for such technology.
The result of the sudden increase in
vanadium prices during 2018 has had a
profound impact on Largo’s balance sheet,
especially as it expects its cash operating
costs to be US$3.46-US$3.65/lbs.
The considerable operating margin generated
by Largo has led to a rapid deleveraging.
Largo had total borrowings of C$276m at the
end of 2016, prior to the increase in vanadium
price. With the significant cash generated over
the last two years, it currently has C$45m of
remaining debt. This is good news for Anglo
Pacific as Largo is very well capitalised and is in a
position to invest in further capacity increases
should it chose to do so.
OUTLOOK
Largo is anticipating production of 10,000 -
11,000 tonnes of V₂O₅ in 2019. This should
result in some volume growth to come in
2019, but would be under the threshold
required for the next deferred consideration
milestone of 12,000 tonnes on any
annualised quarterly production level.
As mentioned above, the price of V₂O₅ has
come off the high levels it was trading at in
H2 2018 and is now around US$18.00/lbs.
Although lower than the recent price, this is
still some 40% higher than the pricing at this
stage last year. Should the recent pricing prove
to be temporary or seasonal then there could
still be price driven growth in 2019, especially
as most commentators still consider there to
be structural supply deficit in the market.
VALUATION
The Maracás Menchen royalty is classified
as a royalty intangible asset on the balance
sheet. As such, this asset is carried at cost
less amortisation and impairments. Royalty
intangible assets are amortised when
commercial production commences, on
a straight-line basis over the expected life
of the mine.
MARACÁS MENCHEN
STAGE
COMMODITY
OPERATOR
LOCATION
PRODUCING
VANADIUM
LARGO RESOURCES
BRAZIL
ROYALTY RATE & TYPE
2% NSR
BALANCE SHEET
CLASSIFICATION
ROYALTY
INTANGIBLE
SALVADOR
Maracás Menchen
revenue increased to
£5.9m in 2018
£5.9m
THE PROJECT IS LOCATED 250KM
SOUTH-WEST OF THE CITY OF SALVADOR,
THE CAPITAL OF BAHIA STATE, BRAZIL
MARACÁS ROYALTY RELATED REVENUE (£m)
5.9
2.0
0.8
0.6
2015
2016
2017
2018
Anglo Pacific Group PLC 2018 Annual Report & AccountsAPG_AR18_26.03.19_FRONT_PROOF_7
36
HOW WE DELIVER GROWTH
STRONG OPERATIONAL
MANAGEMENT TEAMS
Strong operational management teams are integral to
delivering a successful project and to optimising the
value of a mine and, therefore, a royalty or stream.
The Group’s current royalty portfolio includes mines
operated by highly experienced management teams.
Record year
The operator of the Maracás
Menchen mine, Largo Resources
Limited, have overseen a record
year of production from the mine
while at the same time deleveraging
their balance sheet ready for the
next stage of growth
Anglo Pacific Group PLC 2018 Annual Report & AccountsAPG_AR18_26.03.19_FRONT_PROOF_7 37
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BUSINESS REVIEW
continued
WHAT WE OWN
In March 2015, the Group acquired a royalty
interest in the Narrabri coal project, a low-cost
thermal coal and pulverised coal injection (‘PCI’)
coal mine located in New South Wales, Australia,
operated by ASX-listed Whitehaven Coal
Limited (‘Whitehaven’). The Narrabri royalty
entitles the Group to royalty payments equal to
1% of gross revenue on all coal produced from
within the area covered by the Narrabri royalty.
The Narrabri royalty includes the Narrabri mine,
and the Narrabri South project.
The Narrabri mine has scope to increase
production over the short and medium term,
following Whitehaven’s approval to expand
production to 11Mt per annum. Whitehaven
estimates Narrabri to have a reserve based
mine life of 25 years and the potential to
extend production thereafter with the
development of Narrabri South.
PERFORMANCE
The performance from Narrabri in 2018 was
once again impacted by ongoing geotechnical
issues associated with an isolated fault in the
coal body requiring Whitehaven to perform
step around procedures which is causing
reduced volumes from the operation at
present. It has also experienced some delays
in retreating the longwall given its increased
size and the impact which this is having on
the mine roof.
Whitehaven has been working hard to
address these ongoing issues and it was
pleasing to see that it achieved a very strong
level of ROM production in the final quarter
of 2018 of 2.3Mt, 42% higher than the
immediately preceding quarter which was
impacted by a longwall changeover.
Overall, sales volumes were 2.6Mt lower at
4.2Mt in 2018, although some of this decrease
can be attributed to higher stock levels at the
end of 2018 which should come through as
cash in Q1 2019 – stock levels were 86%
higher than at the start of the year.
Some of this decrease was made up for by
higher coal prices in the period. The consensus
estimates for spot thermal coal prices in 2018
was US$79.57/t at the beginning of the year,
whereas Whitehaven achieved average
thermal coal prices of US$106/t during 2018.
But overall, the significantly lower sales
volumes resulted in royalty income of £3.5m
in 2018 compared to £4.9m in 2017.
Whitehaven saw healthy demand for their
higher calorific value coals during 2018, which
supported the price during the year. Although
most of its sales go elsewhere, the price was
strongly impacted by events in China, where
power generation increased during 2018, met
by both thermal coal and renewable sources.
However, increases in domestic supply in
China were modest due to ongoing difficulties
experienced by producers in receiving
regulatory approvals given the higher safety
and environmental checks being enforced.
This led to an increase in demand from the
seaborne market to fill the gap.
OUTLOOK
Whitehaven has guided for FY 2019 (year
to 30 June 2019) production of 5.6 - 6.0Mt.
In its December 2018 quarterly production
update, Whitehaven announced that it has
formed a team to work on the Narrabri Stage
3 project which includes the conversion of
the southern exploration licence to a mining
lease and it expects to submit such an
application to the Department of Planning
and Environment during 2020. This project
has the potential to significantly increase
production at Narrabri and in turn the
royalties paid to Anglo Pacific, as the project
falls within the Group's royalty area.
We were welcomed on site by Whitehaven
in February 2019 and were pleased to see
the wider longwall panels and support
infrastructure for ourselves.
Whitehaven continues to see good demand
for higher quality coal, which should continue
to support the price achieved of late. The
premium being achieved by the 6,000 kcal/
kg is becoming more notable and Whitehaven
believes that this is now beginning to reflect a
structural change in end user requirements
for better quality coal.
New demand from recently commissioned
coal power plants in south-east Asia is
estimated to have required some additional
40Mt in 2018 and this will continue in 2019.
Although thermal coal is being phased out in
some developed economies, it seems that it
will continue to be a major source of power
generation in the Asian market for some time
to come. The short-term outlook for thermal
coal prices thus appears to be positive.
VALUATION
The Narrabri royalty is classified as a royalty
intangible asset on the balance sheet. As such,
this asset is carried at cost less amortisation
and impairments and does not reflect any
valuation uplift for any excess between the fair
value and amortised cost. Its carrying value
does however reflect the impact of translation
from Australian dollars to pounds. Royalty
intangible assets are amortised when
commercial production commences, on a
straight-line basis over the expected life of
the mine.
NARRABRI
STAGE
COMMODITY
OPERATOR
LOCATION
PRODUCING
THERMAL & PCI COAL
WHITEHAVEN COAL
AUSTRALIA
ROYALTY RATE & TYPE
1% GRR
BALANCE SHEET
CLASSIFICATION
ROYALTY
INTANGIBLE
Narrabri generated
saleable tonnes of 4.2Mt
4.2Mt
BRISBANE
SYDNEY
NARRABRI MINE PLAN, SHOWING
SOUTH POTENTIAL EXPANSION AREA
Area
already
mined
Area currently
being mined
NARRABRI
NORTH
LONGWALLS
NARRABRI
SOUTH
POTENTIAL
EXPANSION
AREA
NARRABRI ROYALTY RELATED REVENUE (£m)
4.9
4.2
3.5
3.2
2015
2016
2017
2018
Anglo Pacific Group PLC 2018 Annual Report & AccountsAPG_AR18_26.03.19_FRONT_PROOF_7
38
HOW WE DELIVER GROWTH
LONG-LIFE ASSETS
Long mine life assets can provide long-term revenue,
which in turn can contribute to ensuring that
acquisitions to replace depleted royalties and maintain
cash flows are not required on a regular basis. Four of
the royalties in the Group’s existing portfolio are over
mines that have potential reserves and resources
of 10 years or more.
10+
The Group’s Narrabri, Maracás
Menchen, LIORC, and Ring
of Fire royalty assets all have
potential reserves and
resources in excess of 10 years
Anglo Pacific Group PLC 2018 Annual Report & AccountsAPG_AR18_26.03.19_FRONT_PROOF_7 39
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BUSINESS REVIEW
continued
LABRADOR
IRON ORE ROYALTY
CORPORATION
(LIORC)
STAGE
COMMODITY
OPERATOR
PRODUCING
IRON ORE &
IRON ORE PELLETS
IRON ORE COMPANY
OF CANADA (‘IOC’)/
RIO TINTO
LOCATION
CANADA
ROYALTY RATE & TYPE
BALANCE SHEET
CLASSIFICATION
INDIRECT INTEREST
IN 7% GRR
ROYALTY FINANCIAL
INSTRUMENT
NEWFOUNDLAND
& LABRADOR
Post acquisition the
Group earned £1.9m in
royalty related revenue
£1.9m
LONG-LIFE OPERATION WITH RESERVES
SUFFICIENT FOR ~25 YEARS AT THE
CURRENT RATE OF PRODUCTION
WHAT WE OWN
Anglo Pacific completed its acquisition of
a 4.29% equity stake in Labrador Iron Ore
Royalty Corporation (LIORC) during the
second half of 2018, investing £38m. LIORC is
a Toronto listed company which holds both a
royalty and equity interest in the Labrador Iron
Ore (IOC) project. This entitles the company
to revenue from its 7% gross revenue royalty
(along with a small commission) on revenue
from the operation, along with dividend
income from its equity stake.
LIORC is effectively a pass-through vehicle in
so much that it has a limited mandate other
than to pass through its net cash to
shareholders by way of dividend, subject to
retaining sufficient working capital. This
dividend is paid on a quarterly basis and
includes a base level and a special dividend,
the latter fluctuating depending on the level
of distributions received from the underlying
iron ore operation. Given the restricted
investment mandate available to LIORC
ANGLO PACIFIC ACQUIRED
AN INDIRECT INTEREST
IN THE IOC ROYALTY FOR
£38m DURING 2018
management, Anglo Pacific considers its
equity shareholding in LIORC to effectively
be a part ownership of the IOC royalty and,
for accounting purposes, accounts for this
dividend income as royalty related revenue.
UNDERLYING OPER ATION
As the investment in LIORC is considered
to be a part ownership of the royalty, an
understanding of the underlying operation
and product is important and this was a key
focus of our diligence when considering
making this investment during H2 2018.
IOC is one of Canada’s top iron ore producers,
operated by Rio Tinto, and is among the top
five producers of seaborne iron ore pellets in
the world. It is a long-life operation with
reserves sufficient for ~25 years at the current
rate of production. The operation extracts
~55Mt of crude ore annually and processes
this into concentrate and pellets before
transporting this on rail to port at Sept-Iles in
Newfoundland. All of the infrastructure is
owned by the operation, another key
attraction of this investment.
IOC produces a high-quality iron ore pellet
which is highly sought after due to its efficient
use in steel mills. Its quality is supported by its
low levels of impurities, noticeably low in
phosphorus, alumina and sulphur. These
attributes are very desirable, particularly in Asia.
In 2017, IOC had sales volumes of 19.0Mt of
which 55% was pellet and 45% concentrate.
The operation is very profitable, with Rio
achieving a 41% margin on sales of US$1.9bn
in 2017. The operation paid total dividends of
C$510m, ~62.5% of its EBITDA. LIORC has a
15.1% shareholding, and earned C$77m in
dividends in 2017.
PERFORMANCE
The Group earned royalty related revenue of
£1.9m in 2018 from its investment in LIORC
in H2 2018. Two of the dividends we received
contained a special dividend element,
meaning the dividend in respect of H2 2018
was C$1.15 per share. The dividend in respect
of Q4 2018 was C$0.60 per share which, on an
annualised basis, would imply a yield of ~10%,
exceeding the Group’s initial expectations.
The dividend in H2 2018 could have been
higher had it not been for LIORC withholding
a higher level of cash in the business than we
would have expected. This was in conjunction
with comments by LIORC’s management
during 2018 where they were looking for
shareholder approval to amend their articles
of association in order to invest in other
royalties. LIORC recently announced that the
directors will not proceed with a shareholder
vote in relation to the amendment of its
articles of incorporation. We consider to be
a favourable position for our investment. As
such, the dividend in Q1 2019 could contain
some of the excess cash retained in H2 2018.
OUTLOOK
The outlook for 2019 is positive for LIORC
and pellet premia in general, although under
very regrettable circumstances.
It is likely that there will be reduced iron ore
production from Brazil following the Vale
incident in January 2019, which could take
as much as 11Mt of pellet volumes off the
market in the short-term. This is equivalent
to the annual output from IOC, and should
support prices throughout 2019.
With a full year of revenue to come in 2019,
the potential for additional cash to be
distributed from LIORC and the outlook for
pellet premia being highly positive, the Group
should record significant growth in revenue
during 2019 from this asset.
VALUATION
The investment in LIORC is classified as a
royalty financial instrument. It is carried at fair
value by reference to the quoted bid price of
LIORC at the reporting date.
On initial recognition, the Group made the
irrevocable election to designate its
investment in LIORC as fair value through
other comprehensive income (FVTOCI). As
a result all fair value movements accumulate
in the investment revaluation reserve, within
‘Other Reserves’.
Anglo Pacific Group PLC 2018 Annual Report & AccountsAPG_AR18_26.03.19_FRONT_PROOF_7
40
HOW WE DELIVER GROWTH
DIVERSIFICATION OF
ROYALTY PORTFOLIO
The Group is seeking to build a diversified portfolio
of royalties across a variety of different commodities
and geographic locations to reduce dependency on
its cornerstone royalty, Kestrel. The Group's target
portfolio would result in an increased exposure across
various bulk materials, base metals and energy
commodities.
9 commodities
The Group’s portfolio of
14 royalty assets, provides
exposure to 9 commodities
across 5 continents
M O R E D E TA I L S O N PAG E S 0 4 & 0 5
Anglo Pacific Group PLC 2018 Annual Report & AccountsAPG_AR18_26.03.19_FRONT_PROOF_7 41
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BUSINESS REVIEW
continued
McCLEAN LAKE MILL
STAGE
COMMODITY
OPERATOR
LOCATION
PRODUCING
URANIUM
ORANO
CANADA
ROYALTY RATE & TYPE
TOLLING REVENUE
BALANCE SHEET
CLASSIFICATION
LOAN & ROYALTY
FINANCIAL
INSTRUMENT
THE GROUP HAS RECEIVED
£8.3m IN PRINCIPAL AND
INTEREST REPAYMENTS
SINCE ACQUIRING
McCLEAN LAKE IN 2017
VANCOUVER
SASKATOON
Produced 18Mlbs
of Uranium in 2018
18Mlbs
CIGAR LAKE IS THE WORLD’S HIGHEST
GRADE URANIUM MINE AND IS LOCATED
IN NORTHERN SASKATCHEWAN, CANADA
WHAT WE OWN
In February 2017, Anglo Pacific provided
Denison Mines Inc (Denison) with a C$40.8m
13-year interest bearing loan at a rate of
10%pa. The interest payments are payable
from the cash flows which Denison receives
from the toll revenue generated from its
22.5% interest in the McClean Lake mill,
operated by Orano Group (previously Areva).
The mill processes all ore currently produced
from the nearby, world class, Cigar Lake
uranium mine, operated by Cameco, and
pays a $/lbs toll rate for use of the mill. In any
period where the cash flow from the toll
revenue exceeds the interest payment, the
balance is received by Anglo Pacific as a
repayment of principal. In any period where
the cash flows are less than the interest, the
interest will capitalise and be repaid out of
cash flows in the following period. Any
amounts outstanding at maturity are due and
payable regardless of the cash generated
from the toll.
In addition to the loan, the Group also entered
into a financial transaction with Denison to
purchase the entire share of its toll receipts
received from Cigar Lake for C$2.7m.
This allows for potential mine life extension
at Cigar Lake.
PERFORMANCE
The cash flow received by Denison under
the toll arrangement should produce a regular
and predictable flow of cash, owing to the
world class deposit and blue-chip operator
supplying the mill. Receipts from the financing
arrangement in 2018 were £3.3m compared
to £3.2m earned in respect of 2017 (the cash
received of £5.0m during 2017 included an
amount of £1.8m relating to H2 2016).
The outlook for 2019 is expected to remain
in line with the C$0.5m which we receive on
a monthly basis. However, we note some
rumours about the threat of industrial action
by the workers at the mill which would have
the potential to disrupt the operation and our
income accordingly. We will keep this under
review as the year unfolds.
The income from the toll revenue is based
on a $/lbs of throughput and therefore it is
not directly impacted by movements in the
uranium price. As such, the Group’s cash flows
will not alter with uranium price fluctuations.
The risk to the Group’s cash flow from this
asset could arise if uranium prices fall to a
level where the operation providing the
throughput to the mill became uneconomic
and shut down. The Group does not currently
consider this to be a likely outcome in the
case of Cigar Lake.
VALUATION
The loan instrument is accounted for as a
receivable and carried at amortised cost.
The stream is considered a financial
instrument in accordance with the Group’s
accounting policies and is therefore carried
at fair value.
Anglo Pacific Group PLC 2018 Annual Report & AccountsAPG_AR18_26.03.19_FRONT_PROOF_7
42
HOW WE DELIVER GROWTH
ESTABLISHED
NATURAL RESOURCES
JURISDICTIONS
The Group continues to review potential business
opportunities globally and, in order to manage its risk
profile, intends to focus predominantly on mines in
established, relatively low-risk mining jurisdictions,
primarily those in North America, South America,
Europe and Australia.
99.1%
99.1% of the portfolio is in
established natural resources
jurisdictions
Anglo Pacific Group PLC 2018 Annual Report & AccountsAPG_AR18_26.03.19_FRONT_PROOF_7 43
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BUSINESS REVIEW
continued
EL VALLE-BOINÁS /
CARLÉS (EVBC)
STAGE
COMMODITY
OPERATOR
LOCATION
PRODUCING
GOLD, COPPER &
SILVER
ORVANA MINERALS
SPAIN
ROYALTY RATE & TYPE
2.5 – 3% NSR
BALANCE SHEET
CLASSIFICATION
ROYALTY FINANCIAL
INSTRUMENT
BILBAO
MADRID
Gold production up
24% in 2018
+24%
EVBC ROYALTY RECEIPTS (£m)
1.7
2014
1.2
2015
1.2
2016
2.0
1.7
2017
2018
WHAT WE OWN
The Group has a 2.5% life of mine NSR royalty
on the EVBC gold, copper and silver mine
owned by TSX-listed Orvana Minerals Corp
(‘Orvana’). EVBC is located in the Rio Narcea
Gold Belt of northern Spain and was
previously mined from 1997 to 2006 by Rio
Narcea Gold Mines. The royalty rate increases
to 3% when the gold price is over US$1,100
per ounce.
PERFORMANCE
Income from EVBC was another source
of growth for Anglo Pacific in the period.
Revenue received was up 17% to £1.9m
from £1.7m in 2017.
We reported last year that Orvana has
invested in an efficiency program at EVBC,
and this along with targeting high grade
deposit zones, has produced favourable
results in 2018. In CY 2018 Orvana produced
64k oz of gold, a 24% increase on the previous
year. This is the second year in a row where
Orvana has achieved ~25% production
increases.
In addition to the initiatives implemented in
2017, the focus for 2018 was to invest in plant
and equipment improvements, targeting high
grade deposit zones and to bring parts of the
Carles mine back online to provide skarn
material to feed through the plant. This has
assisted them in once again reporting
production growth in 2018.
OUTLOOK
Orvana remains focused on additional
geological and geotechnical work, that will
allow it to exploit high grade areas, designed
to maximise cash generation.
To this extent, Orvana recently announced the
signing of a new four-year borrowing facility
with a syndicate of Spanish banks which
has been designed to refinance its previous
facility with Samsung. This facility is on better
economic terms which should enable further
reinvestment in mine life expansion.
At present, the Group is estimating a
remaining mine life of two and half years,
which is shorter than that implied by the term
of Orvana’s new facility, suggesting that there
could be royalty revenue to come from this
operation for the next four years at least.
Orvana has announced guidance for FY 2019
of 65k oz of gold production from EVBC,
which is in line with 2018.
Anglo Pacific earns a royalty over all
throughput from the EVBC process plant
and is not restricted to licence geographic
boundaries.
VALUATION
The EVBC royalty is classified as a royalty
financial instrument on the balance sheet.
It is carried at fair value by reference to the
discounted expected future cash flows over
the life of the mine. All valuation movements
are recognised directly in the income
statement.
FOUR MILE
STAGE
COMMODITY
OPERATOR
LOCATION
PRODUCING
URANIUM
QUASAR RESOURCES
AUSTRALIA
ROYALTY RATE & TYPE
1% NSR
BALANCE SHEET
CLASSIFICATION
ROYALTY
INTANGIBLE
The Group has a 1% life
of mine NSR royalty
1%
SYDNEY
ADELAIDE
WHAT WE OWN
The Group has a 1% life of mine NSR royalty
on the Four Mile uranium mine in South
Australia. Four Mile is operated by Quasar
Resources Pty Ltd (‘Quasar’).
PERFORMANCE
The Group received a small amount of income
from Four Mile during the year, although it
remains of the view that this amount should
have been considerably higher. This forms the
basis of the ongoing dispute with the operator,
Quasar, around the level of deductions which
it continues to apply. Quasar continues to
treat the contract, in our view, as akin to a
profit interest, whereas the Group remains
of the view that this is a NSR and that refining
or processing costs should not be taken
into account.
We are continuing to engage with Quasar
in an attempt to resolve this matter.
VALUATION
The Four Mile royalty is classified as a royalty
intangible asset on the balance sheet.
As such, this asset is carried at cost less
amortisation and impairments. Royalty
intangible assets are amortised when
commercial production commences, on
a straight-line basis over the expected life
of the mine.
Anglo Pacific Group PLC 2018 Annual Report & AccountsAPG_AR18_26.03.19_FRONT_PROOF_7
44
HOW WE DELIVER GROWTH
PRODUCTION AND
EXPLORATION
UPSIDE POTENTIAL
The Group seeks to acquire royalty related assets
where it may benefit from improvements made to the
scale of mining operations. Any increases in production
can result in higher royalty payments, without requiring
the Group to contribute to the cost of expanding or
optimising the operation. Royalties can also benefit
from exploration successes that lead to enlarged
economic reserves.
Increased reserves can extend a mine’s life or facilitate
an expansion of the existing operations, potentially
providing higher revenue over a longer period.
Narrabri
Whitehaven Coal Ltd, the
operator of the Group’s Narrabri
royalty has commenced the
process of converting its southern
exploration licence into a mining
lease, providing the Group with
potential production and
exploration upside
M O R E D E TA I L S O N PAG E 3 7
Anglo Pacific Group PLC 2018 Annual Report & AccountsAPG_AR18_26.03.19_FRONT_PROOF_7 SALAMANCA
STAGE
COMMODITY
OPERATOR
LOCATION
DEVELOPMENT
URANIUM
BERKELEY ENERGIA
SPAIN
ROYALTY RATE & TYPE
1% NSR
BALANCE SHEET
CLASSIFICATION
ROYALTY
INTANGIBLE
MADRID
The Group has a 1% life
of mine NSR royalty
1%
THE SALAMANCA PROJECT IS BEING
DEVELOPED IN AN HISTORIC URANIUM
MINING AREA IN WESTERN SPAIN ABOUT
250KM WEST OF MADRID
45
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BUSINESS REVIEW
continued
WHAT WE OWN
The Group has a 1% life of mine NSR royalty
on the Salamanca uranium project located in
Spain and operated by ASX-listed Berkeley
Energia Limited (‘Berkeley’). The project
consists of four main deposits (Retortillo,
Alameda, Zona 7 and Gambuta) and is located
in the Salamanca Province, Spain,
approximately 250km west of Madrid.
PERFORMANCE
Berkeley had been enjoying another
successful year, but ended the year with some
uncertainty surrounding the likely approval
of its outstanding permits. This culminated
in a significant reduction in its share price at
the end of 2018 as the market ascribed little
or no value to the company other than its
cash on hand.
Despite completing its IPO on the Spanish
exchange during the first half of the year,
and outlining the positive impact the
Salamanca project would have on the local
economy, Berkeley has made limited
progress in securing the necessary permits
to commence construction.
In the fourth quarter of 2018 Berkeley
refuted the claims in the media that the
authorities intended to deny permitting
applications. Subsequent to the year end,
Berkeley announced that it had received a
number of favourable assessments from
various regulatory bodies, however, the final
recommendation from the Nuclear Safety
Council and local municipal approvals
remained outstanding. The share price has
recovered considerably in 2019 on this news.
Berkeley had targeted construction to
commence in 2019. In light of the ongoing
permitting delays this is now likely to be
pushed back. Berkeley remains fully financed
to construct the mine and commence
commercial production.
The other positive news for Berkeley is that
the uranium price enjoyed a better year in
2018, buoyed by recontracting in the US and
EU markets and continued increases in global
nuclear capacity. It appears after several years
of depressed uranium prices that there could
be some positive triggers for a re-rating in
the near-term.
VALUATION
The Salamanca royalty is classified as a royalty
intangible asset on the balance sheet. As such,
this asset is carried at cost less amortisation
and impairments. Royalty intangible assets
are amortised when commercial production
commences, on a straight-line basis over the
expected life of the mine.
GROUNDHOG
STAGE
COMMODITY
OPERATOR
LOCATION
DEVELOPMENT
ANTHRACITE
ATRUM COAL
CANADA
ROYALTY RATE & TYPE
1% GRR or US$1.00/t
BALANCE SHEET
CLASSIFICATION
ROYALTY
INTANGIBLE
VANCOUVER
The royalty entitles the Group
to 1% of gross revenue
1%
WHAT WE OWN
The Group retained a royalty on the
Groundhog anthracite project located in
north-west British Columbia, Canada,
following its disposal of the related mining
licences in 2014 to the project’s operator,
ASX-listed, Atrum Coal Limited (‘Atrum’). The
royalty entitled the Group to the higher of
1% of gross revenue on a mine gate basis or
US$1.00/t from coal sales derived from the
Panorama licences. Following a series of
discussions during 2016, an agreement was
reached to settle amounts outstanding under
a promissory note in return for additional
royalties as follows:
0.5% GRR covering all production within
Atrum’s Groundhog Anthracite Project
(‘Groundhog’) tenements from first
production until ten years from the date that
Atrum declares commercial production on
the project; and subsequently
0.1% GRR from production within the
Groundhog North Mining Complex project
area.
PERFORMANCE
Atrum’s focus for 2018 was on the Elan
project, and so there was limited progress in
relation to the Panorama licences. It is hoping
to publish the results of their most recent
drilling program in H1 2019.
VALUATION
The Groundhog royalty is classified as a royalty
intangible asset on the balance sheet. As such,
this asset is carried at cost less amortisation
and impairments. Royalty intangible assets are
amortised when commercial production
commences, on a straight-line basis over the
expected life of the mine.
Anglo Pacific Group PLC 2018 Annual Report & AccountsAPG_AR18_26.03.19_FRONT_PROOF_7
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S T R A T E G I C R E P O R T
BUSINESS REVIEW
continued
RING OF FIRE
STAGE
COMMODITY
OPERATOR
LOCATION
EARLY-STAGE
CHROMITE
NORONT RESOURCES
CANADA
ROYALTY RATE & TYPE
1% NSR
BALANCE SHEET
CLASSIFICATION
ROYALTY
INTANGIBLE
THUNDER BAY
The Group has a 1% life of
mine NSR royalty over a
number of claims
1%
PILBARA
STAGE
COMMODITY
OPERATOR
LOCATION
EARLY-STAGE
IRON ORE
BHP
AUSTRALIA
ROYALTY RATE & TYPE
1.5% GRR
BALANCE SHEET
CLASSIFICATION
ROYALTY
INTANGIBLE
The Group has a
1.5% life of mine GRR
1.5%
PERTH
WHAT WE OWN
The Group has a 1% life of mine NSR royalty
over a number of claims on the Black Thor,
Black Label and Big Daddy chromite deposits,
owned by TSX-listed Noront Resources
Limited. (‘Noront’), in the Ring of Fire region
of Northern Ontario, Canada.
PERFORMANCE
Noront released an updated corporate
presentation in Q3 2018 which outlined the
path towards first production at Eagles Nest,
the first deposit it is targeting to bring into
production. Anticipated timing of first
production is 2024, with construction due
to start in 2021, and this reflects positive
discussions with the State and First Nation
groups over the past few years.
Although there is no specific guidance in
relation to the Group’s royalties, the Black
Thor deposit is the third deposit which would
be brought online should market conditions
be favourable for chromite prices at that time.
Given the guidance in relation to first
production at Eagles Nest we have altered our
expectation for first production at Black Thor,
pushing out the likely start date to 2030.
VALUATION
The Ring of Fire royalty is classified as a
royalty intangible asset on the balance sheet.
As such, this asset is carried at cost less
amortisation and impairments. Royalty
intangible assets are amortised when
commercial production commences, on
a straight-line basis over the expected life
of the mine.
WHAT WE OWN
The Group has a 1.5% life of mine GRR over
three exploration tenements in the central
Pilbara region of Western Australia, owned
by a wholly-owned subsidiary of BHP which
is dual-listed on the LSE and ASX.
The tenements, covering 263km², host a
number of known iron ore occurrences,
including the Railway deposit. The tenements
are supported by extensive rail infrastructure
including the rail lines from Rio Tinto’s West
Angeles and Yandicoogina mines and BHP’s
rail line serving its current operations at
Mining Area C, which lie immediately to the
east of the Railway deposit.
PERFORMANCE
Although no tangible progress in 2018
has been reported in relation to our
tenements, BHP continue to advance the
permitting of their South Flank licences.
Whilst this will have minimal consequences
for Anglo Pacific’s tenements, we are
encouraged that BHP are expanding their
plans adjacent to Mining Area C, and that it
remains likely they will focus on higher grade
deposits, which the Group’s royalties cover.
VALUATION
The Pilbara royalty is classified as a royalty
intangible asset on the balance sheet. As
such, this asset is carried at cost less
amortisation and impairments. Royalty
intangible assets are amortised when
commercial production commences, on a
straight-line basis over the expected life of
the mine.
Despite recent announcements by BHP in
relation to the expansion of Mining Area C, and
in particular the South Flank development in
the Pilbara, limited information is publicly
available for the Group to assess the likely
timing of the development of tenements
covered by the Group’s royalty, the largest of
which covers the Railway Deposit which is
located to the north of the South Flank
development.
In the absence of any public available
information, the Group has estimated the
likely start date for production from
tenements covered by the Group’s royalty
to be 2030 (2017: start date 2027). Applying
this start date to the Group’s valuation model,
together with a pre-tax nominal discount
rate of 8.00% and a long-term iron ore price
of US$106/t for lump and US$94/t for fines
resulted in a net present value of the discount
future royalty cash flows of A$17.5m,
compared to the carrying value of A$21.5m.
As a result of the net present value being
lower than the carrying value, the Group
recognised an impairment charge of
A$4.0m (£2.2m) for the year ended
31 December 2018.
Anglo Pacific Group PLC 2018 Annual Report & AccountsAPG_AR18_26.03.19_FRONT_PROOF_7 47
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DUGBE 1
STAGE
COMMODITY
OPERATOR
EARLY-STAGE
GOLD
HUMMINGBIRD
RESOURCES
LOCATION
LIBERIA
ROYALTY RATE & TYPE
2 – 2.5% NSR
BALANCE SHEET
CLASSIFICATION
ROYALTY FINANCIAL
INSTRUMENT
The Group is entitled to a
2-2.50% life of mine NSR royalty
2.00-2.50%
MONROVIA,
LIBERIA
WHAT WE OWN
The Group entered into a royalty financing
agreement with AIM-listed Hummingbird
Resources PLC (‘Hummingbird’) in December
2012 in relation to its Dugbe 1 gold project in
Liberia. In exchange for US$15.0m, payable
in three tranches of US$5.0m, the Group is
entitled to a 2% life of mine NSR royalty from
any sales of gold mined within a 20km radius
of a specified point in the Dugbe 1 Resource.
PERFORMANCE
There have been no development updates
in relation to the Dugbe 1 project, with
Hummingbird’s focus remaining on its
Yanfolila mine, which suffered operational
issues in Q4 2018 due to adverse weather
events. Hummingbird’s focus for 2019 is
likely to remain on the Yanfolila operation.
VALUATION
The Dugbe 1 royalty is classified as a royalty
financial instrument on the balance sheet.
It is carried at fair value by reference to the
discounted expected future cash flows over
the life of the mine. All valuation movements
are recognised directly in the income
statement.
In light of the limited progress Hummingbird
has made in relation to developing Dugbe 1,
combined with the absence of any public
available information, the Group has
estimated the likely start date for production
to be 2030 (2017: start date 2026). Applying
this start date to the Group’s valuation model,
together with a pre-tax nominal discount rate
of 22.00% and a long-term gold price of
US$1,412/oz resulted in a net present value
of the discount future royalty cash flows of
A$2.2m, compared to the carrying value
of A$5.9m.
As a result of the net present value being lower
than the carrying value, the Group recognised
a valuation charge of A$3.7m (£2.1m) for the
year ended 31 December 2018.
There are certain provisions within the
contract which would entitle Anglo Pacific to
seek its capital to be returned, however, at
present the prospect of these being triggered
appears remote.
Anglo Pacific Group PLC 2018 Annual Report & AccountsAPG_AR18_26.03.19_FRONT_PROOF_7
48
FINANCIAL REVIEW
KEVIN FLYNN
ALONG WITH CASH,
THE REFINANCED
AND UP-SIZED
FACILITY PROVIDES
US WITH ACCESS
TO ~£78m (~$100m)
OF LIQUIDITY TO
FINANCE OUR
GROWTH AMBITIONS
Anglo Pacific enjoyed a very strong financial performance during 2018. We generated a record contribution from our portfolio of £49.4m, a
16% increase from the £42.6m earned in 2017. The comparison for 2017 included £1.8m from the Denison financing arrangement in respect
of H2 2016, so the like-for-like increase is actually 21%.
With our limited cost base, our revenue mainly drops to cash flow and the Group generated free cash flow of £40.2m in 2018, in line with the
£40.5m in 2017 if the £1.8m Denison back payment is excluded.
We began the year with cash on hand of £8.1m and generated free cash flow of £40.2m resulting in available cash of £48.3m, without drawing
down on borrowing facilities. We invested £38.4m in the LIORC stake, and distributed £12.9m to shareholders, a 3:1 capital allocation towards
growth. This capital spend was financed entirely from the Group’s liquid resources, and so the Group ended 2018 with a modest level of net
debt of £3.1m, and returned to a net cash position once again at the beginning of February 2019.
The other notable financial highlight in the year was the refinancing and extending of our borrowing facility, intended to better reflect the
Group’s debt capacity and provide cheaper and more flexible financing options. As part of this refinancing we were pleased that Scotia Bank
joined the existing syndicate of Barclays and Investec. The calibre of banks in our syndicate is testament to the quality of our portfolio and
our track record of identifying and executing accretive royalty related acquisitions.
With further organic growth anticipated from the portfolio in 2019 and access to ~£70m (US$90m) of borrowing lines, the Group is in a strong
financial position to pursue growth opportunities in 2019.
INCOME STATEMENT
Profit after tax for the year ended 31 December 2018 almost tripled to £28.8m, resulting in earnings per share of 15.97p in 2018 compared to
5.88p in 2017. The main reason for such a large increase is due to valuation movements swinging from a deficit in 2017 to a surplus in 2018,
mainly as a result of commodity price volatility over the past two years.
To remove the impact of such volatility and other non-cash items, we present an adjusted earnings measure, and associated earnings
per share, which we feel better represents the underlying trading performance of the Group and is the measure used by the Board when
considering dividend levels.
Royalty related revenue
Receipts from royatly financial instruments
Operating expenses – excluding share based payments
Finance costs
Finance income
Net foreign exchange gains/losses
Other (losses)/income
Tax
Adjusted earnings
Weighted average number of shares ('000)
2018
£'000
46,104
1,975
(4,709)
(1,042)
82
(593)
1,656
(10,990)
32,483
180,278
18.02p
%
17%
8%
7%
2017
£'000
39,566
–
(4,717)
(795)
19
(747)
(300)
(2,933)
30,094
178,895
16.82p
STRATEGIC REPORTAPG_AR18_26.03.19_MIDDLE_AW_PROOF 6Anglo Pacific Group PLC 2018 Annual Report & Accounts 49
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Adjusted earnings increased by 7% to £32.5m in the period from £30.1m in 2017, which translates into adjusted earnings per share (‘AEPS’)
of 18.02p (2017: 16.82p). The main change year on year is a 16% increase in royalty related revenue, partially offset by an increase in the tax
provision now that the Group has utilised its trading losses in full. The following section will focus on these two areas, given that everything
else has remained largely in line with the previous year.
Royalty related revenue
Total royalty related revenue in 2018 was £46.1m, compared to £39.6m in 2017. Royalty related income no longer includes the royalties
received from EVBC following the transition to IFRS 9 at the beginning of 2018. Including the £2.0m from EVBC and the £1.3m in principal
repayments made under the Denison financing arrangement results in a total portfolio contribution of £49.4m in 2018 compared to £42.6m
in 2017, a 16% increase. £1.9m of this increase is represented by maiden revenue from the LIORC investment made in H2 2018. The remainder
of the increase is largely attributable to stronger coking coal and vanadium prices as outlined below.
Kestrel
Maracás Menchen
Narrabri
Four Mile
EVBC*
ROYALTY INCOME
LIORC dividends
Interest – McClean Lake & Jogjakarta
ROYALTY RELATED REVENUE
EVBC*
Principal repayment – McClean Lake**
TOTAL PORTFOLIO CONTRIBUTION
%
13%
195%
(29%)
2018
£m
32.6
5.9
3.5
0.1
–
2017
£m
28.8
2.0
4.9
–
1.7
42.1
13%
37.4
1.9
2.1
(4%)
–
2.2
46.1
16%
39.6
2.0
1.3
49.4
–
3.0
42.6
16%
* Following the application of IFRS 9, the royalties received from EVBC are reflected in the fair value movement of the underlying royalty rather than recorded as royalty income.
** The McClean Lake principal repayment in 2017 included £1.8m relating to tolling receipts from H2 2016.
Kestrel
Despite flat volumes of 4.6Mt from within the Group’s private royalty land at Kestrel in 2018, revenue increased to £32.6m from £28.8m in
2017. The main reason for the increase was the benefit of higher average coking coal prices throughout 2018, which also resulted in a higher
weighted average royalty rate. This increase was slightly offset when reporting this revenue in pounds at a less favourable exchange rate on
average in 2018.
Maracás Menchen (Maracás)
The Maracás royalty is now the Group’s second largest income generating royalty, making up 12% of the income recognised in the income
statement. Income from Maracás almost tripled in 2018, largely driven by vanadium price movements. Sales volumes subject to the Group’s
royalty increased by 5% to 9,713kt, a new record for the operation.
The vanadium price was a clear highlight for Anglo Pacific during 2018, with the price achieved increasing from ~US$8.50/lbs at the beginning
of the year to ~US$26.00/lbs at the end of the year. The spot price peaked at just over US$34.00/lbs in Q4 2018, although it has come down
somewhat thus far in 2019. The reasons behind the price movement are discussed in further detail on page 35 of the business review.
APG_AR18_26.03.19_MIDDLE_AW_PROOF 6Anglo Pacific Group PLC 2018 Annual Report & Accounts
50
FINANCIAL REVIEW
continued
LIORC
Dividend income from the Group’s investment in LIORC was £1.9m in the period, despite only completing the acquisition in H2 2018.
The income which the Group receives is derived mainly from the 7% GRR that LIORC holds over the Labrador operations of the Iron Ore
Company of Canada ('IOC'), together with the 10% commission LIORC earns on all iron ore product produced, sold and shipped by IOC.
In addition LIORC receives dividends from its ongoing 15.10% equity interest in IOC.
The dividend paid by LIORC consists of a standard quarterly dividend of C$0.25 per share and this is then adjusted on a quarterly basis to
provide a special dividend depending on the strength of cash generated from the royalty and underlying operation, which absent production
issues should reflect the iron ore pellet price. The dividend payments received so far have contained special dividends of C$0.65 per share,
with this increasing to C$0.80 per share in respect of Q1 2019.
IOC produces a premium, lower contaminated iron ore pellet which we think will continue to command high premiums going forward as
it is more efficient to use in the manufacture of steel. This trend was evident in H2 2018 and using an annualised Q4 2018 dividend level
would imply a ~10% running yield on our investment.
LIORC retained additional cash balances in the business during H2 2018. Following the recent press releases by LIORC, discussed in more
detail on page 39, we expect there will be additional dividends to come in 2019 in respect of earnings from 2018.
Narrabri
The results from Narrabri were disappointing in 2018, with overall revenue decreasing by 31% to £3.5m, despite higher thermal coal prices
during 2018. Whitehaven Coal, the operator, continues to navigate its way through a known localised fault in the coal deposit, which is
expected to be a short-term issue before volumes can begin to return to more normal levels. Overall sales volumes subject to the Group’s
royalty in 2018 were 4.2Mt compared to 6.8Mt in 2017. This was lower than Whitehaven’s previous guidance, although it was encouraging
to see that Narrabri ended the year with a strong performance in Q4 2018.
EVBC
As noted, EVBC royalties are no longer reported within royalty related revenue following the introduction of IFRS 9 at the beginning
of the year.
Orvana Minerals, the operator, had a successful 2018, with gold production up by around 24% following a strategy to feed higher grade ore
through its processing plant. Our royalty receipts increased by 17% in 2018 and would have been even higher but for lower gold prices,
particularly in Q3 2018.
McClean Lake Mill financing arrangement
Interest earned on the financing arrangement was in line with the previous year, as would be expected given the fixed interest rate and
the amortisation profile associated with the loan.
Overall cash received under the arrangement, including the repayment of principal, was £3.3m in 2018 compared to £3.2m in 2017
(excluding the £1.8m received in 2017 in lieu of H2 2016). We would ordinarily expect this revenue to be stable year on year, although
there is some seasonality with summer holidays, and to be in the region of C$0.5-0.6m per month.
There have been some rumours of potential industrial action by staff at the mill which could interrupt throughput in the coming months.
We will keep this under review but any interruptions should hopefully be temporary.
Four Mile
We are continuing to engage with the operator of the Four Mile project, Quasar Resources, in an attempt to resolve the ongoing royalty
calculation dispute.
Operating expenses
Excluding the impact of share-based payments, operating expenses for the year were £4.7m, which is in-line with 2017, and largely represents
staff costs and the costs associated with operating a listed business based in London.
Operating costs in 2018 were actually less than they were in 2014, a year in which our portfolio contribution was only £3.7m and, when
compared to the cost base associated with generating £49.4m in 2018, highlights the scalability of the royalty model.
Operating costs have been kept under control due to our efforts to recover substantially all diligence costs on aborted transactions which
proceed to full due diligence. We were successful in agreeing recoveries on all material costs incurred in this respect in 2018.
Finance income and finance costs
Finance income and costs are broadly in line with 2017. Finance costs for both years were impacted by refinancings, with the current year
costs due to the upsizing and extension of the Q1 2017 facility to US$60m in Q3 2018. There is also the potential to upsize this by a further
US$30m for further transactions.
STRATEGIC REPORTAPG_AR18_26.03.19_MIDDLE_AW_PROOF 6Anglo Pacific Group PLC 2018 Annual Report & Accounts 51
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Income tax
The current tax charge for the year of £8.4m increased significantly in comparison to £2.0m in 2017 which had the full benefit of carried
forward losses. The Group utilised its remaining tax losses during H1 2018.
The effective tax rate, when measured against pre-tax adjusted earnings was ~25% which, given that most of the Group’s income is from
Australian assets taxed in Australia, is reasonable. With the expectation of even higher levels of volume to come from Kestrel in 2019, the
Group’s effective tax rate is likely to remain between 20-25% in the near-term.
Dividends
The Board, taking into account the record year of portfolio contribution and strong cash generation, has recommended a 25% increase in the
final dividend for 2018 of 3.125p, subject to shareholder approval at the 2019 AGM. This would take the total dividend in respect of 2018 to 8p,
a 14% increase on the 7p equivalent for 2017.
Equally important to the quantum of the dividend is the strength of the dividend cover. To this extent, we are pleased that, based on adjusted
earnings of 18.02p, our dividend was 2.3x covered (2017: 2.4x, based on a 7p dividend). This represents a healthy pay-out to shareholders
whilst also enabling us to re-invest in growth during 2018. Our capital allocation ratio in 2018 was 3:1 in favour of growth.
We expect further growth to come in 2019, mainly driven by volume increases at Kestrel. This should have positive implications for the 2019
dividend, but as the level of income will depend on the performance of commodity prices, we have maintained the quarterly dividend at
1.625p and will use the final dividend to adjust for the full year, as we have done in 2018.
BAL ANCE SHEET
Net assets and net assets per share remained largely flat at £218m and 122p per share in 2017 and 2018.
Movement in Net Assets £m
m
£
275
255
235
215
195
175
32.5
218.9
4.6
0.9
(5.2)
(3.1)
(12.1)
(5.5)
(12.9)
218.1
January 1
Adjusted
earnings
Kestrel
(net of tax)
Equity funded
acquisitions
Amortisation
& impairment
MtM
royalties
MtM
equity p/f
Other
Dividend
December 31
2017
210
30
(9)
11
(3)
(2)
(1)
(1)
(16)
219
Adjusted earnings less dividends added £19.6m to reserves in 2018. The benefit of this was then offset largely by the mark to market of the
Group’s remaining equity holdings at year end.
The vast majority of our non-core equity portfolio is an 8% stake in Berkeley Energia, which endured a torrid end to the year with its share
price declining significantly as a result of rumours of uncertainty surrounding their permitting process in Spain. Berkeley Energia accounted
for most of the £12.1m decline. The strong recovery of the stock in 2019 thus far has reversed some £2.5m of this decline.
Elsewhere, the Group recognised a £2.2m impairment provision against its Pilbara royalty. This reflects a further assessment of the likely start
date for mining within the Group’s tenements, although we are very encouraged by the firm plans which BHP are putting in place to develop
the South Flank deposit, adjacent to their Mining Area C operations.
The other noticeable valuation charge against the Group’s royalty portfolio was a fair value adjustment in respect of the Dugbe 1 royalty,
where again the pushing out of the start date resulted in a £2.1m reduction to the previous carrying value.
These amounts were largely offset by a £5.5m increase in the carrying value of Kestrel, where the resource depletion was largely offset by an
increase to the forecast near term volumes from the Group’s private royalty lands as provided by the operator, together with higher forecast
price inputs going forward, based on the consensus price deck at the end of 2018.
APG_AR18_26.03.19_MIDDLE_AW_PROOF 6Anglo Pacific Group PLC 2018 Annual Report & Accounts
52
FINANCIAL REVIEW
continued
The Kestrel valuation at the end of 2018 was based on the inputs which were available to the company at 31 December 2018. While this did
include the uplift of 40% in volumes announced by Adaro Energy for 2019, it did not include any further updates to production assumptions
as these had not been disclosed to us at the time. We have since visited site and are now updating the valuation model for these findings,
which we expect to be included in the valuation at 30 June 2019. This could show, subject to commodity prices, further volume growth for
2020 onwards above and beyond that included in our valuation at the end of 2018.
Movements in Kestrel valuation £m
m
£
130
120
110
100
90
80
(0.7)
(1.1)
28.7
109.8
104.3
(19.6)
(1.4)
(0.5)
January 1
Depletion
Yield
Product mix
Coal price
Deductions
Translation
December 31
2017
116.9
(20.9)
2.5
(0.6)
9.4
0.1
(3.2)
104.2
The Kestrel royalty continues to represent a significant portion of the Group’s total assets. However, to look at this based on balance sheet
asset value would be painting a slightly misleading picture, as our two most recent royalties (Narrabri and Maracás) are carried on the balance
sheet at the lower of amortised cost or value i.e. they are not adjusted upwards for increased production or pricing assumptions, which is the
case with Kestrel. As such, we feel that the balance sheet net asset number portrays an overly conservative estimate of asset value, certainly
when comparing this to our share price. In the case of Narrabri, the much higher coal pricing environment along with the prospect of
significant volume growth when mining gets through the localised fault results in a much higher value in use than is recognised on the
balance sheet. The same is the case with Maracás, especially given the performance of vanadium prices over the past 18 months. It is our view
that the true net asset value is much higher than the number which the balance sheet derives.
STRATEGIC REPORTAPG_AR18_26.03.19_MIDDLE_AW_PROOF 6Anglo Pacific Group PLC 2018 Annual Report & Accounts 53
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CASH FLOW AND BORROWINGS
Free cash flow generated during the year was £40.2m compared to £42.3m in 2017 and is in line with 2017 when stripping out the £1.8m
received from the McClean Lake financing arrangement relating to H2 2016.
2018 cash flow sources and usage £m
1.4
1.7
(5.1)
(1.3)
0.2
(4.5)
60
50
40
m
£
30
47.7
20
10
0
8.1
(38.4)
8.3
(12.9)
January
1
Royalty related
receipts
Non-core
sales
Royalty
instrument dispoal
Admin
Finance
Tax
FX &
Other
Acquisitions Borrowings
Dividends
5.2
December
31
2017
5.3
44.4
2.4
0
(4.2)
(1)
(0.7)
0.6
(16.7)
(6.1)
(15.9)
8.1
Free cash flow includes the disposal of non-core assets, which for 2018 totalled £3.1m. This comprised the disposal of the Group’s Indo Mines
debenture in Q1 2018 for £1.7m, which had been fully impaired previously. The Group also realised £1.4m from its equity portfolio on a
selective basis in H1 2018.
The strong free cash flow generated in 2018 provided the Group with some £48.3m of liquidity before needing to draw down on borrowings.
This cash was allocated to investments and dividends in a ratio of 3:1. Significantly, the £38.4m of acquisitions during the year were financed
from the Group’s balance sheet and did not require an associated equity raise. Although this, when combined with the £12.9m of dividends,
resulted in the Group swinging from a cash position of £8.1m at the beginning of the year to a net debt position of £3.1m at the end of 2018,
the cash received thus far in 2019 has now brought the Group back to a net cash position.
We took the opportunity to better reflect the Group’s true debt capacity during 2018 and doubled our borrowing facility from US$30m to
US$60m during Q3 2018. This new facility also has a US$30m accordion feature which can be provided by the banks when required to finance
future transactions. The facility also has an option to extend the term by 12 months during its first 18 months, a feature which we will keep
under review as acquisition financing dictates.
With the Group returning to a net cash position, and a well-covered dividend, we have considerable liquidity of ~£78m (~US$100m)
available to us to finance growth opportunities without needing to rely on equity markets. This is a very important landmark for Anglo Pacific
as it not only allows us to be more credible in royalty negotiations, but it also enables us to act more quickly and opportunistically should
circumstances demand.
APG_AR18_26.03.19_MIDDLE_AW_PROOF 6Anglo Pacific Group PLC 2018 Annual Report & Accounts
54
FINANCIAL REVIEW
continued
CURRENCY AND BREXIT
Our results in 2018 were impacted by a stronger pound against most dollar currencies. The average exchange rate against both the AUD
and USD weakened by 6% and 4% respectively. In line with the Group’s currency policy, we successfully hedged a portion of our expected
AUD denominated revenue during 2018 and have put in place further hedges for 2019.
The currency markets continue to be volatile. Although our commodities are priced in US dollars, our income is ultimately received in
Australian dollars, and the ratchet rate on Kestrel is based on the Australian dollar received from coal which is priced in US dollars.
As such, we have been hedging our exposure to the Australian dollar with a view to covering our pound cost base and dividend. There is no
doubt that the outlook for the pound in 2019 will be determined by several factors, but all currencies will be impacted by the prospects of
economic stagnation in China should its economy begin to feel the burden of its ever-increasing debt pile. The impact of the US trade wars,
particularly directed towards China could further compound this, and the US bond markets are suggesting its economy is destined for
recession towards the end of 2019.
The Australian dollar, whose prospects are largely aligned with Chinese GDP growth, has weakened noticeably of late, and it appears that
previously predicted interest rate rises will now turn out to be cuts given the stalling of its economy and property market in particular. And, all
of this volatility before any mention of the impact of Brexit.
We took the view at the beginning of 2019 that the Australian dollar might remain under pressure during the forthcoming year and, regardless
of the impact of Brexit on the GBP:USD rate, the GBP:AUD could move independently of Brexit. We have hedged accordingly and will continue
to keep a close eye on currency markets to ensure that our income for 2019, which we now expect could show a significant uplift as a result of
recent revisions to Kestrel volumes, is protected as much as possible.
OUTLOOK
We enter 2019 in a very strong financial position. We have returned to a net cash position after financing £38.4m of acquisitions from our
balance sheet in 2018. Our refinanced facility has provided us with up to US$90m of borrowing availability. With a well-covered dividend, we
also expect to generate strong levels of free cash flow to add to our pool of liquidity as we go through 2019. We have in place a very supportive
banking syndicate who have continued to support us through 2018 and we look forward to working closely with them going forward as we
look to execute on our growth ambitions.
The information on pages 8 to 54 represents the Group's Strategic Report and has been approved by the Board.
K. Flynn
Chief Financial Officer & Company Secretary
26 March 2019
STRATEGIC REPORTAPG_AR18_26.03.19_MIDDLE_AW_PROOF 6Anglo Pacific Group PLC 2018 Annual Report & Accounts CORPORATE GOVERNANCE REPORT
OUR APPROACH TOWARDS CORPOR ATE GOVERNANCE
As a standard listed company on the London Stock Exchange, the
Company is required to comply with, at a minimum, the regulatory
requirements imposed by the EU that apply to all securities admitted
to trading on EU regulated markets. Accordingly, the Company is
subject to the relevant Listing Rules, the Disclosure and
Transparency Rules of the UK Corporate Governance Code and the
Prospectus Rules. However, it is not required by law to comply with
the super-equivalent provisions of the Listing Rules which apply to
companies with a premium listing.
The Company is, however, complying on a voluntary basis with
related party requirements that are substantially equivalent to those
set out in Chapter 11 of the Listing Rules.
The Board remains committed to high standards of corporate
governance and considers all Non-Executive Directors to be
independent.
55
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BOARD AND COMMIT TEE STRUCTURE
The Board is collectively responsible for approving the Group’s
long-term objectives and strategy and for reviewing performance
against them. The Board is also responsible for the general oversight
of the Group’s operations and management.
The Board was chaired by Patrick Meier, as Non-Executive Chairman,
responsible for the leadership and effectiveness of the Board, during
2018. The time commitment expected of the Non-Executive
Chairman is around six days per month. Mr. Meier’s other
commitments are shown on page 57, none of which is considered to
be significant.
The day-to-day management of the Group is delegated to the Chief
Executive Officer (‘CEO’), save for certain matters reserved for
consideration by the Board. The Chairman and CEO have distinct
roles which have been defined in writing and agreed by the Board.
The CEO is supported by the Chief Financial Officer & Company
Secretary, the Head of Investments and Head of Development who
meet as an Executive Committee. The Executive Committee remains
an informal Board Committee because it is not comprised of a
majority of Executive Directors.
Other responsibilities are devolved to the Nomination,
Remuneration and Audit Committees; their members are all
Non-Executive Directors and their work is described more fully
below. The terms of reference of each Committee, and the matters
reserved to the Board, are available on the Group’s website.
David Archer is Anglo Pacific’s Senior Independent Director (SID). The
role of the SID is to be available to shareholders to discuss any
concerns they may have about the running of Anglo Pacific where
the normal channels of communication are not appropriate. The SID
is not required to seek meetings with shareholders, however is
available to do so if required in order to understand shareholder
concerns and take them to the Board for discussion. The SID is also
required to lead discussions at meetings of Non-Executive Directors
without the Chairman present at least annually to appraise the
chairman’s performance and on such other occasions as are
deemed appropriate.
APG_AR18_26.03.19_MIDDLE_AW_PROOF 6Anglo Pacific Group PLC 2018 Annual Report & Accounts
56
THE BOARD
PATRICK MEIER
MIKE BLY TH
JULIAN TREGER
VANESSA DENNETT
DAVID ARCHER
ROBERT STAN
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CHAIRMAN
NON-EXECUTIVE DIRECTORS
N.P.H. MEIER
69, was appointed Non-Executive Director in April 2015 and
assumed the role of Non-Executive Chairman at the conclusion of
the 2017 AGM in May 2017. Mr. Meier has over 30 years of experience
in investment banking with specialist knowledge of the mining
sector. He has an MA in Natural Sciences from Cambridge University.
Mr. Meier headed up the investment banking activities for RBC
Capital Markets in Europe and Asia and drove a major expansion of
RBC’s European presence. Prior to this role, he headed up RBC’s
activities in the Metals and Mining sector in Europe, Africa and Asia
for many years, and continues to enjoy strong relationships within
the sector. Mr. Meier also served as a Director on the Board of RBC’s
main operating subsidiary in Europe. In addition to his role at Anglo
Pacific Mr. Meier acts as a Non-Executive Director of Firestone
Diamonds plc and as a Senior Adviser to Bacchus Capital Advisers, an
advisory boutique and in various other advisory roles from time to
time.
Committee Chair: Nomination Committee
CHIEF EXECUTIVE OFFICER
J. A . TREGER
56, joined the Group as Chief Executive Officer and Executive
Director on October 21, 2013. He has an MBA from Harvard Business
School and a BA from Harvard University. He began his career
working for Lord Rothschild as an in-house corporate financier,
managing a portfolio of public and private equity investments before
co-founding Active Value Advisors Ltd. to invest in undervalued,
predominantly UK-listed companies, where he advised on more than
US$900.0m of funds over a 12-year period. He currently serves as
Non-Executive Chairman of Audley Capital Advisors LLP, an
investment advisory firm, which he co-founded in 2005, which
specialises in managing value-orientated, special situations
investment strategies with a principal focus on the natural resources
sector. Mr. Treger holds external Non-Executive Directorships with
Mantos Copper S.A., EBT Digital Communications Retail Group and
Broadwell Capital for which he earned fees during the year. These
directorships do not affect Mr. Treger’s ability to perform his role as
CEO of the Company, as they form part of his 10% time commitment
outside Anglo Pacific.
SENIOR INDEPENDENT DIRECTOR
D.S. ARCHER
62, was appointed Non-Executive Director in October 2014. He is
also the Group’s Senior Independent Director. He has over 34 years’
international resources industry experience in the Americas, Asia,
Australia and the Middle East. He is the Chief Executive Officer
of AIM-listed Savannah Resources PLC, an energy metals group
focused on lithium in Portugal, high grade copper in Oman and
the world class Mutamba mineral sands joint venture with Rio Tinto
in Mozambique.
He was previously the Managing Director of ASX-listed company
Hillgrove Resources Limited, where he was responsible for growing
the company into a significant, dividend paying, mineral explorer and
copper producer with assets in Australia and Indonesia. Mr. Archer
was the founder and Deputy Chairman of Savage Resources Limited,
a coal, copper and zinc producer, and the founder and Executive
Chairman of PowerTel Limited. He is also a barrister (non-practising)
of the Supreme Court of New South Wales.
Committee member: Remuneration Committee, Nomination
Committee, Audit Committee
W.M. BLY TH
68, was appointed Non-Executive Director in March 2013 and
became Non-Executive Chairman on April 1, 2014 until stepping
down from this role at the conclusion of the 2017 AGM in May 2017.
He has a BSc from St Andrews University and is a Chartered
Accountant. He was, until his retirement in 2011, a partner for 30
years in RSM (previously Baker Tilly), specialising in providing audit
and related services to AIM and full list clients. During his career he
held a number of senior management positions with the firm,
including a period on its National Executive Committee. In addition
to his directorship of Anglo Pacific, Mr. Blyth is a board member of
Wheatley Housing Group; and director of Haldane Property
Company Ltd and Glasgow & Suburban Property Company Ltd.
Mr. Blyth also acts as trustee for a number of small charities.
Committee Chair: Audit Committee, Remuneration Committee
Committee member: Nomination Committee
V. A . DENNETT
54, was appointed Non-Executive Director in November 2018.
She has over twenty-eight years’ experience as an international lawyer,
most recently as Senior Legal Counsel at Anglo American plc where
she specialised in acquisitions, disposals and joint ventures in multiple
commodities and jurisdictions as well as leading teams of lawyers
based in the mining operations in various different jurisdictions. Prior to
that she was a Consultant in London at international law firm Hogan
Lovells (then Lovells) and a Partner in Johannesburg at Webber Wentzel,
a leading South African law firm with a long history of acting for mining
clients. Ms. Dennett has a Bachelor of Arts and a Bachelor of Laws from
the University of KwaZulu – Natal, South Africa (then University of
Natal) and a Master of Laws from the University of Witwatersrand,
South Africa. She is admitted as a solicitor in England and Wales
(non-practising) and as an attorney, notary and conveyancer (also
non-practising) in South Africa.
Committee member: Audit Committee, Remuneration Committee,
Nomination Committee
R.H. STAN
64, was appointed Non-Executive Director in February 2014. He has
a B.Comm from the University of Saskatchewan and has over
40 years experience in mining and resource development. Mr. Stan
has held several senior positions with Fording Coal Limited, Westar
Mining Ltd. and TECK Corporation before becoming a founding
shareholder and director of publicly quoted Grande Cache Coal
Corporation (“GCC”), an Alberta-based metallurgical coal mining
company. At GCC, he served as President, CEO and Director from
2001 to 2012 and in 2012 negotiated the sale of the company to an
Asian-backed strategic investor consortium (Winsway Coking Coal
and Marubeni Corp) for US$1.0bn. Mr. Stan served two terms as
Chairman of the Coal Association of Canada Board of Directors, was a
board member of the International Energy Agency’s Coal Industry
Advisory Board and represented the mining industry on the Alberta
Economic Development Agency. He currently serves on the board of
several private companies, including Quantex Resources Ltd,
Lighthouse Resources Inc., CanWhite Sands Corp. and Spruce Bluff
Resources Ltd, and formerly served on the board of publicly-listed
Whetstone Minerals Ltd.
Committee member: Audit Committee, Nomination Committee,
Remuneration Committee
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THE BOARD
continued
employees. This was hosted in an informal manner in order to
encourage participation. Following the success of this event, we
replicated it at the 2018 away day and will look to do this twice a year
going forward. Vanessa Dennett has been designated as the Director
responsible for employee engagement.
All of the Directors have access to the Company Secretary’s services
and advice. All of the Directors may also seek independent
professional advice in the performance of their duties, at the Group’s
expense.
Directors’ attendance at Board and Committee meetings which they
were eligible to attend during 2018 was as follows:
Total meetings held
Full Board
8
Audit Remuneration
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3
Nomination
3
Attendance:
D.S. Archer1
W.M. Blyth
V.A. Dennett2
N.P.H. Meier
R.C. Rhodes3
R.H. Stan
J.A. Treger
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1 D.S. Archer was appointed to the Audit Committee on 15 May 2018.
2 V.A. Dennett was appointed to the Board on 1 November 2018.
3 R.C. Rhodes resigned from the Board on 15 May 2018.
BOARD EVALUATION
Every year, the Board undertakes an evaluation of its own
performance and that of the Board Committees and individual
Directors (including the Chairman). Following a formal review in
2017, we carried out a self-evaluation for 2018, of key areas of the
Board’s work including:
• Board composition and availability of appropriate skills;
• roles and responsibilities; committees;
• strategy setting;
• performance monitoring;
• risk management and internal control.
Each of the Directors and the Company Secretary discussed their
views with the Chairman in one-to-one meetings. Overall, the review
concluded that the Board and its committees were performing well,
with no significant issues identified. The Board is seen to be well
balanced with a good mix of relevant skills and experience. During
the review reference was made to the external Board Effectiveness
review carried out in 2017 and, in particular, the recommendations
that were made. These have been implemented with an
improvement in Board papers, time allotted to key issues,
particularly strategy, and the frequency of meetings of the Non-
Executive Directors being noted.
Consideration was also given to future succession planning and the
need to anticipate any retirements, as well as to refreshing the Board
as appropriate as the business grows.
BOARD EVOLUTION
Following the decision by Rachel Rhodes to step down as a
Non-Executive Director at the conclusion of the 2018 AGM in order
to focus on her other professional commitments, the Board
undertook an extensive recruitment process to identify a suitable
replacement. The Nomination Committee engaged a professional
search firm to assist with the identification and shortlisting of
suitable candidates.
In November 2018, following the recommendation of the
Nomination Committee, the Board appointed Vanessa Dennett as
Non-Executive Director. Following Ms. Dennett’s appointment to the
Board, she also joined the Group’s Audit, Nomination and
Remuneration committees. Ms. Dennett’s experience is detailed on
page 57 and she is already making considerable contributions to the
deliberations of the Board.
As the company develops, the composition of the Board will
continue to be evaluated and refreshed when appropriate.
APPOINTMENT, DEVELOPMENT AND ASSESSMENT OF DIRECTORS
All Directors are subject to election by shareholders at the first
opportunity after their appointment. Under the terms of the
Company’s Articles of Association, all Directors are required to retire
and seek reappointment by shareholders at an AGM on the third
anniversary of their appointment. All current Non-Executive
Directors were appointed for an initial three-year term, renewable at
the Board’s discretion for up to two further three-year periods
thereafter, and the Board intends that all future Non-Executive
Director appointments will be on similar terms. Notwithstanding this,
it is the Board’s intention that all Directors, including the Non-
Executive Directors, shall be subject to re-election at each AGM.
Each Director is required to disclose to the Board their other
significant commitments prior to appointment and when there is
any significant change. The Board considers that all of the Directors
allocate sufficient time to the Company to discharge their
responsibilities effectively.
The Company’s Directors have a wide range of skills as well as
updating their knowledge and capabilities. The Chairman regularly
reviews the Directors’ training needs and, where appropriate, the
Group provides the resources to meet the Directors’ requirements.
At least biannually external subject matter experts are engaged to
update and advise the Board on governance and secretarial
changes.
The Board has in place a formal induction process for new Directors
on joining the Board, which is tailored to the needs of the individual.
FUNCTIONING OF THE BOARD
The Chairman, in conjunction with the Company Secretary, is
responsible for setting the Board’s agenda and for ensuring that the
Board receives accurate, timely and clear information. The agenda
includes regular reports from the executive management and from
the Board’s Committees on all matters relating to the running of the
Group. The Chairman is also responsible for ensuring that adequate
time is available for discussion of all agenda items and in particular
strategic issues.
The Group’s Company Secretary is responsible for advising the
Board, through the Chairman, on all governance matters. A large
area of focus in the current year was in relation to the changes to the
UK Corporate Governance Code and GDPR, and we arranged for a
presentation by an expert from a leading law firm. One area which we
identified as an area for improvement was in relation to employee
engagement. To this extent, the Board arranged for a session with all
members of staff to provide them with an update in relation to
business development and to hear the views and concerns of
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• The Chief Financial Officer is required to undertake an annual
assessment process, to identify and quantify the risks that face the
Group’s businesses and functions, and to assess the adequacy of
the prevention, monitoring and mitigation practices in place for
those risks. This process covers all material controls, including
financial, operational and compliance controls.
• The Board is responsible for reviewing the risk assessment and risk
management processes for completeness and accuracy.
• In addition to its work on the above, the Audit Committee also
receives reports about significant risks and associated control and
monitoring procedures. The Group’s internal controls and
procedures documentation are regular agenda items for the
Committee. The Committee also receives regular reports from the
external auditors.
• The Audit Committee reports regularly to the Board on these
matters, so as to enable the Directors to review the effectiveness
of the system of internal control. The Board also receives regular
reports or updates from its other Committees and directly from
management in addition to carefully considering the Group’s risk
register at regular intervals.
• The system accords with the Financial Reporting Council’s Internal
Control: Revised Guidance for Directors on the Combined Code.
There are no significant issues disclosed in the report and financial
statements for the year ended 31 December 2018 and up to the
date of approval of the report and financial statements that have
required the Board to deal with any related material internal control
issues.
The Directors confirm that the Board has reviewed the effectiveness
of the system of internal control during the period and concluded
that the controls and procedures are adequate. The Board will
continue to review the adequacy of the Company’s internal controls
and will test the controls and procedures again during 2019.
REL ATIONS WITH SHAREHOLDERS
The Group is the only major natural resources royalty company listed
on the LSE and recognises the importance of developing a fuller
understanding of its business model and risks amongst investors
and an effective two-way communication with fund managers,
institutional investors and analysts. Management undertake regular
meetings with shareholders following results or investment
announcements. The Chairman and SID also meet with major
shareholders, a range of fund managers and institutions on a regular
basis.
There are over 2,000 private investors in the Group. The Board was
pleased by the attendance at the 2018 AGM and the active
engagement of investors to further their understanding of the
current business activity.
The Company has three joint brokers, BMO Capital Markets,
Berenberg and Peel Hunt, and the Board remains satisfied that the
UK, Europe and North America, which are the jurisdictions likely to
make up most of our shareholder base, are well covered by brokers
with significant local expertise.
At the same time, the Board continues to receive regular investor
relations reports, including commentary on the perception of the
Company, views expressed by the investment community, media
reports, share price performance and analysis, so as to ensure that
all Directors are made aware of the major shareholders’ issues and
concerns.
RISK MANAGEMENT AND INTERNAL CONTROL
The Board retains overall responsibility for the Group’s system of
internal control and risk management and determines the nature
and extent of the significant risks it is willing to take in achieving its
strategic objectives. As discussed above, the Board has recognised
the importance of increased focus on risk and risk management and
has agreed to extend the remit of the Audit Committee to monitor
the effectiveness of the Company’s risk management processes on
behalf of the Board.
Following the extensive update to the Group’s approach to and
documentation of risk in 2017, the Board, supported by executive
management continued to review and enhance the monitoring of
the Group’s principal risks throughout 2018. The Group’s principal
risks are discussed in detail on pages 22 to 29.
A statement of Directors’ responsibilities in respect of the financial
statements is set out on page 80.
The Group’s system of internal control is designed to provide the
Directors with reasonable, but not absolute, assurance that the
Group will not be hindered in achieving its business objectives, or in
the orderly and legitimate conduct of its business, by circumstances
that may reasonably be foreseen. However, no system of internal
control can eliminate the possibility of poor judgement in decision-
making, human error, fraud or other unlawful behaviour,
management overriding controls, or the occurrence of
unforeseeable circumstances and the resulting potential for material
misstatement or loss.
The key elements of the control system in operation are:
• The Board meets regularly with a formal schedule of matters
reserved to it for decision and has put in place an organisational
structure with clear lines of responsibility and appropriate
delegation of authority.
• There are established procedures for planning and approving
investments and information systems for monitoring the Group’s
financial performance against budgets and forecasts.
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MAIN ACTIVITIES COVERED DURING 2018
The Nomination Committee was actively involved during 2018 in
reviewing the structure, size and composition of the Board, and in
particular the recruitment of Ms. Dennett as a Non-Executive
Director following the resignation of Ms. Rhodes. It concluded that
no other changes were required during the year.
The Committee has reviewed the Company’s Succession Planning
Policy for Executive Directors and senior staff members and the
policy to govern any future changes to executive management.
N.P.H. Meier
Chairman of the Nomination Committee
26 March 2019
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NOMINATION COMMITTEE
COMPOSITION
Compliant with the Code:
N.P.H. Meier – Chairman
W.M. Blyth
D.S. Archer
V.A. Dennett – appointed 1 November 2018
R.C. Rhodes – resigned 15 May 2018
R.H. Stan
ROLE AND RESPONSIBILITIES
The primary responsibilities of the Nomination Committee are to:
• Set guidelines (with the approval of the Board) for the types of
skills, experience and diversity being sought when making a
search for new directors. With the assistance of external
consultants, identifying and reviewing in detail each potential
candidate available in the market and agreeing a ‘long list’ of
candidates for each directorship. Following further discussions
and research, deciding upon a shortlist of candidates for interview.
Interview of shortlisted candidates by the Committee members
who then convene to discuss their impressions and conclusions,
culminating in a recommendation to the Board.
• Make recommendations as to the composition of the Board and its
Committees and the balance between Executive Directors and
Non-Executive Directors, with the aim of cultivating a board with
the appropriate mix of skills, experience, independence and
knowledge of the Company.
• Ensure that the succession plans for Directors and senior
management are regularly reviewed for subsequent debate with
the Non-Executive Directors and Chief Executive Officer.
The Committee’s terms of reference can be found on the Group’s
website.
DIVERSIT Y POLICY
To increase diversity, in particular the representation of women and
ethnicity on the Board.
The Board recognises the benefits of diversity and that its current
composition is still deficient in several respects. The decision by
Rachel Rhodes to step down as a Non-Executive Director was a step
backwards in addressing this, but the appointment of Vanessa
Dennett redressed the imbalance. The opportunities for developing
and appointing women to senior management roles and Executive
Directorships will be kept under review.
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MAIN ACTIVITIES COVERED DURING 2018
In 2018 the Committee’s activities focused on:
• reviewing asset carrying values and other material accounting
matters;
• reviewing the accounting classification and treatment of
completed acquisitions and potential opportunities;
• reviewing the impact of the first-time application of new standards,
specifically IFRS 9 and IFRS 15;
• reviewing the change to the Group’s definition and presentation of
revenue;
• considering the impact of new but not yet effective standards,
specifically IFRIC 23, on the Group’s financial statements;
• monitoring legal and tax exposures and reviewing associated
accounting provisions; and
• considering the requirement for the Annual Report and Accounts,
taken as a whole, to be fair, balanced and understandable.
SIGNIFICANT ISSUES REL ATING TO THE FINANCIAL STATEMENTS
The significant issues considered by the Committee in relation to the
financial statements are set out in the table below, together with a
summary of how the issue was addressed by the Committee. In
addition, the Committee and the external auditors have discussed
the significant issues addressed by the Committee during the year
and the areas of particular audit focus, as described in the
Independent Auditor’s Report on pages 81 to 86.
AUDIT COMMITTEE
COMPOSITION
Compliant with the Code:
W.M. Blyth – Chairman from 16 February 2018
D.S. Archer – appointed 15 May 2018
V. Dennett – appointed 1 November 2018
R.C. Rhodes – Chairman until 16 February 2018, resigned 15 May
2018
R.H. Stan
The Committee members have a wide range of financial and
commercial expertise, which the Board considers appropriate to fulfil
the Committee’s duties. Biographies of the Committee members are
set out on page 57.
ROLE AND RESPONSIBILITIES
The objective of the Audit Committee is to assist the Board in
monitoring decisions and processes designed to ensure the integrity
of financial reporting, to establish sound systems of internal control
and to facilitate robust risk management processes.
The Committee’s terms of reference set out its main responsibilities,
and are available on the Group’s website. The Committee is
responsible for:
• monitoring the integrity of the Company’s annual and interim
financial statements, the accompanying reports to the
shareholders and corporate governance statements;
• making recommendations to the Board concerning the adoption
of the annual and interim financial statements;
• reviewing and challenging the consistency of, and any changes to,
accounting policies, methods and standards;
• overseeing the Group’s relations with the external auditors,
including the assessment of their independence and their
effectiveness;
• making recommendations to the Board on the appointment,
retention and removal of the external auditors and the tendering
of external audit services;
• advising the Board on the external auditor’s remuneration for both
audit and any non-audit work;
• reviewing and monitoring the reports from management on the
principal risks of the Group outlined on pages 22 to 29 and the
management of those risks;
• monitoring and reviewing the adequacy and effectiveness of the
Company’s internal financial controls;
• considering the need for and managing the effectiveness of the
Company’s approach to internal audit; and
• reviewing and monitoring the environmental and social impact of
the Company’s activities, the Company’s whistle-blowing
procedure and the Company’s systems and controls for the
prevention of bribery.
The Committee’s terms of reference can be found on the Group’s
website.
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AUDIT COMMITTEE
Significant issues considered by the Committee in relation to the financial statements
How the issue was addressed by the Committee
Review of carrying values of royalties held at amortised cost and
resulting impairment charges
Review of the carrying value of royalties held at fair value
Review of accounting classification and treatment of completed
acquisitions
Review of first-time application of new accounting standards (IFRS 9
and IFRS 15) together with the revision of the definition and
presentation of revenue
Group tax exposures
How the issue was addressed by the Committee
The Committee reviewed and challenged management’s key
assumptions including production profiles, forecast commodity prices
and discount rates used to estimate the recoverable amount of each
royalty and compared this to the respective carrying value. The
Committee reviewed the disclosures related to the Group’s
impairment policy outlined in note 3 and the impairment charge of
£2.2m described in note 18 for the year ended 31 December 2018.
The Committee concluded the impairment charges recognised during
the year ended 31 December 2018 were appropriate and have been
adequately disclosed.
The Committee reviewed and challenged management’s key
assumptions including production profiles, forecast commodity prices
and discount rates used to determine the carrying value of those
royalties held at fair value.
In addition, the Committee has reviewed the independent valuation
of the Group’s coal royalties, together with management’s review
and challenge of the key assumptions used by the independent valuer
to determine carrying value of the coal royalties.
The Committee reviewed the disclosures related to the revaluation
gain of £10.1m in relation to coal royalties, together with the
revaluation charge of £0.9m in relation to royalty financial instruments,
described in notes 16 and 17 respectively, for the year ended
31 December 2018.
The Committee concluded that the fair value has been calculated in
accordance with the Group’s accounting policy outlined in note 3, is
appropriate as at 31 December 2018 and is adequately disclosed.
The Committee reviewed and challenged management’s accounting
classification and treatment of the £38.4m investment in Labrador
Iron Ore Company.
The Committee concur with management’s classification of the
investment as a royalty financial instrument, in light of LIORC’s
revenue being generated from its exposure to one mining operation,
through the 7% gross revenue royalty it holds over the IOC and its
equity interest in IOC. The Committee further concur with
management’s decision to make an irrevocable election to designate
this investment as FVTOCI given the equity nature of the investment.
The Committee reviewed the disclosures related to the investment in
LIORC outlined in note 17, including the revaluation gain of £0.3m in
relation to this investment for the year ended 31 December 2018.
The Committee reviewed management’s first-time application of both
IFRS 9 and IFRS 15. In particular the Committee reviewed the
accounting treatment applied to the EVBC royalty which is now
classified as FVTPL and no longer has royalty income recognised in
the income statement but rather is disclosed with the fair value
movement on the face of the income statement as detailed in note 17.
The Committee concur with management’s conclusion that the
adoption of IFRS 15 does not result in a material change to the Group’s
revenue recognition. In addition, the Committee concur with
management’s decision to revise the definition of revenue and include
income received from royalty related financial assets in order to
provide greater consistency in the classification of the royalty income
arising in the course of the Group’s ordinary activities as detailed in
notes 2 and 6.
The Committee considered management’s assessment of any
potential or uncertain tax exposures. The Committee challenged
management, and its professional advisors, on tax positions taken
where there is no precedent or guidance in the public domain and
concluded that the disclosures contained in notes 4, 12 and 37 are
sufficient and that no additional provision is appropriate.
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• The system accords with the Financial Reporting Council’s Internal
Control: Revised Guidance for Directors on the Combined Code.
There are no significant issues disclosed in the report and financial
statements for the year ended 31 December 2018 and up to the
date of approval of the report and financial statements that have
required the Board to deal with any related material internal control
issues.
The Directors confirm that there have been no significant changes to
the system of internal controls, nor have there been any significant
breaches reported during the year. As a result the Board has
concluded that the controls and procedures are adequate.
The Committee also considers, on an annual basis, whether an
internal audit function is required. Its present view is that one is not
yet justified given the compact size of the Group and the Directors’
involvement with individual transactions.
EXTERNAL AUDIT
To safeguard the objectivity and independence of the external audit
process, it remains the Committee’s policy to review and approve
all fees related to non-audit services. The policy prohibits the
auditors from providing certain services such as accounting or
valuation services. Details of the auditors’ remuneration are
disclosed in note 7b.
The Committee will continue to review its activities in light of any
regulatory developments going forward.
The Committee has satisfied itself that the external auditors’
independence was not impaired.
The Committee held meetings with the external auditors without the
presence of management on three occasions and the Chairman of
the Committee held regular meetings with the lead audit
engagement partner during the year.
The Committee’s assessment of the external auditors’ performance
and independence underpins its recommendation to the Board to
propose to shareholders the re-appointment of Deloitte LLP as
auditors until the conclusion of the AGM in 2020. Resolutions to
authorise the Board to re-appoint and determine the remuneration
of Deloitte LLP will be proposed at the AGM on 13 May 2019.
W.M. Blyth
Chairman of the Audit Committee
26 March 2019
FAIR, BAL ANCED AND UNDERSTANDABLE
A key requirement of the Group’s Annual Report and Accounts is that
it be fair, balanced and understandable. The Audit Committee and
the Board are satisfied that the Annual Report and Accounts meet
this requirement as appropriate weight has been given to both
positive and negative developments in the year.
In justifying this statement, the Audit Committee has considered the
robust process which operates in creating the Annual Report and
Accounts, including:
• the thorough process of review, evaluation and verification by
senior management, which considered and drew on best practice
for the creation of the Annual Report and Accounts;
• a meeting of the Audit Committee held to review and consider
the draft Annual Report and Accounts in advance of the final
sign-off; and
• final sign-off provided by the Board.
INTERNAL CONTROL AND RISK MANAGEMENT
The Committee is responsible for the oversight of internal control
and risk management systems across the Group.
In carrying out its role, the Committee reviews the following:
• Regular updates of key internal control matters in respect of the
Group financial reporting processes, such as financial reporting
systems and controls.
• Procedures developed by management to identify and evaluate
key business, financial and operational risks, and the effectiveness
of the responses being implemented to mitigate the potential
impacts.
• Policies and procedures in place to detect, monitor and investigate
activity in respect of anti-fraud, bribery and corruption, such as the
Group whistle-blowing facilities.
The key elements of the control system in operation are:
• The Board meets regularly with a formal schedule of matters
reserved to it for decision and has put in place an organisational
structure with clear lines of responsibility and appropriate
delegation of authority.
• There are established procedures for planning and approving
investments and information systems for monitoring the Group’s
financial performance against budgets and forecasts.
• The Chief Financial Officer is required to undertake an annual
assessment process to identify and quantify the risks that face the
Group’s businesses and functions, and to assess the adequacy of
the prevention, monitoring and mitigation practices in place for
those risks. This process covers all material controls, including
financial, operational and compliance controls. The process
undertaken during the year is discussed in more detail within the
Principal Risks and Uncertainties section on pages 22 to 29. The
Audit Committee is responsible for reviewing the risk assessment
process for completeness and accuracy.
• In addition to its work on the above, the Audit Committee also
receives regular reports about significant risks and associated
control and monitoring procedures. The Group’s risk register and
internal controls and procedures documentation are regular
agenda items for the Committee. The Committee also receives
regular reports from the external auditors.
• The Audit Committee reports to the Board on these matters, so as
to enable the Directors to review the effectiveness of the system of
internal control. The Board also receives reports from its other
Committees and directly from management.
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REMUNERATION COMMITTEE
COMPOSITION
Compliant with the Code:
W.M. Blyth – Chairman
D.S. Archer
V.A. Dennett – appointed 1 November 2018
R.H. Stan
ROLE AND RESPONSIBILITIES
The primary responsibilities of the Remuneration Committee are to:
• establish and develop the Group’s general policy on executive and
senior management remuneration;
• determine specific remuneration packages for the Chairman, the
Chief Executive and the Chief Executive’s direct reports; and
• design the Company’s share incentive schemes.
The Remuneration Committee’s terms of reference can be found on
the Group’s website.
EXTERNAL ADVISORS
The Remuneration Committee has access to the advice of
independent remuneration consultants when required. During 2018,
the Remuneration Committee received advice from the Executive
Compensation practice of Aon plc. Aon was first appointed by the
Remuneration Committee on January 20, 2014. Aon is a signatory
to the Remuneration Consultants’ Code of Conduct and has no
other connection with the Company. The Remuneration Committee
is satisfied that the advice that it receives from Aon is objective
and independent. Total fees paid to Aon in respect of its services
were £37,656.
MAIN ACTIVITIES COVERED DURING 2018
The Remuneration Committee’s activities focused on:
• designing the CEO’s 2018 bonus framework and the associated
performance scorecard criteria;
• providing guidance to the CEO on salaries and bonuses to be
awarded to his direct reports and approving salaries and bonuses
paid
• reviewing the Company’s bonus arrangements and proposing the
introduction of a deferred bonus scheme; and
• Reviewing the remuneration policy ahead of its renewal at the
forthcoming AGM
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DIRECTORS’ REMUNERATION REPORT
Dear Shareholder,
Our remuneration report is, as last year, in two parts: a statement of
the Company’s policy on Directors’ remuneration, and an Annual
Remuneration Report which describes how the policy was
implemented during 2018. Under the Regulations which govern this
report, the Directors’ remuneration policy must be put to a binding
shareholder resolution every three years. As the policy was last put
to a shareholder vote in 2016, shareholders are being asked to
support the policy at the forthcoming AGM.
This report is set against a background of continued strength in the
Company’s performance following a record contribution from its
underlying royalty portfolio of £49.4m. The main focus for the
Committee this year was in relation to a review of the policy and the
setting of bonus matrices, Director fees and salary benchmarking.
After careful consideration the Committee has decided that the
remuneration policy remains appropriate for the Company and
continues to support the long investment horizons of the business,
providing alignment between shareholders and Executive Directors
and Senior Management. This is primarily through the Value Creation
Plan, with the performance period of the plan continuing to run until
June 2021. However, to further increase the alignment to
shareholders the Committee has decided to introduce an element
of deferral to the annual bonus plan. The Committee considered
the level of deferral which would be appropriate and has decided
that for any new external Executive Director, 40% of any bonus
earned in respect of 2019 and beyond will be deferred into shares
for two years. For the existing Executive Director, the Committee
has decided to operate a transitional arrangement as follows:
• 20% of any bonus earned in respect of 2019 will be deferred into
shares for two years
In terms of short-term incentives, the CEO and the CEO’s direct
senior reports have individually crafted bonus objectives which were
agreed for the 2018 financial year. The bonus award criteria relate to
a series of agreed corporate and personal performance targets
which are scored out of a total of 100 points. The criteria have been
amended from those of 2017 both in recognition of the changed
circumstances of the Company and to introduce more precision to
the link between the real ‘stretch-performance’ targets and
favourable outcomes for the Company. This score is then applied to
a maximum bonus calculated as a percentage of total salary as
outlined on page 72.
The CEO was awarded a bonus of £274,050 under the bonus criteria
matrix or 72.5% of the total potential award.
As noted above, the Value Creation Plan ('VCP') is a major plank in
our overall remuneration strategy and is a long-term incentive plan
which provides awards of shares (in the form of nil cost share
options) at the end of five years to the CEO and to senior executives
for increases in TSR at rates above 7% per annum. The VCP is
designed to support the Company’s growth strategy by providing
incentives aligned with shareholder interests. The changes made to
the VCP at the 2016 AGM extended the term of the plan such that
there are still two years remaining before management’s
performance will be assessed against TSR. The Committee
continues to believe this is an effective plan to incentivise its
participants and to encourage the retention of key employees by
giving them an opportunity to share in the growth of the Company
over the long term. Further details can be found in the
Remuneration Policy part of this report.
The main objectives for the Remuneration Committee in 2019 will
be to:
• 30% of any bonus earned in respect of 2020 will be deferred into
• Review and further tailor the senior executive bonus criteria for
shares for two years
the 2019 financial year
• 40% of any bonus earned in respect of 2021 (and beyond) will be
• Implement the proposed deferred bonus scheme; and
• Maintain an ongoing review of and determine the most
appropriate balance between, salary and bonus for the senior
executive.
More detail is provided in the body of the Remuneration Report and
the Remuneration Committee trusts you will endorse the resolution
to approve this report at the forthcoming AGM.
Yours sincerely
W.M Blyth
Chairman of the Remuneration Committee
26 March 2019
deferred into shares for two years
In setting the transitional arrangement, the Committee was mindful
that the bonus opportunity will remain unchanged and therefore the
introduction of deferral will reduce the cash payable to the CEO for
any given level of performance. In addition to the changes relating to
the bonus deferral, the Committee has agreed to align the pension
contributions of any future Executive Director with those of the
wider workforce. No further changes to the policy are proposed.
The salary of the Chief Executive Officer (‘CEO’) was benchmarked at
the end of 2018. Considering the responsibilities of the CEO and his
continued strong performance in the role, the Committee
concluded that a 4.8% increase to the basic salary of the CEO was
appropriate at this stage. The Committee will continue to conduct
this exercise on a regular basis in order to ensure that the Company
is paying market rates that attract and retain key personnel, with any
increases made by reference to individual performance, experience
and responsibilities.
The Company contributes to money purchase pension
arrangements on behalf of staff on a matched basis subject to an
overall cap. This cap will remain static for 2019.
The fees for the Chairman and the Non-Executive Directors were last
re-assessed at the beginning of 2017 and remained unchanged
throughout 2018. They were reviewed with effect from 1 January
2019 as detailed in section M.
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DIRECTORS’ REMUNERATION REPORT
The remuneration report is in two parts.
REMUNER ATION POLICY REPORT
A . Strategic overview and policy drivers
The foundations for our remuneration strategy were first
enumerated in the 2013 Annual Report and Accounts, and largely
continue to apply today. The strategy was, historically, based on the
following Company specific elements, which continue to form the
backdrop to the overall remuneration strategy:
• Long investment horizons; often there can be an interval of
between two and 10 years before a royalty comes on stream and
the royalty may continue to flow for 20 years or more. As business
development is now focused on royalty acquisitions, incentives
are heavily weighted towards longer-term performance.
• No comparable peer group, certainly in the UK, for the purposes of
benchmarking Director performance. As a result, our incentive
plans have been based on absolute performance rather than
performance relative to other companies. However, a relative
measure in relation to the VCP was added whereby the rewards for
the holders of 2016 awards (granted in 2017) will only be earned
should the Company’s share price performance match or exceed
the performance of the FTSE 350 All Mining Index.
• A relatively high ratio between its market capitalisation (£270m
at 31 December 2018) and the number of its employees (10, as at
31 December 2018, of whom one is an Executive Director). The
investment team is relatively small and much of the Company’s
royalty know-how rests with them. The risk to the business of
losing these and other key employees is correspondingly
significant, and we have traditionally regarded retention as an
important objective of our remuneration strategy.
B. How the views of shareholders and employees have been taken
into account
The Remuneration Committee has a policy of active engagement
with shareholders on remuneration matters. The Remuneration
Committee also considers shareholder feedback received in relation
to the AGM each year. Details of votes cast for and against the
resolution to approve last year’s remuneration report are provided in
the Annual Remuneration Report. This feedback, plus any additional
feedback received during any meetings from time to time, is then
considered as part of the Company’s annual review of remuneration
policy.
Non-Board employees are consulted individually on the executive
remuneration policy to the extent that it impacts upon the structure
and level of their own pay and bonuses.
The first part constitutes the ‘Remuneration Policy Report’ which will
subject to a binding vote at the forthcoming AGM. The policy
remains broadly unchanged from that approved by shareholders in
2016. The main change to the policy is the introduction of bonus
deferral, which is detailed in the policy table. The policy also provides
a revised overview of the VCP Principal Terms and Conditions, which
is consistent with last year’s report.
The report is structured in the following sections:
A.
B.
C.
D.
E.
F.
G.
H.
I.
J.
K.
L.
Strategic overview and policy drivers;
How the views of shareholders and employees have been taken
into account;
The remuneration policy for Executive Directors;
Annual bonus – Choice of performance measures and approach
to target-setting;
VCP – Principal Terms and Conditions and Reward Scenarios;
Reward scenarios;
Determinations to be made by and discretions available to the
Committee;
Differences in remuneration policy for Executive Directors
compared to other employees;
Approach towards appointment of new Executive Directors;
Service contracts and payments for loss of office;
Non-Executive Directors; and
Legacy arrangements
The second part, the Annual Remuneration Report for 2018, details
the remuneration paid to Directors during 2018 with a comparison
to the previous year. It will be put to an advisory shareholder vote at
the 2019 AGM. It is structured as follows:
A.
B.
C.
D.
E.
F.
G.
H.
I.
J.
K.
L.
Single figure total remuneration
Annual bonus for the year ended 31 December 2018
Vesting of long-term incentive awards
Directors’ shareholding and share interests
Total pension entitlements
Loss of office payments
Percentage increase in the remuneration of the CEO
Total shareholder return
Total remuneration for the CEO over time
Relative importance of spend on pay
External directorships
2018 salary review
M.
Fees for the Chairman and Non-Executive Directors
N.
Performance targets for the annual bonus and VCP awards
granted in 2014 and beyond
O.
Statement of shareholder voting
The information in sections A to G and I to M has been audited; the
remaining sections are unaudited.
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C. The remuneration policy for Executive Directors
The Directors’ remuneration policy sets out the Company’s remuneration policy for its Executive and Non-Executive Directors and will be put
to shareholder vote at the forthcoming AGM. The VCP, which was initially approved at the 2014 AGM and amended following shareholder
approval at the 2016 AGM, remains in place. The Committee’s specific policy for each element of remuneration is as follows:
Element, purpose
and link to strategy
SALARY
To recruit, retain and
reward executives of a
suitable calibre for the
roles and duties
required
PENSION AND
BENEFITS
To provide market
competitive benefits
ANNUAL BONUS
To encourage and
reward delivery of the
Company’s operational
objectives
Operation
Salaries are set with reference to individual performance, experience and
responsibilities to reflect the market rate for the individual and their role,
determined with reference to remuneration levels in companies of similar size
and complexity, taking into account pay levels within the Company in general.
Salaries are reviewed annually. Increases for Executive Directors will normally be
in line with those for the general workforce except where there is a change of
role or responsibilities or in other exceptional circumstances.
Maximum
There is no prescribed maximum annual
increase.
A Company contribution to a money purchase pension scheme, or a cash
allowance in lieu of pension at the request of the individual. In addition, the main
benefits currently provided are: death in service and private medical insurance
scheme which are provided to all staff.
Pension: 11% (2017: 11%) of salary –
pension contributions for any future
Executive Director will be aligned with the
wider workforce.
Death in service policy: five times salary.
The maximum value of benefit overall is not
predetermined and is based upon the cost
to the Company.
The maximum annual bonus opportunity
is 100% of salary.
For annual bonuses in respect of FY2019 and onwards, a portion of any bonus
earned will be deferred into awards over shares with awards normally vesting
after a two-year period.
Any new external Executive Director appointment will have at least 40% of any
bonus deferred.
For the existing Executive Director, transitional arrangements are in place. 20%
of bonus will be deferred in respect of any bonus awarded for FY2019, 30% in
respect of FY2020 and 40% in respect of FY2021.
At the discretion of the Committee, an Executive Director may also be entitled to
receive the value of dividends paid between grant and vesting on vested shares.
The payment may be in cash or shares and may assume dividend reinvestment.
Bonus outturns are determined based on the achievement of a combination of
corporate and personal performance targets. Both are expected to form a
substantial part of the scorecard.
Corporate performance targets are agreed by the Board at the beginning of the
year.
Personal performance targets are agreed with the Chairman and the
Committee.
The Committee will use a balanced scorecard approach to assess performance
against targets at the end of the year.
The targets are discussed more fully in section D overleaf.
LONG-TERM
INCENTIVES
The LTIP takes the form of a Value Creation Plan (VCP) with a performance
period to June 16, 2021.
To encourage and
reward delivery of the
Company’s strategic
objectives and provide
alignment with
shareholders through
the use of shares and
incentivise retention
of key personnel
Awards that were granted in 2014 were amended in 2016 with a performance
period of seven years to June 16, 2021 and are subject to the following
performance condition:
• Minimum growth in TSR of 7% per annum, with growth measured over the
seven-year period
2016 awards (granted in 2017) have a performance period to June 16, 2021 and
are subject to two TSR performance conditions:
• Minimum growth in TSR of 7% per annum, with growth measured from a
premium to the market capitalisation based on the net asset value per share
as at December 31, 2015.
• A relative measure of TSR which requires outperformance of a
comparator group
For participants with 2014 and 2016 awards, the 2016 awards will accrue at a
lower level once the 2014 awards reach the threshold growth of 7% per annum.
The detailed design is discussed in section E overleaf.
The maximum number of shares that can
be awarded under the option grants
equates to 7.5% of the Company’s issued
share capital as at the end of the
measurement period.
In 2014, the Committee allocated the pool
as follows:
CEO:
Non-Board senior managers:
56.0%
6.9%
In 2016, the Committee allocated the pool as
follows (and granted to participants in 2017):
CEO:
Non-Board senior managers:
Unallocated reserve:
20.0%
4.0%
13.1%
The potential rewards achievable by Executive Directors under the remuneration policy are illustrated at section F. The policy in respect of any
future Director appointments is discussed at section I below.
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DIRECTORS’ REMUNERATION REPORT
D. Annual bonus – Choice of performance measures and approach to
target setting
Annual bonuses are based on a scorecard of performance during the
calendar year. The scorecard sets challenging targets for triggering
bonus, and for rewarding outperformance on a sliding scale. The
scorecard will be split between corporate objectives and personal
objectives, both of which are expected to form a substantial part of
the scorecard.
The corporate objectives are agreed by the Board at the beginning
of each year, together with an assessment of the potential for
outperformance and the risk of shortfall. This covers such areas as
business performance, finance, relationships and reputation. This
constitutes the criteria for triggering a bonus and for assessing the
levels of challenge and outperformance that would warrant higher
levels of bonus. The CEO’s personal objectives for the year are
agreed at the beginning of the year by the Chairman of the Board in
conjunction with the Committee. The personal objectives focus on
the required contribution of the individual Executive Director to the
achievement of the Company’s objectives for the year, but also on
important but less measurable aspects such as leadership, building
personal and team relationships, and the extent to which they
personally have ‘gone the extra mile’.
The CEO’s performance against corporate and personal objectives is
assessed by the Chairman and the Committee at the beginning of
the following year, and bonus is awarded on the basis of the agreed
criteria.
E . LTIP – Principal terms and conditions and reward scenarios
The LTIP takes the form of a Value Creation Plan (VCP). The key
features of the VCP are as follows:
Key features:
• Eligibility – All employees are eligible to participate in the VCP,
although participation has been limited to the Executive Directors
together with other non-Board members of the senior
management team at the discretion of the Committee acting in
consultation with the CEO.
• Alignment with shareholders – No value accrues under the
VCP to its participants unless growth in the Company’s TSR over
the performance period is at least equal to 7% growth per annum.
• Reward pool cap – The maximum number of shares to be
awarded under the VCP option grants will not be capable of
exceeding such number equating to 7.5% of the Company’s issued
share capital as at the end of the measurement period. This
provides an effective cap of total growth in TSR approximately
above 300%.
Two sets of awards have been made under the VCP:
• 2014 awards, which were modified in 2016; and
• 2016 awards, which used the units from the unallocated pool and
were granted in 2017.
Both the modification of the 2014 awards and the new 2016 awards
were approved by shareholders at the 2016 AGM.
PERFORMANCE
PERIOD
ALLOCATION
OF THE POOL*
2014 Awards
2016 Awards
Seven-year performance period, ending on June 16, 2021.
Performance is measured from the net asset value as at
December 31, 2015 to June 16, 2021.
CEO:
56%
Non-Board Senior Managers: 6.9%
Total Allocated:
62.9%
CEO:
20%
Non-Board Senior Managers: 4.0%
Total Allocated:
24.0%
OPERATION
Subject to threshold growth of 7% per annum, participants
become entitled to receive nil or nominal cost options over
ordinary shares in the capital of the Company, subject to the cap.
The number of options is set by reference to a share of a pool
value equal to 10% of the growth in the Company’s TSR over
the seven-year period or, if less, 50% of the growth in the
Company’s TSR over the seven-year period in excess of the
threshold growth.
This will mean that, if the total growth in TSR over the
seven-year period is:
• below approximately 61%, no value accrues;
• between approximately 61% and 76%, the value that accrues
is equal to 50% of the growth in the Company’s TSR over the
seven-year period in excess of the threshold growth; and
• between 76% and the 300% effective cap, the value that
accrues is equal to 10% of the growth in the Company’s TSR
over a seven-year period.
This pool value is adjusted to reflect the percentage of the pool
allocated to these awards (62.9% of the total).
Subject to a threshold growth of 7% per annum over £161.3m,
participants become entitled to receive nil or nominal cost
options over ordinary shares in the capital of the Company,
subject to the cap. £161.3m was the net asset value at December
31, 2015 and a premium of approximately 61% to the market
capitalisation on the same date.
The number of options is set by reference to a share of a pool
value equal to 10% of the growth in the Company’s TSR over the
five-year period. There is no “catch-up” once the threshold
growth is achieved.
This means that if the total growth in TSR is:
• below approximately 40%, no value accrues;
• above approximately 40%, the value that accrues is equal to
10% of the growth in the Company’s TSR over 94.9p per share
over the performance period.
This pool value is adjusted to reflect the percentage of the pool
allocated to these awards (37.1% of the total, when including the
unallocated reserve).
In addition, a relative measure of TSR ensures it is at least equal
to the movement in the index of the FTSE 350 Mining Index. In
the event that the increase in TSR does not equal or exceed the
aforementioned index, no value will accrue to the new awards.
Pay-outs to the CEO and other participants who have 2014
awards will accrue at a lower level based on the outcome of the
awards currently allocated. Once the share price reaches the
threshold at which value accrues under the 2014 awards, value
accrues on only half of the units under the 2017 awards held by
the CEO and any non-Board members of the senior
management team who have an existing award.
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VESTING
Options to which participants become entitled at the end of the relevant performance period ending on June 16, 2021 will become
exercisable as follows:
• One-third immediately;
• One-third after 12 months;
• One-third after 24 months
MAXIMUM
VALUE
The maximum value that can accrue for the full award pool (which includes both the 2014 and the 2017 awards) is capped at 7.5%
of the Company’s issued share capital as at the end of the measurement period.
* Unallocated reserve: 13.1%
Illustrative returns
The following table illustrates the potential return for the CEO and other participants and shareholders for various levels of growth in TSR over
the performance period to June 16, 2021:
CEO – 2014 award
CEO – 2016 award
CEO TOTAL
Others – 2014 award
Others – 2016 award
Unallocated
OVERALL TOTAL
Shareholders
Benefit assuming total growth in TSR (from an illustrative starting market
capitalisation plus capital inflows of £262.1m) over a seven-year period of:
Allocation
of pool
56%
20%
76%
6.9%
4%
13.1%
100%
50%
£0.0m
£2.3m
76%*
100%
150%**
£10.6m
£3.2m
£13.9m
£3.8m
£20.8m
£5.0m
£2.3m
£13.8m
£17.7m
£25.8m
£0.0m
£0.5m
£1.5m
£1.3m
£0.7m
£2.3m
£1.7m
£0.9m
£3m
£2.6m
£1.3m
£4.4m
£4.27m
£18.07m
£23.24m
£34.14m
£119.73m
£170.91m
£224.76m
£337.86m
*Approximately 76% growth in TSR over the seven-year period results in a total pool equal to 9.3% of the growth. This reflects a pool equal to 10% for the original awards and a pool for the new
awards which reflects the reduction in the value that accrues for participants with original awards once the threshold growth of 7% per annum is met.
**At the effective cap of total growth in TSR of 300% over the period, the benefit to shareholders would be £677.20m and total participant awards would be £66.80m, of which the CEO would receive
£41.7m under the 2014 award and £8.7m under the 2016 award.
TSR performance must match or exceed the performance of the FTSE 350 All Mining Index for new awards to pay out. Awards in the table are calculated from the respective starting market
capitalisations (Illustrative starting market capitalisation of £248.0m for original awards and £161.3m for new awards (based on the net asset value as at December 31, 2015)).
F. Reward scenarios
The Company’s policy results in a significant portion of remuneration received by the CEO being dependent on Company performance. The
chart below illustrates how the total pay opportunity for the CEO varies under three different performance scenarios: below target (fixed pay
only), on-target, maximum and maximum with 50% share price growth. This chart is indicative as share price movement and dividend accrual
have been excluded. All assumptions made are noted below the chart.
Below target and on-target do not include any VCP vesting and simply allow for salary, benefits and pension for the below target level with a
bonus award included at the on-target level. The maximum level includes the fair value of the VCP assuming outperformance of the FTSE 350
Mining Index is achieved. To aid comparability with standard LTIP structures, the chart reflects the total pay opportunity if the VCP (both the
2014 awards and the 2016 awards) is included on an annualised basis.
Below Target
100%
£439,560
On-Target
69%
Maximum
42%
Maximum + 50%
share price growth
38%
31%
£637,560
38%
34%
13%
£1,052,995
18%
£1,161,712
£0
£200,000
£400,000
£600,000
£800,000
£1,000,000
£1,200,000
£1,400,000
Fixed Pay
Annual Bonus
LTIP
APG_AR18_26.03.19_MIDDLE_AW_PROOF 6Anglo Pacific Group PLC 2018 Annual Report & Accounts
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DIRECTORS’ REMUNERATION REPORT
Assumptions:
• Below Target = fixed pay only (salary + benefits + pension);
• On-target = fixed pay, 50% vesting of the annual bonus and 0% of
the VCP awards (i.e. the value that accrues for threshold
performance);
• Maximum (2014 and 2016 VCP awards included on an annualised
basis) = fixed pay and 100% vesting of the annual bonus and
annualised 2014 and 2016 VCP awards, granted in 2017. The
annualised value reflects a seven-year performance period of the
2014 award and five-year performance period of the 2016 award;
• Maximum plus 50% share price growth = fixed pay and 100%
vesting of the annual bonus and annualised 2014 and 2016 VCP
awards, granted in 2017 with 50% share price growth applied to
the awards.
• Salary levels (on which other elements of the package are
calculated) are based on those which apply from January 1, 2019.
Salary for the CEO is 90% of his full time equivalent salary; and
• The fair value of the VCP has been calculated using a stochastic
model as at the date of grant (or in the case of the 2014 awards, the
date of modification). The model projects the share price of Anglo
Pacific using the historical volatility of the Company (whilst past
behaviour is not always a good indicator of movements in the
future, it is difficult to determine a more accurate method). For
each simulation the resulting share price and thus pay-out is
determined. The fair value is the average of 100,000 possible
simulations.
G. Determinations to be made by and discretions available to the
Committee
The Committee operates the Group’s variable incentive plans
according to their respective rules and in accordance with HMRC
rules where relevant. To ensure the efficient administration of these
plans, the Committee will be required to make determinations and
apply certain operational discretions. These include the following:
• selecting the participants in the plans on an annual basis;
• determining the timing of grants of awards and/or payment;
• adjusting basic salaries for changes in time commitment (within
the full-time equivalent levels set out in this policy);
• determining the quantum of awards and/or payments (within the
limits set out in the policy table above);
• determining the extent of vesting based on the assessment of
performance;
• making the appropriate adjustments required in certain
circumstances (e.g. change of control, variation of share capital
including rights issues and corporate restructuring events, and
special dividends);
• determining ‘good leaver’ status for incentive plan purposes and
applying the appropriate treatment; and
• undertaking the annual review of weighting of performance
measures, and setting targets for the annual bonus plan from
year-to-year.
If an event occurs which results in the annual bonus plan or
long-term incentive performance conditions and/or targets being
deemed no longer appropriate (e.g. a material acquisition or
divestment), the Committee will have the ability to adjust
appropriately the measures and/or targets and alter weightings,
provided that the revised conditions or targets are not materially less
difficult to satisfy.
H. Differences in remuneration policy for Executive Directors
compared to other employees
The Committee aims to ensure, over time, a proper differential
between the level of the remuneration of Executive Directors and
other employees, but also appropriate differences in the structure of
remuneration to reflect different levels of responsibility and planning
horizons of employees across the Company.
The remuneration framework of non-Board employees was
reviewed during 2018 and will continue to be reviewed going
forward. The Committee notes the current difference between the
pension contribution of the CEO at 11% and for all other staff at 7%,
and has agreed to align pension contributions of future Executive
Directors with the wider workforce. There are currently three main
differences to the remuneration framework:
• the Committee will continue to reserve access to the VCP to the
most senior executives who have the greatest potential to
influence the Company’s long-term performance albeit, given the
short timetable to the end of the performance period, further
awards are less likely; and
•
• the Executive Directors will receive any annual bonus partly in
cash and partly in the form of deferred shares as described on
page 67 of the remuneration policy; but
in order to encourage employees without access (or with less
access) to the VCP to build up a shareholding in the Company,
consideration will be given to either including a share component
in any annual bonuses awarded to non-Board employees and
continuing to offer them options pursuant to the CSOP or the
USOP, or a combination of the two.
I. Approach to appointment of new Executive Directors
The remuneration package for a new Executive Director would be
set in accordance with the terms of the Company’s approved
remuneration policy in force at the time of appointment. Currently,
for an Executive Director, this would include a potential annual
bonus of no more than 100%. There is also provision within the VCP
arrangements for the Committee to dilute the pool by an additional
10% for new appointees.
The salary for a new Executive Director may be set below the normal
market rate, with phased increases following an initial probationary
period and over the first few years as the executive gains experience
in their new role. The Committee may offer new appointees
additional cash and/or share-based elements when it considers
these to be in the best interests of the Company and its
shareholders, including the use of awards made under 9.4.2 of the
Listing Rules. Such payments would take account of remuneration
relinquished when leaving the former employer and would reflect (as
far as practicable) the nature and time horizons attaching to that
remuneration and the impact of any performance conditions.
Shareholders will be informed of any such payments at the time of
appointment.
For an internal Executive Director appointment, any variable pay
element awarded in respect of the prior role will be allowed to pay
out according to its terms, adjusted as relevant to take into account
the appointment. In addition, any other ongoing remuneration
obligations existing prior to appointment may continue, provided
that they are put to shareholders for approval at the earliest
opportunity.
For external Executive Director appointments, the Committee may
agree that the Company will meet certain relocation expenses as
appropriate.
APG_AR18_26.03.19_MIDDLE_AW_PROOF 6Anglo Pacific Group PLC 2018 Annual Report & AccountsGOVERNANCE 71
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For external Executive Director appointments, the bonus deferral
level will be set in line with the terms of the policy (currently 40% of
any bonus earned). For internal Executive Director appointments
prior to 2021, the bonus deferral level will typically be transitioned to
full level, as described in the policy table above.
For the appointment of a new Chairman or Non-Executive Director,
the fee arrangement would be set in accordance with the approved
remuneration policy in force at that time.
J. Service contracts and payments for loss of office
The Committee, together with the Nomination Committee, reviews
the contractual terms for new Executive Directors to ensure that
these reflect best practice.
The current Executive Director’s service contract is for an indefinite
term and contains a notice period of six months, which is in line with
the Company’s continuing policy that service contracts should not
have a notice period of more than one year.
The service contracts contain provision for early termination. A
Director’s service contract may be terminated without notice and
without any further payment or compensation, except for sums
accrued up to the date of termination, on the occurrence of certain
events such as gross misconduct. If the employing company
terminates the employment of an Executive Director in other
circumstances, compensation is limited to salary due for any
unexpired notice period and any amount assessed by the
Committee as representing the value of other contractual benefits
(including pension) which would have been received during the
period. Payments in lieu of notice are not pensionable. The service
contract of Mr. Treger provides for a six-month notice period and an
additional termination payment equivalent to six months’ basic
salary. In the event of a change of control of the Company there is no
enhancement to contractual terms. The service contract of the
Executive Director is available for inspection at the Company’s
registered office.
In summary, the contractual provisions for Executive Directors are as follows:
Provision
Notice period
Detailed terms
One year or less.
Termination payment
Basic salary plus benefits (including pension), paid monthly and subject to mitigation.
In addition, any statutory entitlements or sums to settle or compromise claims in connection with the
termination would be paid as necessary.
Additional termination payment to bring the total payment to the equivalent of 12 months’ basic salary.
Remuneration entitlements
A pro-rata bonus may also become payable for the period of active service along with vesting for
outstanding share awards (in certain circumstances – see below).
Change of control
There are no enhanced terms in relation to a change of control.
In all cases performance targets would apply.
Any share-based entitlements granted to an Executive Director under the VCP will be determined based on the plan rules. The default
treatment is that any outstanding unvested awards lapse on cessation of employment. However, in certain prescribed circumstances, such as
death, disability, retirement or other circumstances at the discretion of the Committee (taking into account the individual’s performance and
the reasons for their departure) ‘good leaver’ status can be applied. For good leavers, the unvested awards remain subject to performance
conditions (measured over the original time period) and are reduced pro-rata in size to reflect the proportion of the performance period
actually served. The Committee has the discretion to disapply time pro-rating if it considers it appropriate to do so. In determining whether an
executive should be treated as a good leaver or not, the Committee will take into account the performance of the individual and the reasons
for their departure.
Share based awards granted to an Executive Director in respect of a deferred bonus will generally vest in full on normal timetable where
cessation of employment is due to death, ill-health, injury or disability (evidenced to the satisfaction of the Committee) or in circumstances
where the Committee determines that ‘good leaver’ status should be applied. The Committee retains discretion in exceptional circumstances
to allow awards to vest at the date of cessation.
Where an Executive Director ceases to be employed in circumstances where they are not a ‘good leaver’, share based awards granted in
respect of the deferred bonus will lapse whether vested or unvested.
K. Non-Executive Directors
The Company aims to attract and retain a high-calibre Non-Executive Chairman and Non-Executive Directors by offering a market
competitive fee level.
APG_AR18_26.03.19_MIDDLE_AW_PROOF 6Anglo Pacific Group PLC 2018 Annual Report & Accounts
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DIRECTORS’ REMUNERATION REPORT
The Committee’s specific policy is as follows:
Element, purpose and
link to strategy
Operation
BOARD FEES
Attract, retain and
fairly reward high
calibre individuals
Fees are currently paid in cash. Non-Executive Directors are not eligible to participate in the Company’s
annual performance related incentive schemes, share option schemes or pension scheme.
The Chairman is paid a single fee for all his responsibilities. The Non-Executive Directors are paid a
basic fee. Additional fees are paid to Chairmen and members of the main Board Committees and to
the SID to reflect their extra responsibilities. The Chairman and the Non-Executive Directors are
entitled to reimbursement of reasonable expenses. They may also receive limited travel or
accommodation-related benefits in connection with their role as a Director.
Fees are reviewed by the Board taking into account individual responsibilities, factors such as
Committee Chairmanships, time commitment, other pay increases being made to employees in the
Company, and fees payable for the equivalent role in comparable companies.
Normally fees are reviewed every two years and fee increases are generally effective from
1st January in the year of review.
The Board may adjust the fees for an individual Non-Executive Director during the intervening
period if there is a significant change in their responsibilities and/or time commitments.
Maximum
Current fee levels are set
out in the Annual Report
on Remuneration.
Overall fee limit will be
within the £600,000 limit
set out in the Company’s
Articles of Association.
Mr. Meier, Mr. Archer, Mr. Blyth, Ms. Dennett and Mr. Stan were appointed for an initial three-year term, renewable at the Board’s discretion for
up to two further three-year periods thereafter and the Board intends that all future Non-Executive Directors’ appointments will be on similar
terms. None of the letters of appointment have provisions that relate to a change of control of the Company.
The details of the Non-Executive Directors’ letters of appointment are as follows:
Non-Executive
N.P.H. Meier
D.S. Archer
W.M. Blyth
Date of appointment
Notice period
Non-Executive
30 April 2015
One month
V.A. Dennett
15 October 2014
One month
R.H. Stan
20 March 2013
One month
Date of appointment
1 November 2018
19 February 2014
Notice period
One month
One month
L . Legacy arrangements
In approving this Policy Report, authority is given to the Company to honour any commitments entered into with current or former Directors
(such as the payment of a pension or the unwinding of legacy share schemes) that have been disclosed to shareholders in previous
remuneration reports. Details of any payments to former Directors will be set out in the Annual Remuneration Report as they arise.
ANNUAL REMUNER ATION REPORT FOR 2018
This part of the report details the remuneration paid to Directors during 2018 with a comparison to the previous year. It will be put to an advisory
shareholder vote at the 2019 AGM. The information in sections A to G and I to M has been audited; the remaining sections are unaudited.
A . Single figure for total remuneration
EXECUTIVE DIRECTORS
J.A. Treger1
NON-EXECUTIVE DIRECTORS
N.P.H. Meier2
D.S. Archer
W.M. Blyth3
V.A. Dennett4
R.C. Rhodes5
R.H. Stan
Salary/fees
£’000
Benefits
£’000
Total bonus
£’000
Pension
£’000
Other
£’000
Total
remuneration
£’000
2018
2017
2018
2017
2018
2017
2018
2017
2018
2017
2018
2017
2018
2017
378
360
115
90
56
56
55
74
8
–
18
51
46
46
4
–
–
–
–
–
–
–
–
–
–
–
–
–
274
257
40
36
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
696
653
115
90
56
56
55
74
8
–
18
51
46
46
1 J.A. Treger agreed to receive 90% of his contractual salary for both 2017 and 2018 as outlined in section K below.
2 N.P.H. Meier became Non-Executive Chairman on May 10, 2017.
3 W.M. Blyth was Non-Executive Chairman until May 10, 2017.
4 V.A. Dennett was appointed to the Board on 1 November 2018.
5 R.C. Rhodes resigned from the Board on 15 May 2018.
APG_AR18_26.03.19_MIDDLE_AW_PROOF 6Anglo Pacific Group PLC 2018 Annual Report & AccountsGOVERNANCE 73
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B. Annual bonus for the year ending 31 December 2018
A set of individually crafted corporate and personal bonus criteria were agreed with the CEO for the 2018 financial year which took into
account the evolving corporate and financial priorities of the Group.
The Remuneration Committee was conscious of the need to ‘’sense check’’ the bonus arrangements for the CEO both for major negative
external influences and for truly outstanding performance. As a result, the bonus criteria and calculations were made subject to two major
caveats:
• That the Company had not suffered an exceptional negative event in the bonus year or in the lead up to the determination of the quantum of
the bonus; and
• The Remuneration Committee may look at overriding some or all of the bonus criteria should the CEO’s efforts in the 2018 financial year
result in a major transformational outcome that demonstrably benefits shareholders, is reflected in a material share price increase and
would not otherwise be adequately captured in the bonus matrix.
In addition, many of the bonus criteria are referenced to the achievement of hurdle performance that is either ‘’superior’ or ‘’exceptional’’. No
bonus is earned for ‘’poor’’ or merely ‘’adequate’’ performance.
The bonus matrix for the CEO for 2018 is detailed below.
2018 CEO Scorecard
Criteria
CORPORATE PERFORMANCE CRITERIA
A. GROWTH
Measures for assessment included:
• Acquisition of producing and/or near producing royalties (transformational and medium-sized)
• Acquisition of development royalties
• Previous acquisitions meeting targeted returns
• Royalty accretiveness to earnings
B. FINANCIAL PERFORMANCE
Measures for assessment included:
• Net profit after tax
• Capital raisings
• Price/net asset value
C. FINANCIAL CONTROL
Measures for assessment included:
• Risk and currency management plan and implementation
• Budgeting and financial reporting
PERSONAL PERFORMANCE CRITERIA
Maximum award
(%)
Actual outcome
(%)
40
24
25
20
10
7
D. RELATIONSHIPS, REPUTATION AND BUSINESS DEVELOPMENT
10
8.5
•
Implementation of IR plan
• Engagement with debt and equity providers
• Engagement with and development of royalty sourcing network
• Progress regarding resolution of long-standing business issues
E. LEADERSHIP
• Senior management development and succession
• Development of a collaborative, goal-oriented, ethical company with harmonious working relationships
• Personal contribution
TOTAL
15
13
100
72.5
APG_AR18_26.03.19_MIDDLE_AW_PROOF 6Anglo Pacific Group PLC 2018 Annual Report & Accounts
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DIRECTORS’ REMUNERATION REPORT
Growth: The main acquisition during the year was the investment in
Labrador Iron Ore Royalty Corporation in August. In addition, a
development royalty, Ca~nariaco, was acquired in June 2018. Growth
bonus in relation to these transactions was 14%. An element of the
growth bonus was in respect of the performance of 2018
acquisitions, which earned a score of 8%. A further part of the
growth bonus related to the performance of investments from 2015
to 2017 meeting modelled returns. The returns as modelled gave an
overall score of 2%. Total overall score of 24% out of a possible 40%.
Financial Performance: Adjusted earnings of £32.5m was ~1.5x the
budgeted amount of £22.3m and earned the maximum bonus of
10%. In September 2018, the Group successfully refinanced its
revolving credit facility, adding a third bank to the lending syndicate
and increasing the overall size of the facility from US$30m to
U$60m. The bonus earned in relation to this metric was 5%. As at
year end, the share price was £1.49 versus NAV per share of £1.22
and hence exceeded the hurdle of >1 and earned the full bonus
allocation of 5%. Total overall score of 20% out of a possible 25%.
Financial Control: Management of the Group’s exposure to exchange
rate risk has remained a key focus throughout 2018 with 78% of the
Group’s royalty related revenue denominated in AUD. The Group’s
currency hedging strategy developed in 2017, was fully implemented
and further refined throughout 2018. The aim of the hedging policy
is to ensure that the Group has sufficient pounds sterling to meet its
dividend and overhead obligations, and this was done effectively
throughout 2018. This area earned a bonus allocation of 1.5%. The
Group’s approach to budgeting and financial control continued with
a high degree of effectiveness and accuracy, particularly in relation
to overheads, which were below budget for 2018 and in line with
previous years, despite increased investment in business
development. In addition, the Group’s financial reporting continued
to be of a very high standard. These elements met the hurdle bonus
level of superior to earn a score of 4%. Good relationships have been
formed with the new owners of Kestrel, which have resulted in an
improvement in the information flow regarding mining operations.
A bonus allocation of 1.5% was earned in this regard. Total overall
score of 7.0% out of a possible 10%.
Relationships, Reputation and Business Development: A more
extensive investor relation plan was developed and implemented in
2018, resulting in active engagement with all of the Group’s top 20
shareholders. In addition, the Group was well represented at a
number of industry conferences where the CEO lead multiple panel
discussions. Ongoing concerns with climate change and wider ESG
issues led to the Group focussing on its own ESG policies and
approach to responsible investing, which in turn provided the Group
with the opportunity to engage with a number of ESG funds. To
further assist with existing and potential shareholder engagement,
the CEO appointed a Head of Investor Relations, whose remit will
include making further enhancements to the investor plan for 2019.
The Group continues to be focused on growth, with the
appointment of a Head of Development together with a designated
business development consultant in Canada to further expand the
Group’s access to royalty sourcing networks. Superior hurdles were
met in each of these three metrics. Total overall score of 8.5% out of
a possible 10%.
Professionalism: Under the guidance of the CEO, staff at all levels
have continued to develop throughout 2018, with a number of
internal promotions resulting in better support for and the expansion
of the existing management team. The addition to the Group’s small
management team has diversified the skill set available and better
placed it to develop and evaluate the pipeline of new prospects. The
CEO’s personal contribution was evidenced by his championing the
review of the Group’s approach to ESG issues. In particular he
instigated a comprehensive ESG risk assessment of the operators of
the Group’s producing assets. In addition, he added the ESG risk
assessment as a key component to management’s due diligence in
evaluating business opportunities. Superior hurdles were met in
relation to professionalism, resulting in an overall score of 13.0% out
of a possible 15%.
Bonus outturn
The overall bonus score was agreed at 72.5% under the bonus
scoring matrix for a total award of £274,050 (72.5% x £420,000 x
90%). The overall aggregate bonus of £274,050 bonus falls within the
100% bonus limit set out in the policy table.
The CEO’s direct senior reports, none of whom are Executive
Directors, have individually crafted bonus objectives which were
agreed for the 2018 financial year. The bonus award criteria relate to
a series of agreed corporate and personal performance criteria
which are scored out of a total of 100 points. This score is then
applied to a maximum bonus calculated as a percentage of total
salary. The percentages range up to 100% of salary depending on
the executive’s position and their level of individual participation in
the VCP.
Bonus criteria will be further tailored for the 2019 year to ensure that
these closely match key performance metrics and at the same time
provide real ‘stretch-performance’ targets.
C. Vesting of long-term incentive awards
No awards vested in 2018.
Long-term incentive awards made during the year
There were no awards granted to Executive Directors under the JSOP,
the CSOP or USOP in 2018.
The CEO’s allocation of units under the VCP out of the pool to
Executive Directors has remained constant at 76,000 units or 76% of
the total number of units (2017: 76,000 units). As at the date of this
report there are a total of 86,880 units issued out of a total pool of
100,000 units, including the awards for non-Board senior managers
(2017: 86,880 units).
Outstanding share awards
There are currently no awards to Executive Directors outstanding
under the JSOP, the CSOP or the USOP.
APG_AR18_26.03.19_MIDDLE_AW_PROOF 6Anglo Pacific Group PLC 2018 Annual Report & AccountsGOVERNANCE 75
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D. Directors’ shareholding and share interests
The Committee encourages the Executive Directors to build up a shareholding in the Company, so as to ensure the alignment of their interest
with those of shareholders, but there is no formal shareholding guideline. In addition, the VCP is designed to increase this alignment.
The Chairman and Non-Executive Directors are also encouraged to hold shares in the Company although the Chairman and independent
Non-Executive Directors are expected to ensure that the level of their individual shareholdings is not significant and thereby call into question
their continuing independence.
Details of the Directors’ interests in shares are shown in the table below.
EXECUTIVE DIRECTORS
J.A. Treger
NON-EXECUTIVE DIRECTORS
N.P.H. Meier
D.S. Archer
W.M. Blyth
V.A. Dennett
R.H. Stan
Beneficially
owned at
26 March
2019
Beneficially
owned at
31 December
2018
5,651,454
5,651,454
231,927
20,000
139,250
–
231,927
20,000
139,250
–
226,015
226,015
Not subject to
performance conditions
Subject to
performance conditions
LTIP
Deferred
bonus shares
LTIP
Deferred
bonus shares
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
None of the Directors holds their shares in hedging arrangements or as collateral for loans. Such an arrangement would require the express
permission of the Board.
E . Total pension entitlements
The Company makes contributions to employees’ pensions and has designated the National Employment Savings Trust (NEST) as its
stakeholder pension provider. The Committee is prepared to pay additional basic salary (or fees) in lieu of part or all of a Director’s pension
contribution.
F. Loss of office payments
There were no loss of office payments made to Directors in 2018 (2017: nil).
G. Percentage increase in the remuneration of the CEO
CEO £’000
– salary (full time equivalent basis)
– benefits
– bonus
Average per employee £’000
– salary
– benefits
– bonus
2018
420
40
274
108
7
43
2017
400
36
257
99
8
49
% change
5%
11%
7%
9%
(13%)
(12%)
The table above shows the movement in the salary, benefits and annual bonus for the CEO between the current and previous financial year
compared to that for the average UK employee. The Committee has chosen this comparator and it feels that it provides a more appropriate
reflection of the earnings of the average worker than the movement in the Group’s total wage bill, which is distorted by movements in the
number of employees. For the benefits and bonus per employee, this is based on those employees eligible to participate in such schemes.
APG_AR18_26.03.19_MIDDLE_AW_PROOF 6Anglo Pacific Group PLC 2018 Annual Report & Accounts
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DIRECTORS’ REMUNERATION REPORT
H. Total shareholder return
The performance of the Company’s ordinary shares compared
with the FTSE 350 Mining Index for the five-year period ended on
31 December 2018 is shown in the graph opposite. Both have been
re-based at the start of the period in order to provide a graphical
measure of comparative performance.
The Company has chosen the FTSE 350 Mining Index as a
comparator for historical reporting purposes as it believes it to be
the nearest relevant index appropriate to the Group.
The middle market price of an ordinary share on 31 December 2018
was 149.00p. During the year the share price ranged from a low of
125.00p to a high of 166.50p.
FTSE 350 Mining Index vs. Anglo Pacific Group 2008-2018
(Rebased to 100)
250
200
150
100
50
0
8
0
.
1
0
.
1
0
9
0
.
1
0
.
1
0
0
1
.
1
0
.
1
0
1
1
.
1
0
.
1
0
2
1
.
1
0
.
1
0
3
1
.
1
0
.
1
0
4
1
.
1
0
.
1
0
5
1
.
1
0
.
1
0
6
1
.
1
0
.
1
0
7
1
.
1
0
.
1
0
8
1
.
1
0
.
1
0
9
1
.
1
0
.
1
0
FTSE 350 Mining Index
Anglo Pacific Group
I. Total remuneration for the CEO over time
Total remuneration (£’000)
Bonus outturn (%)
Bonus (£’000)
LTIP vesting (%)
2009
2010
2010
2011
2012
2013
2013
2014
2015
2016
2017
2018
B.M. Wides
155
N/A4
76
–
197
N/A4
75
–
69
N/A4
38
–
253
37%
84
–
J. Theobald1
209
193
–
–
–
–
–
–
39
–
–
–
432
64%
160
–
374
–
–
–
563
47%
167
–
J.A. Treger2
692
72%
274
–
653
71%
257
–
1 J. Theobald was appointed CEO on 6 October 2010.
2 J.A. Treger was appointed CEO on 21 October 2013.
3 J. Theobald also received £63,333 as payment in lieu of notice, £95,000 termination payment (paid in January 2014) and £2,400 for legal advice.
4 For 2009 and 2010, this is not applicable as there were no caps in place.
The table above shows the total remuneration for the CEO during each of the financial years. The total remuneration figure includes the
annual bonus. No LTIP awards vested. The bonus outturn percentage is expressed as a percentage of the cap, where applicable, for the period
in question. As there were no caps on bonus in 2010, the actual bonus payable based on performance in those years has been included for
information in the table.
J. Relative importance of spend on pay
(£m)
Staff costs
Dividends
2018
3.87
12.89
2017
3.79
15.87
% (decrease)/
increase
2.1%
(19%)
K. External directorships
Mr. Treger holds an external non-executive directorship with Mantos Copper S.A. for which he earned fees during the year. This directorship
does not affect Mr. Treger’s ability to perform his role as CEO of the Company, as this directorship forms part of his 10%-time commitment
aside from Anglo Pacific (see “The Board” section of the Governance Report). As a result, Mr. Treger is paid 90% of his full time equivalent
salary of £420,000.
APG_AR18_26.03.19_MIDDLE_AW_PROOF 6Anglo Pacific Group PLC 2018 Annual Report & AccountsGOVERNANCE 77
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L . 2019 salary review
The Executive Director’s full time equivalent (‘FTE’) salary was reviewed in January 2019 as outlined in the Chairman’s letter to shareholders,
and the current salary (on a FTE basis) is as follows:
Current salaries for the Executive Director
Executive
J.A. Treger
FTE Salary as at
1 January 2019
FTE Salary as at
1 January 2018
440,000
420,000
Increase
4.8%
The 4.8% increase in the Executive Director’s salary, was below the increase in the salaries of the wider workforce.
M. Fees for the Chairman and Non-Executive Directors
As detailed in the Remuneration Policy, the Company’s approach to setting Non-Executive Directors’ remuneration is with reference to
market levels in similar companies, levels of responsibility and time commitments. A summary of current fees is as follows:
Chairman
Committee member
Base fee
INCREMENT
Senior Independent Director
Senior Independent Director (if also chairing a committee)
Committee Chairmanship
Committee Membership
2019
2018
% Increase
125,000
115,000
48,000
42,000
46,000
40,000
10,000
10,000
7,000
7,000
6,000
5,000
5,000
6,000
8.7%
4.3%
5%
–
40%
40%
–
The Chairman’s fee of £125,000 was set with effect from January 1, 2019 for a two-year period.
N. Performance targets for the annual bonus and LTIP awards to be granted in 2019 and beyond
The annual bonus scorecard approach will continue in 2019. The scorecard will set challenging targets for triggering bonus, and for rewarding
outperformance on a sliding scale. The scorecard will be a combination of corporate objectives and personal objectives. Corporate objectives
for 2019 will cover areas such as business performance, funding and finance, relationships and reputation. Due to the commercially sensitive
nature of the Group’s corporate objectives, further details of the 2019 scorecard will be provided in the 2019 Directors’ Remuneration Report.
No long-term incentive awards are due to be made in 2019. Details of the awards made in 2014 and 2017 under the VCP can be found in the
notes of the policy table on page 68.
O. Statement of shareholder voting
At last year’s AGM held on 15 May 2018, the Directors’ remuneration report was approved by shareholders on a show of hands. Details of the
valid proxy votes received for the resolution are detailed below:
Votes cast in favour (including proxy appointments that gave discretion to the Chairman)
Votes cast against
Total votes cast (excluding votes directed to be withheld)
Votes withheld
The Directors’ remuneration policy was last put to shareholders at the AGM held on 10 May 2016:
Votes cast in favour (including proxy appointments that gave discretion to the Chairman)
Votes cast against
Total votes cast (excluding votes directed to be withheld)
Votes withheld
Approval
This report was approved by the Board on 26 March 2019 and signed on its behalf by
W. M. Blyth
Chairman of the Remuneration Committee
Votes
Percentage
97,059,236
94,525
99.90%
0.10%
97,153,761
100.00%
17,880
Votes
Percentage
72,615,262
5,166,921
93.36%
6.64%
77,782,183
100.00%
119,824
APG_AR18_26.03.19_MIDDLE_AW_PROOF 6Anglo Pacific Group PLC 2018 Annual Report & Accounts
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DIRECTORS’ REPORT
The Directors present their report and audited consolidated financial
statements for the year ended 31 December 2018.
PRINCIPAL ACTIVITIES
The Group’s principal royalty activities are set out in the Strategic
Report on pages 8 to 54.
GOING CONCERN
The financial position of the Group and its cash flows are set out on
pages 89 and 92. The directors have considered the principal risks of
the company which are set out on pages 22 to 29, and considered key
sensitivities which could impact on the level of available borrowings.
As at 31 December 2018, the Group had cash and cash equivalents
of £5.2m as set out in note 24 and borrowings under its revolving
credit facility of £8.3m (U$10.6m) as set out in note 26. Subject to
continued covenant compliance, the Group has access to a further
£38.8m (U$49.4m) through its secured U$60.0m revolving credit
facility.
The Directors have considered the Group’s cash flow forecasts for
the period to the end of March 2020. The Board is satisfied that the
Group’s forecasts and projections, taking into account reasonably
possible changes in trading performance and other uncertainties,
together with the Group’s cash position and access to the undrawn
revolving credit facility, show that the Group will be able to operate
within the level of its current facilities for the foreseeable future. For
this reason, the Group continues to adopt the going concern basis in
preparing its financial statements.
RESULTS AND DIVIDENDS
The consolidated income statement is set out on page 87 of the
financial statements.
The Group reported a profit after tax of £28.8m (2017: £10.5m).
Total dividends for 2018 will amount to 8.00p per share (2017: 7.00p
per share), combining the recommended final dividend of 3.125p per
share for the year ended 31 December 2018 with the interim
dividends of 1.625p per share paid on 15 August 2018, 15 November
2018 and 14 February 2019. The final dividend for the year ended 31
December 2018, is subject to shareholder approval at the 2019 AGM.
The Board proposes to pay the final dividend on 30 May 2019 to
shareholders on the Company’s share register at the close of
business on 17 May 2019. The shares will be quoted ex-dividend on
the London and Toronto Stock Exchanges on 16 May 2019.
OUTLOOK
The outlook for and likely future developments of the Group are
described within the Chairman’s Statement on pages 6 and 7,
together with the Chief Executive Officer’s Statement on pages 8
and 11, and the Group’s Strategic Report on pages 8 to 54.
DIRECTORS
The names of the Directors in office on the date of approval of these
financial statements, together with their biographical details and
other information, are shown on pages 56 and 57.
All Directors will stand for election or re-election at the 2019 AGM.
A table of Directors’ attendance at Board and Committee meetings
during 2018 is on page 58.
DIRECTORS’ DISCLOSURES
With regard to the appointment and replacement of Directors, the
Company is governed by its Articles of Association, the Companies
Act 2006 and related legislation. At the next AGM, all of the
Company’s Directors will be offering themselves for election or
re-election.
The Directors may exercise all the powers of the Company subject to
applicable legislation and regulation and the Articles of Association
of the Company. The Company’s Articles of Association may be
amended by special resolution of the shareholders. At the 2018
AGM, held on 15 May 2018, the Directors were given the power to
issue new shares up to an aggregate nominal amount of £1,206,013.
This power will expire at the earlier of the conclusion of the 2019
AGM or 30 June 2019. Further, the Directors were given the power to
make market purchases of ordinary shares up to a maximum
number of 18,090,203. This power will expire at the earlier of the
conclusion of the 2019 AGM or 30 June 2019.
At the AGM held on 15 May 2018, the Directors were given the power
to allot equity shares or sell treasury shares for cash other than
pro-rata to existing shareholders. This power was limited to 5% of the
Company’s issued ordinary share capital (other than in connection
with a rights or other similar issue) and will expire at the earlier of the
conclusion of the 2019 AGM or 30 June 2019.
The Group maintains insurance for its Directors and officers against
certain liabilities in relation to the Group. The Group has entered into
qualifying third party indemnity arrangements for the benefit of all
its Directors in a form and scope which comply with the
requirements of the Companies Act 2006.
CAPITAL STRUCTURE
The structure of the Company’s ordinary share capital at 22 March
2019 was as follows:
Issued No.
Nominal value
per share
Total
% of total
capital
Ordinary shares
181,470,392
0.02
3,629,408
100%
CHANGE OF CONTROL
There are a number of agreements that terminate upon a change of
control of the Company such as certain commercial contracts and
the revolving credit facility. None of these are considered significant
in terms of the business as a whole. There is no change of control
provision in any of the Directors’ contracts.
RIGHTS AND OBLIGATIONS
Dividends
The £0.02 ordinary shares carry the right to dividends determined at
the discretion of the Board.
Voting rights
The £0.02 ordinary shares carry the right to one vote per share.
Restrictions on transfer of holdings
There are no specific restrictions on the size of a holding nor on the
transfer of the Company’s shares, which are both governed by the
general provisions of the Articles of Association of the Company and
prevailing legislation. There are no known agreements between
holders of the Company’s shares that may result in restrictions on
the transfer of shares or voting rights.
Special control rights
The Company’s ordinary shares are subject to transfer restrictions
and forced transfer provisions that are intended to prevent, among
other things, the assets of the Company from being deemed to be
‘plan assets’ under US Employment Retirement Income Security Act
of 1974 (ERISA). For more information refer to the important notices
section.
Employee share schemes
Details of employee share schemes are set out on page 68 below and
in note 30 to the financial statements.
APG_AR18_26.03.19_MIDDLE_AW_PROOF 6Anglo Pacific Group PLC 2018 Annual Report & AccountsGOVERNANCE 79
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Treasury
The Company holds 925,933 £0.02 ordinary shares in treasury for
the purposes of settling the Group’s share-based compensation
plans, as described in note 29.
SUBSTANTIAL SHAREHOLDINGS
The Company has been notified, aside from the interests of the
Directors, of the following interests of 3% or more in the share capital
of the Company at 22 March 2019.
Warrants
On 22 May 2014, the Company resolved to create 500,000 warrants,
to be issued pursuant to a warrant instrument dated 10 June 2014.
These warrants entitle the warrant holders to subscribe in cash for
ordinary shares at the subscription price of £2.50 per ordinary share
(subject to any adjustment events in accordance with the warrant
instrument). The rights to subscribe for ordinary shares conferred by
the warrants may only be exercised within five years from the date of
the grant of the warrants and in accordance with the warrant
instrument.
On 18 January 2017, the Company resolved to create 294,695
warrants, to be issued pursuant to a warrant instrument dated 10
February 2017, with Investec Bank PLC as part of the refinancing of
the Group’s revolving credit facility (refer to note 26). These warrants
entitle the warrant holders to subscribe in cash for ordinary shares at
the subscription price of £1.58 per ordinary share (subject to any
adjustment events in accordance with the warrant instrument). The
rights to subscribe for ordinary shares conferred by the warrants may
only be exercised within three years from the date of the grant of the
warrants and in accordance with the warrant instrument.
Allotment of ordinary shares
On 16 May 2018, the Company issued 37,954 new Ordinary Shares at
a price of 92.21p per share amounting to an aggregate nominal value
of £759 and aggregate consideration of £34,998 following the
exercise of options awarded to employees under the Company
Share Option Plan (‘CSOP’). Further details are set out in notes 29
and 30 to the financial statements.
On 10 October 2018, the Company issued 51,453 new Ordinary
Shares at a price of 77p per share amounting to an aggregate
nominal value of £1,029 and aggregate consideration of £39,619
following the exercise of options awarded to employees under the
CSOP. Further details are set out in notes 29 and 30 to the financial
statements.
On 11 June 2018, the Company issued 478,951 new Ordinary Shares
at a price of 156.6p per share amounting to an aggregate nominal
value of £9,579 and aggregate consideration of £750,037. This issue
price was fixed on 4 June 2018 and represented the 30-day VWAP.
There shares were the total consideration for the acquisition of the
Ca~nariaco copper royalty, further details of which are set out in
notes 18 and 29 to the financial statements.
On 6 February 2017, the Company issued 10,960,000 new Ordinary
Shares at a price of 125p per share amounting to an aggregate
nominal value of £219,200 and aggregate consideration of
£13,700,000 as part of a firm placing announced on 1 February 2017.
The issue price was fixed on 1 February 2017 and represented a
discount of approximately 5.1% to the closing middle market price
on the London Stock Exchange of 131.75p per share on 31 January
2017. The net proceeds were used to provide the majority of funding
for the Denison financing and streaming agreements, further details
of which are set out in note 22 to the financial statements.
As a result of the preceding issuance, the Company has issued
568,358 new Ordinary Shares other than as part of a pre-emptive
offer in the 12 months preceding the date of this Annual Report and
Accounts, representing approximately 0.3% of the Company’s share
capital as at the date of this Annual Report. The Company has issued
a further 49,019,681 new Ordinary Shares other than as part of a
pre-emptive offer in the three years preceding the date of this
Annual Report and Accounts, representing an aggregate of
approximately 27% of the Company’s share capital as at the date of
this Annual Report.
Schroder Investment Management
Ordinary Shares
of 2p each
18,050,437
Representing
9.95%
Canaccord Genuity Wealth Management
17,934,211
Aberforth Partners
AXA Investment Manager
P.N.R. Cooke
Miton Asset Management
BlackRock Investment Management
Charles Stanley
J.A. Treger
16,620,444
13,207,775
8,649,120
7,625,799
5,940,575
5,876,342
5,651,454
See page 75 for a list of Directors’ interests in shares.
9.89%
9.16%
7.28%
4.77%
4.20%
3.27%
3.24%
3.12%
STATEMENT AS TO DISCLOSURE OF INFORMATION TO AUDITORS
The Directors who were in office on the date of approval of these
financial statements have confirmed that, as far as they are aware,
there is no relevant audit information of which the auditors are
unaware. Each of the Directors has confirmed that they have taken
all the steps that they ought to have taken as Directors in order to
make themselves aware of any relevant audit information and to
establish that it has been communicated to the auditors.
OTHER STATUTORY AND REGUL ATORY INFORMATION
Information in relation to the Group’s payment policy can be
found in note 28 and a statement on Going Concern is provided
in note 3.1.1.
AUDITORS
Deloitte LLP have expressed willingness to continue in office. In
accordance with section 489(4) of the Companies Act 2006 a
resolution to appoint auditors will be proposed at the 2019 AGM.
DESIGNATED FOREIGN ISSUER STATUS
The Company continues to be listed on the TSX and to be a
‘reporting issuer’ in the Province of Ontario, Canada. The Company
also continues to be a ‘designated foreign issuer’, as defined in
National Instrument 71-102 – Continuous Disclosure and Other
Exemptions Relating to Foreign Issuers of the Canadian Securities
Administrators. As such, the Company is not subject to the same
ongoing reporting requirements as most other reporting issuers in
Canada. Generally, the Company will be in compliance with Canadian
ongoing reporting requirements if it complies with the UK Financial
Conduct Authority in its capacity as the competent authority for the
purposes of Part VI of the Financial Services and Markets Act 2000
(United Kingdom), as amended from time to time, and the applicable
laws of England and Wales (the ‘UK Rules’) and files on its SEDAR
profile at www.sedar.com any documents required to be filed or
furnished pursuant to the UK Rules.
By Order of the Board
K. Flynn
Company Secretary
26 March 2019
Registered office
1 Savile Row
London
W1S 3JR
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STATEMENT OF DIRECTORS’ RESPONSIBILITIES
The Directors are responsible for preparing the Annual Report and
Accounts, the Directors’ Remuneration Report and the financial
statements in accordance with applicable law and regulations.
DIRECTORS’ STATEMENT PURSUANT TO THE DISCLOSURE AND
TR ANSPARENCY RULES
We confirm that to the best of our knowledge:
• the financial statements, prepared in accordance with IFRSs as
adopted by the EU, give a true and fair view of the assets, liabilities,
financial position and profit or loss of the Company and the
undertakings included in the consolidation taken as a whole;
• the Strategic Report includes a fair review of the development and
performance of the business and the position of the Company and
the undertakings included in the consolidation taken as a whole,
together with a description of the principal risks and uncertainties
that they face; and
• the Annual Report and financial statements, taken as a whole, are
fair, balanced and understandable and provide the information
necessary for shareholders to assess the Company’s performance,
business model and strategy.
The Directors are responsible for the maintenance and integrity of
the corporate and financial information included on the Group’s
website, www.anglopacificgroup.com. Legislation in the United
Kingdom governing the preparation and dissemination of financial
statements may differ from legislation in other jurisdictions.
The Directors consider that the Annual Report and Accounts, taken
as a whole, is fair, balanced and understandable and provides the
information necessary for shareholders to assess the Company’s
performance, business model and strategy.
By Order of the Board
N.P.H. Meier
Chairman
26 March 2019
Company law requires the Directors to prepare financial statements
for each financial year. Under that law the Directors have elected to
prepare the Group and parent Company financial statements in
accordance with International Financial Reporting Standards
(‘IFRSs’) as adopted by the European Union (‘EU’). Under company
law the Directors must not approve the financial statements unless
they are satisfied that they give a true and fair view of the state of
affairs of the Group and the Company and of the profit or loss of the
Group and the Company for that period. In preparing these financial
statements, International Accounting Standard 1 requires that
Directors:
• properly select and apply accounting policies;
• present information, including accounting policies, in a manner
that provides relevant, reliable, comparable and understandable
information;
• provide additional disclosures when compliance with the specific
requirements in IFRSs are insufficient to enable users to
understand the impact of particular transactions, other events and
conditions on the entity’s financial position and financial
performance; and
• make an assessment of the Group’s ability to continue as a going
concern.
The Directors are responsible for keeping adequate accounting
records that are sufficient to show and explain the Company’s
transactions and disclose with reasonable accuracy at any time the
financial position of the Company and the Group and enable them to
ensure that the financial statements and the Directors’
Remuneration Report comply with the Companies Act 2006 (United
Kingdom) and, as regards the Group financial statements, Article 4 of
the IAS Regulation. They are also responsible for safeguarding the
assets of the Company and the Group and hence for taking
reasonable steps for the prevention and detection of fraud and other
irregularities.
The Directors who were in office at the date of this statement
confirm that:
• so far as they are each aware there is no relevant audit information
of which the Company’s auditors are unaware; and
• the Directors have taken all steps that they ought to have taken to
make themselves aware of any relevant audit information and to
establish that the auditors are aware of that information.
APG_AR18_26.03.19_MIDDLE_AW_PROOF 6Anglo Pacific Group PLC 2018 Annual Report & AccountsGOVERNANCE 81
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F I N A N C I A L S T A T E M E N T S
INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS
OF ANGLO PACIFIC GROUP PLC
REPORT ON THE AUDIT OF THE FINANCIAL
STATEMENTS
• the consolidated and parent company statements of changes
in equity;
OPINION
In our opinion:
• the financial statements of Anglo Pacific Group plc (the ‘parent
company’) and its subsidiaries (the ‘group’) give a true and fair
view of the state of the group’s and of the parent company’s affairs
as at 31 December 2018 and of the group’s profit for the year
then ended;
• the group financial statements have been properly prepared
in accordance with International Financial Reporting Standards
(IFRSs) as adopted by the European Union;
• the parent company financial statements have been properly
prepared in accordance with IFRSs as adopted by the European
Union and as applied in accordance with the provisions of the
Companies Act 2006; and
• the financial statements have been prepared in accordance
with the requirements of the Companies Act 2006 and, as regards
the group financial statements, Article 4 of the IAS Regulation.
We have audited the financial statements which comprise:
• the consolidated income statement;
• the consolidated statement of comprehensive income;
• the consolidated and parent company balance sheets;
• the consolidated and parent company cash flow statement; and
• the related notes 1 to 39.
The financial reporting framework that has been applied in their
preparation is applicable law and IFRSs as adopted by the European
Union and, as regards the parent company financial statements,
as applied in accordance with the provisions of the Companies
Act 2006.
BASIS FOR OPINION
We conducted our audit in accordance with International Standards
on Auditing (UK) (ISAs (UK)) and applicable law. Our responsibilities
under those standards are further described in the auditor’s
responsibilities for the audit of the financial statements section of
our report.
We are independent of the group and the parent company in
accordance with the ethical requirements that are relevant to our
audit of the financial statements in the UK, including the Financial
Reporting Council (FRC’s) Ethical Standard as applied to listed public
interest entities, and we have fulfilled our other ethical
responsibilities in accordance with these requirements. We confirm
that the non-audit services prohibited by the FRC’s Ethical Standard
were not provided to the group or the parent company.
We believe that the audit evidence we have obtained is sufficient and
appropriate to provide a basis for our opinion.
SUMMARY OF OUR AUDIT APPROACH
Key audit
matters
The key audit matters that we identified in the current year were:
• Valuation of the Kestrel royalties
• Impairment assessment of the royalties intangibles portfolio
• Accounting for deferred and current tax
Within this report, any new key audit matters are identified with and any key audit matters which are the same as the prior
year are identified with .
Materiality
The materiality that we used for the group financial statements was £4.4m which was determined on the basis of 2% on
net assets.
Scoping
Consistent with how the Group is managed we consider the Group to be one component. Consequently all assets, liabilities,
income and expenses are subject to a full scope audit.
Significant
changes
in our
approach
We have not included the Denison transaction as a key audit matter for 2018. In 2017 the transaction was a key audit matter
because of the complexity of the initial accounting classification and valuations for the loan and streaming royalty. Having
audited the fair value methodology and sources of assumptions during 2017, the potential for a material misstatement this
year is considered significantly lower.
Within the accounting for deferred and current tax key audit matter, a second uncertain tax position has arisen for the 2018
year end audit.
APG_AR18_26.03.19_MIDDLE_AW_PROOF 6Anglo Pacific Group PLC 2018 Annual Report & Accounts
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INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS
OF ANGLO PACIFIC GROUP PLC
CONCLUSIONS REL ATING TO GOING CONCERN
We are required by ISAs (UK) to report in respect of the following matters where:
• the directors’ use of the going concern basis of accounting in preparation of the financial statements is not
appropriate; or
• the directors have not disclosed in the financial statements any identified material uncertainties that may cast
significant doubt about the group’s or the parent company’s ability to continue to adopt the going concern basis
of accounting for a period of at least twelve months from the date when the financial statements are authorised
for issue.
We have
nothing
to report
in respect of
these matters.
KEY AUDIT MAT TERS
Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial statements
of the current period and include the most significant assessed risks of material misstatement (whether or not due to fraud) that we identified.
These matters included those which had the greatest effect on: the overall audit strategy, the allocation of resources in the audit; and
directing the efforts of the engagement team.
These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon,
and we do not provide a separate opinion on these matters.
VALUATION OF THE KESTREL ROYALT Y
Key audit
matter
description
Royalties arrangements held at fair value, have a value of £117.6m as at 31 December 2018 (2017: £115.0m). The Kestrel
royalty comprises £109.8m (2017: £104.3m) of the total and management engaged an independent valuation specialist
to perform an independent valuation of the royalty asset. The valuation of the Kestrel royalty is subjective and contains
significant levels of judgement in relation to the discount rate used, the forecast commodity prices and the expected
production profile.
Following the acquisition of the Kestrel mine by a new operator with announced plans to accelerate production,
management has considered the extent to which increases in the forecast production are appropriate.
Due to the high level of judgements involved, we have determined that there was a potential for fraud through possible
manipulation of this balance.
The price and discount rate assumptions are set out in note 16 along with the related sensitivity analysis. The Group
discloses this risk as a critical accounting judgement in note 4.
Refer to the Audit Committee report where this matter is considered by the Audit Committee as a significant issue,
“Review of the carrying value of royalties held at fair value” on page 62.
How the
scope of
our audit
responded
to the key
audit matter
We obtained the valuation model used by management’s independent specialist to determine the fair value of the Kestrel
royalty. We challenged the assumptions adopted by management`s independent specialist by comparison to recent third
party forecast commodity price data, reference to third party documentation and the relevant reserves and resources
reports. We understood the key changes being made by the new operator and calculated that the effect on the valuation
of the increased production profile recognised to date by management was not material. To challenge the discount rates
we prepared independent discount rates and compared those to the rates adopted by management.
We evaluated the independence, objectivity and competence of management’s independent specialist. We challenged
the valuation assumptions adopted in line with the above methodology by directly reviewing their reporting and speaking
directly with the specialist. In doing so we assessed the extent to which management may have influenced the key
assumptions in the valuation model to address the risk of any possible management bias.
Key
observations
We concur that the fair value of the Kestrel royalty is within an acceptable range.
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IMPAIRMENT ASSESSMENT OF THE ROYALT Y INTANGIBLES PORTFOLIO
Key audit
matter
description
Royalty arrangements held as intangibles have a gross carrying amount of £113.3m at 31 December 2018 (2017: £115.8m)
and a net carrying amount of £71.1m (2017: £77.4m). As a consequence of the volatility in current commodity prices, the
assessment of whether impairment/reversal indicators exist and estimating the recoverable amount of royalty
arrangements accounted for as intangible assets where necessary require management to adopt key judgements in relation
to the discount rates used, the forecast commodity prices, the expected production profiles and where relevant the
probability of production commencing.
Impairment indicators were identified for Four Mile and Salamanca with carrying amounts of £1.2m (2016: £1.5m) and £2.3m
(2017: £2.3m) respectively. Indicators of impairment were also identified for Ring of Fire which has a carrying amount of
£3.6m (2017: £3.7m).
An impairment charge of £2.2m was recognised at Pilbara (see note 18) while no impairment or impairment reversal was
recognised for 2017. The Group discloses this risk as a critical accounting judgement in note 4.
Refer to the Audit Committee report where this matter is considered by the Audit Committee as part of the significant issue,
“Review of the carrying values of royalties held at amortised cost along with the investment portfolio and resulting
impairment charges” on page 62.
How the
scope of
our audit
responded
to the key
audit matter
We challenged management’s assessment as to whether indicators of impairment exist for specific royalty arrangements
through evaluation of changes in production and pricing forecasts and a review of publicly available information. Where such
indicators were identified, we obtained copies of the valuation models and challenged the assumptions adopted by
management by comparison to third party forecast commodity price data, reference to third party documentation and the
relevant reserves and resources reports.
To challenge the discount rates we prepared independent discount rates and compared those to the rates adopted by management.
We reviewed and challenged management’s assessment of whether projects still in the development phase would reach
commercial production through an independent assessment based on third party data available from asset operators.
Where there were indicators of impairment reversal for royalty assets we evaluated whether it was appropriate to reverse
previous impairments.
Key
observations
We concur with management’s impairment assessment. In respect of the intangible assets where indicators of impairment
were identified, we found that the assumptions used were within a reasonable range and had been determined and applied
on a consistent basis across the Group.
ACCOUNTING FOR DEFERRED AND CURRENT TA X
Key audit
matter
description
How the
scope of
our audit
responded
to the key
audit matter
The preparation and filing of tax returns requires certain judgements and interpretations to be made, in some circumstances
where there is little guidance or precedent.
In 2017 the Group undertook a restructuring of certain loss making entities. The Group obtained advice from professional
advisers in respect of these transactions. The tax treatment in relation to the restructure is uncertain given the lack of
precedence and guidance from the tax authorities. In the event this aspect were successfully challenged by the tax
authorities, possibly through litigation, this would result in a reduction in the deferred tax asset of £3.3m (2017: £3.3m) and
the recognition of current tax liability of £3.6m (2017:£3.6m) as at 31 December 2018, with a £6.9m (2017:£6.9m)
corresponding income statement tax charge for 2018.
The Group has increased its tax provisions by £1.7m during the year in relation to a separate uncertain tax position. This
represents management’s best estimate as to a settlement value should the judgement be successfully challenged.
Management disclosed these matters as uncertain tax positions in note 12 to the financial statements. The Group discloses
this risk as a critical accounting judgement in note 4.
Refer to the Audit Committee report where these matters are considered by the Audit Committee as part of the significant
issue, “Group tax exposures” on page 62.
We reviewed the papers prepared by management’s independent tax expert in respect of the two uncertain tax positions.
We utilised our specialists to
• review management’s tax advice and accounting papers;
• evaluate the potential for the Group’s historical treatments to be challenged;
• review the tax legislation, case law and relevant precedents to determine if the tax treatment was reasonable;
• recalculate the potential exposures; and
• challenge management’s assessment of the probable loss to be provided for and the possible exposures disclosed.
We held a meeting with management to discuss our concern that there is no clear precedence or guidance on these matters
and, as such, these result in uncertain tax positions.
Key
observations
We concur with management’s provisions and disclosure.
APG_AR18_26.03.19_MIDDLE_AW_PROOF 6Anglo Pacific Group PLC 2018 Annual Report & Accounts
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INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS
OF ANGLO PACIFIC GROUP PLC
OUR APPLICATION OF MATERIALIT Y
We define materiality as the magnitude of misstatement in the financial statements that makes it probable that the economic decisions of a
reasonably knowledgeable person would be changed or influenced. We use materiality both in planning the scope of our audit work and in
evaluating the results of our work.
Based on our professional judgement, we determined materiality for the financial statements as a whole as follows:
GROUP FINANCIAL STATEMENTS
Materiality
£4.4m (2017: £4.3m)
Basis for determining materiality
2% of net assets (2017: 2%)
PARENT COMPANY FINANCIAL
STATEMENTS
£2.7m (2017: £2.7m)
2% of net assets (2017: 2%)
Rationale for the
benchmark applied
Net assets was considered a more stable base
than profits due to the effect of unrealised fair
value gains/losses in each financial year.
Net assets was considered a more stable base
than profits due to the effect of unrealised fair
value gains/losses in each financial year.
The long term value for shareholders is also in
the asset base as the group generates its wealth
through royalties acquired. Considering that
these are often bought in the development
phase of an asset's life a significant portion
of the group’s value at this moment is not
reflected in the income statement.
The long term value for shareholders is also in the
asset base as the company generates its wealth
through royalties acquired. Considering that
these are often bought in the development
phase of an asset's life a significant portion of the
company’s value at this moment is not reflected
in the income statement.
Net assets
£218.1m
Group
materiality
£4.4m
Audit Committee
reporting threshold
£0.22m
We agreed with the Audit Committee that we would report to the Committee all audit differences in excess of £220,000 (2017: £86,000) for
the group, as well as differences below that threshold that, in our view, warranted reporting on qualitative grounds. We also report to the Audit
Committee on disclosure matters that we identified when assessing the overall presentation of the financial statements.
AN OVERVIEW OF THE SCOPE OF OUR AUDIT
Consistent with the how the Group is managed we consider the Group to be one component. Consequently all assets, liabilities, income and
expenses are subject to full scope audit. Audit work to respond to the risks of material misstatement was performed directly by the audit
engagement team.
There were no changes to the overall scope of the audit compared the prior year.
OTHER INFORMATION
The directors are responsible for the other information. The other information comprises the information included in
the annual report, other than the financial statements and our auditor’s report thereon.
Our opinion on the financial statements does not cover the other information and, except to the extent otherwise
explicitly stated in our report, we do not express any form of assurance conclusion thereon.
We have nothing
to report in
respect of these
matters.
In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing
so, consider whether the other information is materially inconsistent with the financial statements or our knowledge
obtained in the audit or otherwise appears to be materially misstated.
If we identify such material inconsistencies or apparent material misstatements, we are required to determine whether
there is a material misstatement in the financial statements or a material misstatement of the other information. If,
based on the work we have performed, we conclude that there is a material misstatement of this other information, we
are required to report that fact.
APG_AR18_26.03.19_MIDDLE_AW_PROOF 6Anglo Pacific Group PLC 2018 Annual Report & AccountsFINANCIAL STATEMENTS 85
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RESPONSIBILITIES OF DIRECTORS
As explained more fully in the statement of directors’ responsibilities, the directors are responsible for the preparation of the financial
statements and for being satisfied that they give a true and fair view, and for such internal control as the directors determine is necessary to
enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.
In preparing the financial statements, the directors are responsible for assessing the group’s and the parent company’s ability to continue as a
going concern, disclosing as applicable, matters related to going concern and using the going concern basis of accounting unless the
directors either intend to liquidate the group or the parent company or to cease operations, or have no realistic alternative but to do so.
AUDITOR’S RESPONSIBILITIES FOR THE AUDIT OF THE FINANCIAL STATEMENTS
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement,
whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but
is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists.
Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected
to influence the economic decisions of users taken on the basis of these financial statements.
Details of the extent to which the audit was considered capable of detecting irregularities, including fraud are set out below.
A further description of our responsibilities for the audit of the financial statements is located on the FRC's website at: www.frc.org.uk/
auditorsresponsibilities. This description forms part of our auditor’s report.
EXTENT TO WHICH THE AUDIT WAS CONSIDERED CAPABLE OF DETECTING IRREGUL ARITIES, INCLUDING FR AUD
We identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, and then design and perform
audit procedures responsive to those risks, including obtaining audit evidence that is sufficient and appropriate to provide a basis for our opinion.
IDENTIF YING AND ASSESSING POTENTIAL RISKS REL ATED TO IRREGUL ARITIES
In identifying and assessing risks of material misstatement in respect of irregularities, including fraud and non-compliance with laws and
regulations, our procedures included the following:
• enquiring of management and the audit committee, including obtaining and reviewing supporting documentation, concerning the group’s
policies and procedures relating to:
– identifying, evaluating and complying with laws and regulations and whether they were aware of any instances of non-compliance;
– detecting and responding to the risks of fraud and whether they have knowledge of any actual, suspected or alleged fraud;
– the internal controls established to mitigate risks related to fraud or non-compliance with laws and regulations;
• discussing among the engagement team regarding how and where fraud might occur in the financial statements and any potential
indicators of fraud; As part of this discussion, we identified potential for fraud in the key audit matter of the valuation of the Kestrel royalty
due to the high level of judgements involved; and
• obtaining an understanding of the legal and regulatory frameworks that the group operates in, focusing on those laws and regulations that
had a direct effect on the financial statements or that had a fundamental effect on the operations of the group. The key laws and regulations
we considered in this context included the provisions and requirements of the Companies Act 2006 .
AUDIT RESPONSE TO RISKS IDENTIFIED
As a result of performing the above, we identified the valuation of Kestrel royalty as a key audit matter. The key audit matters section of our
report explains the matter in more detail and also describes the specific procedures we performed in response to that key audit matter.
In addition to the above our procedures to respond to risks identified included the following:
• reviewing the financial statement disclosures and testing to supporting documentation to assess compliance with relevant laws and
regulations discussed above;
• enquiring of management, the audit committee and external legal counsel concerning actual and potential litigation and claims;
• performing analytical procedures to identify any unusual or unexpected relationships that may indicate risks of material misstatement due
to fraud;
• reading minutes of meetings of those charged with governance; and
•
in addressing the risk of fraud through management override of controls, testing the appropriateness of journal entries and other
adjustments; assessing whether the judgements made in making accounting estimates are indicative of a potential bias; and evaluating the
business rationale of any significant transactions that are unusual or outside the normal course of business.
We also communicated relevant identified laws and regulations and potential fraud risks to all engagement team members including our tax
specialists and remained alert to any indications of fraud or non-compliance with laws and regulations throughout the audit.
APG_AR18_26.03.19_MIDDLE_AW_PROOF 6Anglo Pacific Group PLC 2018 Annual Report & Accounts
86
INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS
OF ANGLO PACIFIC GROUP PLC
REPORT ON OTHER LEGAL AND REGUL ATORY REQUIREMENTS
Opinions on other matters prescribed by the Companies Act 2006
In our opinion the part of the directors’ remuneration report to be audited has been properly prepared in accordance with the Companies
Act 2006.
In our opinion, based on the work undertaken in the course of the audit:
• the information given in the strategic report and the directors’ report for the financial year for which the financial statements are prepared
is consistent with the financial statements; and
• the strategic report and the directors’ report have been prepared in accordance with applicable legal requirements.
In the light of the knowledge and understanding of the group and the parent company and their environment obtained in the course of the
audit, we have not identified any material misstatements in the strategic report or the directors’ report.
MAT TERS ON WHICH WE ARE REQUIRED TO REPORT BY EXCEPTION
Adequacy of explanations received and accounting records
Under the Companies Act 2006 we are required to report to you if, in our opinion:
• we have not received all the information and explanations we require for our audit; or
• adequate accounting records have not been kept by the parent company, or returns adequate for our audit
have not been received from branches not visited by us; or
• the parent company financial statements are not in agreement with the accounting records and returns.
We have nothing
to report in respect
of these matters.
Directors’ remuneration
Under the Companies Act 2006 we are also required to report if in our opinion certain disclosures of directors’
remuneration have not been made or the part of the directors’ remuneration report to be audited is not in
agreement with the accounting records and returns.
We have nothing
to report in respect
of these matters.
OTHER MAT TERS
Auditor tenure
Following the recommendation of the audit committee, we were appointed by shareholders at the AGM on 11 June 2014 to audit the financial
statements for the year ending 31 December 2014 and subsequent financial periods. The period of total uninterrupted engagement including
previous renewals and reappointments of the firm is 5 years, covering the years ending 31 December 2014 to 31 December 2018.
Consistency of the audit report with the additional report to the audit committee
Our audit opinion is consistent with the additional report to the audit committee we are required to provide in accordance with ISAs (UK).
Use of our report
This report is made solely to the company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our
audit work has been undertaken so that we might state to the company’s members those matters we are required to state to them in an
auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other
than the company and the company’s members as a body, for our audit work, for this report, or for the opinions we have formed.
Christopher Thomas ACA (Senior statutory auditor)
for and on behalf of Deloitte LLP
Statutory Auditor
London, United Kingdom
26 March 2019
APG_AR18_26.03.19_MIDDLE_AW_PROOF 6Anglo Pacific Group PLC 2018 Annual Report & AccountsFINANCIAL STATEMENTS 87
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CONSOLIDATED INCOME STATEMENT
for the year ended 31 December 2018
Royalty related revenue
Amortisation of royalties
Operating expenses
Notes
6
18
7(a)
2018
£’000
46,104
(2,974)
(6,032)
2017
£’000
(Restated*)
39,566
(3,116)
(5,890)
OPERATING PROFIT BEFORE IMPAIRMENTS, REVALUATIONS AND GAINS ON DISPOSALS
37,098
30,560
Gain on sale of mining and exploration interests
Impairment of mining and exploration interests
Impairment of royalty intangible assets
Revaluation of royalty financial instruments
Revaluation of coal royalties (Kestrel)
Finance income
Finance costs
Net foreign exchange loss
Other net income/(losses)
PROFIT BEFORE TAX
Current income tax charge
Deferred income tax (charge)/credit
PROFIT ATTRIBUTABLE TO EQUITY HOLDERS
TOTAL AND CONTINUING EARNINGS PER SHARE
Basic earnings per share
Diluted earnings per share
19
19
18
17
16
9
10
11
12
12
13
13
–
–
(2,234)
(871)
10,061
82
(1,042)
(593)
2,043
1,774
(219)
–
(6,324)
(11,933)
19
(795)
(747)
(488)
44,544
11,847
(8,378)
(7,373)
(1,997)
677
28,793
10,527
15.97p
5.88p
15.94p
5.88p
The notes on pages 93 to 130 are an integral part of these consolidated financial statements.
* The Group has revised its definition of revenue to include all royalty related revenue arising in the course of the Group’s ordinary activities. As a result, the presentation of the comparative income
statement has been restated to show an additional £2,184,000 of income in revenue, which was previously included in finance income. Refer to note 2 and 6.
In the current year, net foreign exchange gains and losses are now presented separately on the face of the income statement. Previously they
were included in finance income. The comparative financial information has been adjusted to be on a consistent basis. Profit attributable to
equity holders remains unchanged.
APG_AR18_26.03.19_BACK_PROOF 6Anglo Pacific Group PLC 2018 Annual Report & Accounts
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CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
for the year ended 31 December 2018
PROFIT ATTRIBUTABLE TO EQUITY HOLDERS
ITEMS THAT WILL NOT BE RECLASSIFIED TO PROFIT OR LOSS
Changes in the fair value of equity investments held at fair value through other comprehensive income
Revaluation of royalty financial instruments
Revaluation of mining and exploration interests
ITEMS THAT MAY BE SUBSEQUENTLY RECLASSIFIED TO PROFIT OR LOSS
Available-for-sale investments
Revaluation of equity investments
Reclassification to income statement on disposal of equity investments
Reclassification to income statement on impairment
Deferred tax relating to items that have been or may be reclassified
Net exchange loss on translation of foreign operations
Notes
2018
£’000
28,793
2017
£’000
10,527
17
19
290
(12,147)
(11,857)
17, 19
–
–
–
(147)
(6,669)
(6,816)
–
–
–
2,233
(1,774)
219
341
(883)
136
OTHER COMPREHENSIVE (LOSS)/PROFIT FOR THE YEAR, NET OF TAX
(18,673)
136
TOTAL COMPREHENSIVE PROFIT FOR THE YEAR
10,120
10,663
The notes on pages 93 to 130 are an integral part of these consolidated financial statements.
FINANCIAL STATEMENTSAPG_AR18_26.03.19_BACK_PROOF 6Anglo Pacific Group PLC 2018 Annual Report & Accounts 89
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CONSOLIDATED BALANCE SHEET AND
COMPANY BALANCE SHEET
as at 31 December 2018
Notes
2018
£’000
Group
2017
£’000
NON-CURRENT ASSETS
Property, plant and equipment
Coal royalties (Kestrel)
Royalty financial instruments
Royalty and exploration intangible assets
Mining and exploration interests
Deferred costs
Investments in subsidiaries
Other receivables
Deferred tax
CURRENT ASSETS
Trade and other receivables
Derivative financial instruments
Cash and cash equivalents
TOTAL ASSETS
NON-CURRENT LIABILITIES
Borrowings
Other payables
Deferred tax
CURRENT LIABILITIES
Income tax liabilities
Trade and other payables
TOTAL LIABILITIES
NET ASSETS
CAPITAL AND RESERVES ATTRIBUTABLE TO SHAREHOLDERS
Share capital
Share premium
Other reserves
Retained earnings
TOTAL EQUITY
15
16
17
18
19
20
21
22
27
22
23
24
26
28
27
28
29
29
2018
£’000
22
–
3,929
2,349
2,559
584
99,439
56,532
–
Company
2017
£’000
44
–
3,979
2,349
13,273
449
70,207
56,862
–
22
44
109,778
104,266
46,205
71,194
2,848
926
–
19,335
3,261
10,867
77,421
16,431
689
–
21,259
5,484
253,569
236,461
165,414
147,163
10,267
188
5,223
15,678
8,702
100
8,099
16,901
764
–
1,024
1,788
427
–
1,349
1,776
269,247
253,362
167,202
148,939
8,300
575
35,156
44,031
4,085
3,023
7,108
–
418
31,507
31,925
5
2,495
2,500
8,300
575
668
9,543
111
20,736
20,847
–
418
676
1,094
5
12,716
12,721
51,139
34,425
30,390
13,815
218,108
218,937
136,812
135,124
3,629
62,779
47,285
104,415
3,618
61,966
64,752
88,601
3,629
62,779
33,576
36,828
3,618
61,966
42,495
27,045
218,108
218,937
136,812
135,124
The notes on pages 93 to 130 are an integral part of these consolidated financial statements.
The Company has elected to take the exemption under section 408 of the Companies Act 2006 (United Kingdom) not to present the parent
company profit and loss account. The profit for the Parent Company for the year was £22,791,000 (2017: £13,538,000).
The financial statements of Anglo Pacific Group PLC (registered number: 897608) on pages 81 to 130 were approved by the Board and
authorised for issue on 26 March 2019 and are signed on its behalf by:
N.P.H. MEIER
Chairman
J.A. TREGER
Chief Executive Officer
APG_AR18_26.03.19_BACK_PROOF 6Anglo Pacific Group PLC 2018 Annual Report & Accounts
90
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
for the year ended 31 December 2018
Notes
Share
capital
£’000
3,399
Share
premium
£’000
49,211
Merger
reserve
£’000
29,134
–
–
–
Warrant
reserve
£’000
143
–
Other reserves
Share
based
payment
reserve
£’000
2,016
Investment
revaluation
reserve
£’000
10,708
Foreign
currency
translation
reserve
£’000
23,568
Special
reserve
£’000
632
Investment
in
own shares
£’000
(2,601)
Retained
earnings
£’000
Total
equity
£’000
93,928 210,138
–
–
–
–
–
10,527
10,527
Balance at 1 January 2017
Profit for the year
Other comprehensive
income:
Available-for-sale
investments
Valuation movement
taken to equity
Transferred to income
statement on disposal
Transferred to income
statement on
impairment
Deferred tax
Foreign currency
translation
TOTAL COMPREHENSIVE
PROFIT
Dividends
Issue of ordinary shares
Value of employee services
TOTAL TRANSACTIONS
WITH OWNERS OF THE
COMPANY
BALANCE AT
31 DECEMBER 2017
–
–
–
–
–
–
–
–
–
–
–
–
–
–
219
12,755
–
–
219
12,755
27
14
29
30
–
–
–
–
–
–
–
–
–
–
3,618
61,966
29,134
–
–
–
–
–
–
–
–
–
–
2,233
(1,774)
219
341
–
1,019
–
–
–
–
–
–
–
–
–
–
–
–
1,016
1,016
8
–
–
1
(892)
(883)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
2,241
(1,774)
219
342
(892)
10,527
10,663
(15,869)
(15,869)
–
15
12,974
1,031
– (15,854)
(1,864)
143
143
11,727
3,032
22,685
11,727
3,032
22,685
632
632
(2,601)
88,601 218,937
(2,601)
88,601 218,937
Balance at 1 January 2018
3,618
61,966
29,134
Adjustment for transition to
new accounting standards
–
–
–
–
477
–
–
–
–
(527)
(50)
Restated opening balance
3,618
61,966
29,134
143
12,204
3,032
22,685
632
(2,601)
88,074 218,887
Profit for the year
Other comprehensive
income:
Changes in fair value of
equity investments held at
fair value through other
comprehensive income
Valuation movement
taken to equity
Deferred tax
27
Foreign currency
translation
TOTAL COMPREHENSIVE
PROFIT
Transferred to retained
earnings on disposal
Dividends
Issue of ordinary shares
Value of employee services
Total transactions with
owners of the company
BALANCE AT
31 DECEMBER 2018
14
29
30
–
–
–
–
–
–
–
–
–
28,793
28,793
–
–
–
–
–
–
11
–
11
–
–
–
–
–
–
813
–
813
–
–
–
–
–
–
–
–
–
–
–
–
(11,857)
(147)
–
– (12,004)
(398)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
1,127
(65)
155
(6,759)
(6,669)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(11,922)
8
(6,759)
28,793
10,120
398
–
(12,889)
(12,889)
–
39
824
1,166
(12,452)
(10,899)
(398)
1,127
3,629
62,779
29,134
143
(198)
4,159
16,016
632
(2,601) 104,415 218,108
The notes on pages 93 to 130 are an integral part of these consolidated financial statements.
FINANCIAL STATEMENTSAPG_AR18_26.03.19_BACK_PROOF 6Anglo Pacific Group PLC 2018 Annual Report & Accounts 91
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COMPANY STATEMENT OF CHANGES IN EQUITY
for the year ended 31 December 2018
Notes
Share
capital
£’000
3,399
Share
premium
£’000
49,211
Merger
reserve
£’000
29,134
Other reserves
Warrant
reserve
£’000
143
Investment
revaluation
reserve
£’000
8,916
Share
based
payment
reserve
£’000
2,016
Foreign
currency
translation
reserve
£’000
82
Special
reserve
£’000
632
Retained
earnings
£’000
Total
equity
£’000
29,361 122,894
Balance at 1 January 2017
Changes in equity for 2017
Available-for-sale investments:
Valuation movement
taken to equity
Transferred to income
statement on disposal
Transferred to income
statement on impairment
Deferred tax on valuation
Net income recognised
direct into equity
Profit for the period
Total recognised income
and expenses
Dividends
Issue of ordinary shares
Value of employee services
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
219
12,755
–
–
14
29
30
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
2,331
(1,774)
13
(14)
556
–
556
–
–
–
–
–
–
–
–
–
–
–
–
1,016
3,032
3,032
BALANCE AT 31 DECEMBER 2017
3,618
61,966
29,134
Balance at 1 January 2018
3,618
61,966
29,134
143
143
9,472
9,472
Adjustment for transition to new
accounting standards
Restated opening balance
Changes in equity for 2018
Changes in fair value of equity
investments held at fair value
through other comprehensive
income:
Valuation movement
taken to equity
Net income recognised
direct into equity
Profit for the period
Total recognised income
and expenses
Transferred to retained
earnings on disposal
Dividends
Issue of ordinary shares
Value of employee services
–
–
–
–
477
–
3,618
61,966
29,134
143
9,949
3,032
–
–
–
–
–
–
11
–
–
–
–
–
–
–
813
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(10,154)
(10,154)
–
(10,154)
(369)
–
–
–
–
–
–
–
–
–
–
1,127
14
29
30
–
–
–
–
–
–
–
–
–
–
82
82
–
82
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
2,331
(1,774)
13
(14)
556
13,538
13,538
13,538
14,094
(15,869)
(15,869)
–
15
12,974
1,031
632
632
27,045 135,124
27,045
135,124
–
(527)
(50)
632
26,518 135,074
–
–
–
–
–
–
–
–
–
–
(10,154)
(10,154)
22,791
22,791
22,791
12,637
369
–
(12,889)
(12,889)
–
39
824
1,166
BALANCE AT 31 DECEMBER 2018
3,629
62,779
29,134
143
(574)
4,159
82
632
36,828 136,812
The notes on pages 93 to 130 are an integral part of these consolidated financial statements.
APG_AR18_26.03.19_BACK_PROOF 6Anglo Pacific Group PLC 2018 Annual Report & Accounts
92
CONSOLIDATED STATEMENT OF CASH FLOWS AND
COMPANY STATEMENT OF CASH FLOWS
for the year ended 31 December 2018
CASH FLOWS FROM OPERATING ACTIVITIES
Profit before taxation
Adjustments for:
Finance income
Finance costs
Net foreign exchange gains/losses
Other income
Gain on disposal of mining and exploration interests
Impairment of mining and exploration interests
Impairment of royalty and exploration intangible assets
Revaluation of royalty financial instruments
Royalties due or received from royalty financial instruments
Impairment of investment in subsidiaries
Revaluation of coal royalties (Kestrel)
Depreciation of property, plant and equipment
Amortisation of royalty intangible assets
Amortisation of deferred acquisition costs
Share based payment
Forgiveness of loan to subsidiary undertaking
Intercompany dividends
(Increase)/Decrease in trade and other receivables
(Decrease)/Increase in trade and other payables
Cash generated from operations
Income taxes (paid)/refunded
NET CASH GENERATED FROM OPERATING ACTIVITIES
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds on disposal of mining and exploration interests
Proceeds on return of capital from mining and exploration interests
Purchase of property, plant and equipment
Purchases of royalty and exploration intangible assets
Proceeds from royalty financial instruments
Purchases of royalty financial instruments
Advances under commodity related financing agreements
Repayments under commodity related financing agreements
Prepaid acquisition costs
Sundry income
Finance income
Investment in subsidiaries
Return of capital from subsidiaries
Intercompany dividends
Loans granted to subsidiary undertakings
Loan repayments from subsidiary undertakings
NET CASH USED IN INVESTING ACTIVITIES
Cash flows from financing activities
Drawdown of revolving credit facility
Repayment of revolving credit facility
Loans from subsidiary undertakings
Proceeds from issue of share capital
Transaction costs of share issue
Dividends paid
Finance costs
NET CASH (USED IN)/GENERATED FROM FINANCING ACTIVITIES
NET (DECREASE)/INCREASE IN CASH AND CASH EQUIVALENTS
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
Effect of foreign exchange rate changes
CASH AND CASH EQUIVALENTS AT END OF PERIOD
Notes
2018
£’000
Group
2017
£’000
(*Restated)
Company
2017
£’000
(*Restated)
2018
£’000
44,544
11,847
23,261
13,725
9
10
11
19
19
18
17
17
21
16
15
18
20
8(a)
12
19
19
15
18
17
17
22
22
20
9
21
21
33
33
25, 26
25, 26
29
14
10, 20
(82)
1,042
593
(2,043)
–
–
2,234
871
1,975
–
(19)
795
747
230
(1,774)
219
–
6,324
–
–
(10,061)
11,933
26
2,974
202
1,323
–
–
43,598
(1,554)
(650)
41,394
(4,482)
36,912
612
827
(4)
–
1,720
(38,408)
–
1,276
(34)
–
82
–
–
–
–
–
33
3,116
–
1,174
–
–
34,625
3,402
1,138
39,165
(1,863)
37,302
2,424
–
–
(1,125)
258
(3,323)
(24,990)
3,051
(224)
–
19
–
–
–
–
–
(33,929)
(23,910)
17,300
(9,000)
–
75
–
(12,889)
(1,264)
(5,778)
(2,795)
8,099
(81)
5,223
7,498
(13,651)
–
13,700
(726)
(15,869)
(795)
(9,843)
3,549
5,331
(781)
8,099
(216)
524
612
(1,657)
–
–
–
(1,925)
1,975
5,325
–
26
–
202
1,323
284
(27,794)
1,940
(337)
(534)
1,069
(369)
700
562
–
(4)
–
1,720
–
–
1,276
(34)
–
216
(39,346)
4,789
27,794
(2,080)
866
(4,241)
17,300
(9,000)
8,552
75
–
(12,889)
(813)
3,225
(316)
1,349
(9)
1,024
(1)
335
2,076
(35)
(1,774)
13
–
3,076
–
1,467
–
33
–
–
1,174
(6,483)
(11,399)
2,207
86
900
3,193
(321)
2,872
2,424
–
–
–
258
–
(24,990)
3,051
(224)
209
1
(4,084)
–
11,399
(2,374)
405
(13,925)
7,498
(10,451)
18,764
13,700
(726)
(15,869)
(335)
12,581
1,528
924
(1,103)
1,349
The notes on pages 93 to 130 are an integral part of these consolidated financial statements.
* The Group has revised its definition of revenue to include all royalty related revenue arising in the course of the Group’s ordinary activities. As a result, the presentation of the comparative
statement of cash flows has been restated to show an additional £2,184,000 of net cash generated from operating activities, which was previously included in cash flows from investing activities.
Refer to notes 2 and 6.
FINANCIAL STATEMENTSAPG_AR18_26.03.19_BACK_PROOF 6Anglo Pacific Group PLC 2018 Annual Report & Accounts 93
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended 31 December 2018
1 GENER AL INFORMATION
Anglo Pacific Group PLC (the ‘Company’) and its subsidiaries (together, the ‘Group’) secure natural resources royalties and streams by creating
new royalties directly with operators or by acquiring existing royalties. The Group has royalties and investments in mining and exploration
interests primarily in Australia, North and South America and Europe, with a diversified exposure to commodities represented by coal,
vanadium, uranium, gold and iron ore.
The Company is a public limited company, which is listed on the London Stock Exchange and Toronto Stock Exchange and incorporated
and domiciled in the United Kingdom. The address of its registered office is 1 Savile Row, London, W1S 3JR, United Kingdom (registered
number: 897608).
2
CHANGES IN ACCOUNTING POLICIES AND DISCLOSURES
(a) New and amended IFRS Standards that are effective for the current year
Impact of initial application of IFRS 9 Financial Instruments
In the current financial year, the Group has applied IFRS 9 Financial Instruments (as revised in July 2014) and the related consequential
amendments to other IFRS Standards that are effective for an annual period that begins on or after 1 January 2018. As permitted by the
transition provisions, the Group has elected not to restate the comparatives for the adoption of IFRS 9.
The overall impact on net assets from the transition to IFRS 9 was a reduction in opening net assets of £50,000 to £218,887,000 due to the
recognition of expected credit losses. The adoption of IFRS 9 impacted the following through 2018:
Impairment: The standard introduces an ‘expected credit loss’ model which for the Group requires an assessment of impairment of financial
assets held at amortised cost. The Group’s primary asset held at amortised cost is the interest-bearing loan to Denison Mines (note 22) and
the expected credit losses at 1 January 2018 and 31 December 2018 were £50,000 and £114,000 respectively.
Classification and measurement: The measurement and accounting treatment of the Group’s financial assets is materially unchanged on
application of the new standard with the exception of mining and exploration interests previously categorised as available-for-sale and royalty
financial instruments previously categorised as available-for-sale equity financial assets.
Mining and exploration interests are now held at fair value through other comprehensive income (‘FVTOCI’), with the effect that the gains and
losses on disposal and impairment losses are no longer recycled from reserves to the income statement for this category of asset. There is no
impact to the net assets of the Group at 1 January 2018. During the year ended 31 December 2018 mining and exploration interests were
disposed with historical gains of £398K transferred to retained earnings rather than the income statement, following the adoption of IFRS 9
(note 19).
Royalty financial instruments (with the exception of Labrador Iron Ore – see “Changes to revenue presentation” below) are now held at fair
value through profit or loss (‘FVTPL’), meaning they are held at fair value on the balance sheet, with fair value movements taken through the
income statement rather than reserves. Accumulated fair value movements of £477k (net of deferred tax) recognised in the investment
revaluation reserve as of 1 January 2018 have been reclassified to retained earnings on adoption of IFRS 9 (note 17).
Royalty income from these assets is no longer recognised as revenue in the income statement and instead reduces the fair value of the asset.
There is no impact to the net assets of the Group at 1 January 2018. During the year ended 31 December 2018 royalties from the Group’s
EVBC royalty of £1,975k were deducted from the royalty’s carrying value (rather than being recognised as royalty revenue) and a non-cash
revaluation gain of £1,925k was instead recognised in the income statement, following the adoption of IFRS 9.
Impact of application of IFRS 15 ‘Revenue from Contracts with Customers’
The Group adopted IFRS 15 Revenue from Contracts with Customers (as amended in April 2016) with effect from 1 January 2018 with no
change arising to the Group’s revenue recognition.
The Group’s royalty income is derived from three sources: assets accounted for as investment property (Kestrel) under IAS 40, assets at fair
value (EVBC) accounted for under IFRS 9 and assets accounted for as intangibles (Narrabri, Maracás Menchen and Four Mile) under IAS 38.
The royalty income derived from investment properties continues to be accounted for in accordance with IAS 40, while the royalty income
derived from assets at fair value is accounted for under IFRS 9 as described above. The royalty income derived from assets classified as
intangibles are accounted for in accordance with IFRS 15. Apart from providing more extensive disclosures for the Group’s revenue
transactions, the application of IFRS 15 has had no impact on the financial position or financial performance of the Group.
(b) New and amended IFRS Standards but not yet effective
At the date of authorisation of these financial statements, the Group has not applied the following new and revised IFRS Standards that have
been issued but are not yet effective:
• IFRS 16 Leases
• Annual Improvements to IFRS Standards 2015 – 2017
• Amendments to IAS 19 Employee Benefits
• IFRIC 23 Uncertainty over Income Tax Treatments
FRS 16 Leases
IFRS 16 Leases was published in January 2016 and will be effective for the Group from 1 January 2019, replacing IAS 17 Leases.
The principal impact of IFRS 16 will be to change the accounting treatment by lessees of leases currently classified as operating leases. Lease
agreements will give rise to the recognition by the lessee of an asset, representing the right to use the leased item, and a related liability for
future lease payments. Lease costs will be recognised in the income statement in the form of depreciation of the right-of-use asset over the
lease term, and finance charges representing the unwinding of the discount on the lease liability.
APG_AR18_26.03.19_BACK_PROOF 6Anglo Pacific Group PLC 2018 Annual Report & Accounts
94
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended 31 December 2018
As the Group’s operating leases relate primarily to office space and office equipment, the adoption of IFRS 16 is not expected to result in a
material increase in lease liabilities or a corresponding increase in property, plant, and equipment right-of-use assets. Information on the
Group’s operating lease commitments is disclosed in note 32.
Annual Improvements to IFRS Standards 2015–2017 Cycle Amendments to IFRS 3 Business Combinations, IFRS 11 Joint Arrangements, IAS 12 Income
Taxes and IAS 23 Borrowing Costs
IAS 12 Income Taxes
In particular amendments to IAS 12 Income Taxes clarify that an entity should recognise the income tax consequences of dividends in profit
or loss, other comprehensive income or equity according to where the entity originally recognised the transactions that generated the
distributable profits. This is the case irrespective of whether different tax rates apply to distributed and undistributed profits.
All the amendments are effective for annual periods beginning on or after 1 January 2019 and generally require prospective application.
The directors of the Company do not anticipate that the application of the amendments in the future will have an impact on the Group’s
consolidated financial statements.
Amendment to IAS 19 Employee Benefits Plan Amendment, Curtailment or Settlement
The amendments to IAS 19 apply only to plan amendments, curtailments or settlements that occur on or after the beginning of the annual
period in which the amendments to IAS 19 are first applied.
The directors of the Company do not anticipate that the application of the amendments in the future will have an impact on the Group’s
consolidated financial statements.
IFRIC 23 Uncertainty over Income Tax Treatments
IFRIC 23 sets out how to determine the accounting tax position when there is uncertainty over income tax treatments. The Interpretation
requires an entity to:
• determine whether uncertain tax positions are assessed separately or as a group; and
• assess whether it is probable that a tax authority will accept an uncertain tax treatment used, or proposed to be used, by an entity in its
income tax filings:
– If yes, the entity should determine its accounting tax position consistently with the tax treatment used or planned to be used in its income
tax filings.
– If no, the entity should reflect the effect of uncertainty in determining its accounting tax position.
The Interpretation is effective for annual periods beginning on or after 1 January 2019. Entities can apply the Interpretation with either full
retrospective application or modified retrospective application without restatement of comparatives retrospectively or prospectively. The
adoption of IFRIC 23 is not anticipated to have an impact on the provisions recognised in relation to the Group’s uncertain tax positions as at
31 December 2018, as detailed in notes 4 and 12.
The directors of the Company do not anticipate that the application of the amendments in the future will have an impact on the Group’s
consolidated financial statements.
Other issued standards and amendments that are not yet effective are not expected to have a significant impact on the financial statements.
(c) Change to revenue presentation
For the year ended 31 December 2018 the Group has revised its definition of revenue and included income received from royalty related
financial assets in order to provide greater consistency in the classification of the royalty income arising in the course of the Group’s ordinary
activities.
Income recognised from the Denison non-current other receivable was previously reported as interest within finance income. In addition,
the income earned on the Jogjakarta royalty financial instrument was previously reported as effective interest income on royalty financial
instruments within other gains and losses. The Group has included £2,011K (2017: £1,926K) of Denison interest and £77K (2017: £258K) of
Jogjakarta effective interest within “royalty related revenue” for the year ended 31 December 2018 and the comparative has been restated
to be on a consistent basis (note 6).
Dividend income is received from the Group’s investment in Labrador Iron Ore Corporation, which was acquired during the year ended
31 December 2018, whose primary asset is a royalty income stream. This equity financial instrument was designated at inception as fair
value through other comprehensive income with dividends accordingly recognised in the income statement. This income is considered
royalty-related and therefore part of the Group’s ordinary activities. As such the £1,949K of dividend income receivable from Labrador
Iron Ore for the year ended 31 December 2018 was presented in revenue (note 6).
SIGNIFICANT ACCOUNTING POLICIES
3
The principal accounting policies applied in the preparation of these consolidated financial statements are set out below. These policies have
been consistently applied to all the years presented unless otherwise stated.
3.1 Basis of preparation
The financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS Standards). The financial
statements have also been prepared in accordance with IFRS Standards adopted by the European Union and therefore the Group financial
statements comply with Article 4 of the EU IAS Regulation.
The financial statements have been prepared on the historical costs basis, as modified by the revaluation of coal royalties (investment
property) and certain financial instruments.
FINANCIAL STATEMENTSAPG_AR18_26.03.19_BACK_PROOF 6Anglo Pacific Group PLC 2018 Annual Report & Accounts 95
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The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires
management to exercise its judgement in the process of applying the Group’s accounting policies. The areas involving a higher degree of
judgement or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements are disclosed
in note 4.
3.1.1 Going concern
The financial position of the Group and its cash flows are set out on pages 89 and 92. The Directors have considered the principal risks of the
Company which are set out on pages 22 to 29 as well as access to funding as set out in note 26 and considered key sensitivities which could
impact on the level of available borrowings. As at 31 December 2018, the Group had cash and cash equivalents of £5.2m and borrowings of
£8.3m (U$10.6m). Subject to continued covenant compliance, the Group has access to a further £38.8m (U$49.4m) through its secured
U$60.0m revolving credit facility.
The Directors have considered the Group’s cash flow forecasts for the period to the end of March 2020. The Board is satisfied that the Group’s
forecasts and projections, taking into account reasonably possible changes in trading performance and other uncertainties, together with the
Group’s cash position and access to the revolving credit facility, show that the Group will be able to operate within the level of its current
facilities for the foreseeable future. For this reason, the Group continues to adopt the going basis in preparing its financial statements.
3.2 Consolidation
Subsidiaries
The financial statements incorporate a consolidation of the financial statements of the Company and entities controlled by the Company (its
subsidiaries). Control is achieved when the Company has the power over the investee, is exposed, or has rights, to variable returns from its
involvement with the investee and has the ability to affect those returns through its power over the investee.
The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the
Group controls another entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are
de-consolidated from the date that control ceases.
Investments in subsidiaries are accounted for in the parent company at cost less impairment. Cost is adjusted to reflect changes in
consideration arising from contingent consideration amendments.
Inter-company transactions, balances and unrealised gains on transactions between Group companies are eliminated on consolidation.
Unrealised losses are also eliminated. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the
policies adopted by the Group.
3.3 Foreign currencies
(a) Functional and presentation currency
Items included in the financial statements of each of the Group’s entities are measured using the currency of the primary economic
environment in which the entity operates (‘the functional currency’). The consolidated financial statements are presented in pounds sterling,
which is the Company’s functional and the Group’s presentation currency.
(b) Transactions and balances
Foreign currency transactions are translated into the functional currency of the respective Group entity, using the exchange rates prevailing
at the dates of the transactions or valuation where items are re-measured. Foreign exchange gains and losses resulting from the settlement of
such transactions and from the translation at year end exchange rates of monetary assets and liabilities denominated in foreign currencies
are recognised in the income statement. Non-monetary assets and liabilities measured at historical cost are translated using the exchange
rates at the date of the transaction (and not retranslated). Non-monetary assets and liabilities measured at fair value are translated using the
exchange rates at the date when fair value was determined.
(c) Group companies
The results and financial position of all the Group entities that have a functional currency different from the presentation currency are
translated into the presentation currency as follows:
(i) assets and liabilities for each balance sheet presented are translated at the closing rate at the date of that balance sheet;
(ii)
income and expenses for each income statement are translated at average exchange rates; and
(iii) all resulting exchange differences are charged/credited to other comprehensive income and recognised in the currency translation
reserve in equity.
Exchange differences on foreign currency balances with foreign operations for which settlement is neither planned nor likely to occur in the
foreseeable future, and therefore form part of the Group’s net investment in these foreign operations, are recognised in other comprehensive
income and accumulated in the foreign currency translation reserve in equity. If a foreign operation is partially disposed of or sold, exchange
differences that were recorded in equity are reclassified in the income statement as part of the gain or loss on sale.
3.4 Property, plant and equipment
Property, plant and equipment is stated at cost, less accumulated depreciation and accumulated impairment losses. The cost of property,
plant and equipment comprises its purchase price and any costs directly attributable to bringing the asset to the location and condition
necessary for it to be capable of operating in the manner intended by management. Once a mining project has been established as
commercially viable, expenditure other than that on land, buildings, plant and equipment is capitalised as a producing asset within ‘Other
Assets’ together with any amount transferred from ‘Exploration and Evaluation Costs’ (note 3.6(b)).
APG_AR18_26.03.19_BACK_PROOF 6Anglo Pacific Group PLC 2018 Annual Report & Accounts
96
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended 31 December 2018
Property, plant and equipment is depreciated over its useful life, or, where applicable, over the remaining life of the mine if shorter once it is
operating in the manner intended by management. The major categories of property, plant and equipment are depreciated on a units of
production and/or straight-line basis as follows:
Equipment and fixtures
Other Assets:
Producing assets
4 to 10 years
Units of production (over reserves)
Coal tenures
Units of production (over reserves)
The gain or loss arising on the disposal or retirement of an asset is determined as the difference between the sales proceeds and the carrying
amount of the asset and is recognised in profit or loss.
3.5 Coal royalties (investment property)
Royalty arrangements which are derived from the ownership of sub-stratum lands are accounted for as investment properties in accordance
with IAS 40. Investment property is held to earn a return in the form of royalty entitlements arising from mining activity and is initially
measured at cost including any transaction costs. Investment property is subsequently measured at fair value at each reporting date with any
valuation movements recognised in the income statement. Fair value is determined by a suitably qualified independent external consultant
based on the discounted future royalty income expected to accrue to the Group.
3.6 Intangible assets
(a) Royalty arrangements
Royalty arrangements which are identified and classified as intangible assets are initially measured at cost, including any transaction costs.
Upon commencement of production at the underlying mining operation intangible assets are amortised on a straight-line basis over the life
of the mine. Amortisation rates are adjusted on a prospective basis for all changes to estimates of the life of mine.
(b) Exploration and evaluation costs
Exploration expenditure relates to the initial search for deposits with economic potential. Evaluation expenditure arises from a detailed
assessment of deposits or other projects that have been identified as having economic potential.
Expenditure on exploration and evaluation activities is capitalised when there is a high degree of confidence in the project’s viability and
hence it is probable that future economic benefits will flow to the Group. If this is no longer the case, an impairment loss is recognised in the
income statement. Amortisation of capitalised exploration and evaluation costs does not commence until the underlying project commences
commercial production.
3.7 Impairment of property, plant and equipment and intangible assets
At each reporting date, the Group reviews the carrying amounts of its property, plant and equipment and intangible assets to determine
whether there is any indication that those assets are impaired. If such an indication is identified, the recoverable amount of the asset is
estimated in order to determine the extent of any impairment.
The recoverable amount is the higher of fair value (less costs of disposal) and value in use. In assessing value in use, the estimated cash flows
are discounted to their present value using a pre-tax discount rate that has been adjusted to reflect the risks specific to that asset. If the
recoverable amount of the asset is estimated to be less than its carrying value, the carrying amount of the asset is reduced to its recoverable
amount. An impairment loss is also recognised in the income statement.
Should an impairment loss subsequently reverse, the carrying amount of the asset is increased to the revised estimate of its recoverable
amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no
impairment been recognised. A reversal of an impairment loss is also recognised in the income statement.
3.8 Financial instruments
Financial assets and financial liabilities are recognised on the Group’s balance sheet when the Group has become a party to the contractual
provisions of the instrument.
(a) Cash and cash equivalents
Cash and cash equivalents comprise cash on hand and demand deposits, together with other short-term, highly liquid investments that are
readily convertible into known amounts of cash and which are subject to an insignificant risk of changes in value.
(b) Loans and receivables
Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. On
initial recognition loans and receivables are stated at their fair value. After initial recognition these are measured at amortised cost using the
effective interest method, less provision for impairment. Discounting is omitted where the effect of discounting is immaterial. The Group’s
trade and other receivables fall into this category of financial instruments.
(c) Derivative financial instruments
The Group will selectively enter into foreign exchange forward contracts to manage its exposure to foreign exchange risk associated with its
Australian dollar denominated royalty income, when considered necessary. Further details of derivative financial instruments are disclosed in
note 23.
Derivatives are initially recognised at fair value at the date a derivative contract is entered into and are subsequently remeasured to their fair
value at each balance sheet date. The resulting gain or loss is recognised in profit or loss immediately.
FINANCIAL STATEMENTSAPG_AR18_26.03.19_BACK_PROOF 6Anglo Pacific Group PLC 2018 Annual Report & Accounts 97
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A derivative with a positive fair value is recognised as a financial asset whereas a derivative with a negative fair value is recognised as a financial
liability. A derivative is presented as a non-current asset or a non-current liability if the remaining maturity of the instrument is more than
12 months and it is not expected to be realised or settled within 12 months. Other derivatives are presented as current assets or current liabilities.
(d) Mining and exploration interests
Mining and exploration interests are recognised and derecognised on a trade date where a purchase or sale of an investment is under a
contract whose terms require delivery of the investment within the timeframe established by the market concerned, and are initially
measured at fair value, including transaction costs.
On initial recognition, the Group may make an irrevocable election to designate investments in mining and exploration equity instruments as
FVTOCI. Designation as FVTOCI is not permitted if the equity investment is held for trading or if it is contingent consideration recognised by an
acquirer in a business combination.
A financial asset is held for trading if:
•
it has been acquired principally for the purpose of selling in the near term; or
• on initial recognition it is part of a portfolio of identified financial instruments that the Group manages together and has evidence of a recent
actual patter of short-term profit-taking; or
•
it is a derivative (except for a derivative that is a financial guarantee contract or a designated and effective hedging instrument).
Investments in equity instruments at FVTOCI are initially measured at fair value plus transaction costs. Subsequently, they are measured at fair
value with gains and losses arising from changes in fair value recognised in other comprehensive income and accumulated in the investment
revaluation reserve, within “Other Reserves”. The cumulative gain or loss is not reclassified to profit or loss on disposal of the equity
investments, instead, it is transferred to retained earnings.
Dividends on these investments in equity instruments are recognised in profit or loss in accordance with IFRS 9, unless the dividends clearly
represent a recovery of part of the cost of the investment.
The Group has designated all investments in equity instruments that are not held for trading as at FVTOCI on initial application of IFRS 9 (see
notes 17 and 19).
(e) Royalty financial instruments
Royalty financial instruments are recognised or derecognised on completion date where a purchase or sale of the royalty is under a contract,
and are initially measured at fair value, including transaction costs.
All of the Group’s royalty financial instruments have been designated as at FVTPL, with the exception of the investment in Labrador Iron Ore
Corporation for which the Group has made an irrevocable election to designate as at FVTOCI.
The royalty financial instruments at FVTPL are measured at fair value at the end of each reporting period, with any fair value gains or
losses recognised in profit or loss. The net gain or loss recognised in profit or loss includes any royalties earned on the royalty instrument,
and is included in the ‘revaluation of royalty financial instruments’ line item (note 17). Fair value is determined in the manner described in
note 17 and 34.
The Group’s investment in the equity instruments of Labrador Iron Ore Corporation is classified as a royalty financial instrument as its primary
asset is a royalty income stream. On initial recognition the Group made the irrevocable election to designated this investment as FVTOCI. The
dividends received from this investment are recognised in profit or loss, and are included in the ‘royalty related revenue’ line item (note 6).
(f ) Financial liabilities and equity instruments
Financial liabilities and equity instruments are classified according to the substance of the contractual arrangements entered into. An equity
instrument is any contract that evidences a residual interest in the assets of the Group after deducting all of its liabilities.
(g) Trade payables
Trade payables are not interest bearing and are stated at their fair value on initial recognition. After initial recognition these are measured at
amortised cost using the effective interest method.
(h) Borrowings
Interest bearing bank facilities are initially recognised at fair value, net of directly attributable transaction costs. Transaction costs are
recognised in the income statement on a straight-line basis over the term of the facility.
(i) Equity instruments
Equity instruments issued by the Company are recorded as the proceeds received, net of direct issue costs.
3.9 Impairment of financial assets
The Group recognises a loss allowance for expected credit losses (‘ECL’) on investments in debt instruments that are measured at amortised
cost or at FVTOCI and trade receivables. The amount of expected credit losses is updated at each reporting date to reflect changes in credit
risk since initial recognition of the respective financial instrument. The Group’s primary asset held at amortised cost is the interest-bearing
loan to Denison Mines (note 22).
The Group always recognises lifetime ECL for trade receivables. The expected credit losses on these financial assets are estimated using a
provision matrix based on the Group’s historical credit loss experience, adjusted for factors that are specific to the debtors, general economic
conditions and an assessment of both the current as well as the forecast direction of conditions at the reporting date, including time value of
money where appropriate. Due to trade receivables ultimately representing a royalty related income and being repaid within a month after
the reporting date, the amount of expected credit losses is immaterial.
APG_AR18_26.03.19_BACK_PROOF 6Anglo Pacific Group PLC 2018 Annual Report & Accounts
98
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended 31 December 2018
For all other financial instruments, the Group recognises lifetime ECL when there has been a significant increase in credit risk since initial
recognition. However, if the credit risk on the financial instrument has not increased significantly since initial recognition, the Group measures
the loss allowance for that financial instrument at an amount equal to 12-month ECL.
Lifetime ECL represents the expected credit losses that will result from all possible default events over the expected life of a financial
instrument. In contrast, 12-month ECL represents the portion of lifetime ECL that is expected to result from default events on a financial
instrument that are possible within 12 months after the reporting date.
3.10 Taxation
The tax expense represents the sum of the tax currently payable and deferred tax.
Current tax
The tax currently payable is based on taxable profit for the year. Taxable profit differs from net profit as reported in the income statement
because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never
taxable or deductible. The Group’s liability for current tax is calculated by using tax rates and laws that have been enacted or substantively
enacted by the reporting date.
Deferred tax
Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amount of assets and liabilities in the
financial statements and the corresponding tax bases used in the computation of taxable profit, and is accounted for using the balance sheet
liability method. Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised to
the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised. Such assets
and liabilities are not recognised if the temporary difference arises from the initial recognition of goodwill or from the initial recognition (other
than in a business combination) of other assets and liabilities in a transaction that affects neither the taxable profit nor the accounting profit.
Deferred tax liabilities are recognised for taxable temporary differences arising on investments in subsidiaries and associates, and interests in
joint ventures, except where the Group is able to control the reversal of the temporary difference and it is probable that the temporary
difference will not reverse in the foreseeable future. Deferred tax assets arising from deductible temporary differences associated with such
investments and interests are only recognised to the extent that it is probable that there will be sufficient taxable profits against which to
utilise the benefits of the temporary differences and they are expected to reverse in the foreseeable future.
The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that
sufficient taxable profits will be available to allow all or part of the asset to be recovered.
Deferred tax is calculated at the tax rates that are expected to apply to the period when the liability is settled or the asset is realised based on
tax laws and rates that have been enacted or substantively enacted at the balance sheet date.
The measurement of deferred tax liabilities and assets reflects the tax consequences that would follow from the manner in which the Group
expects, at the end of the reporting period, to recover or settle the carrying amount of its assets and liabilities.
Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against current tax liabilities
and when they relate to income taxes levied by the same taxation authority and the Group intends to settle its current tax assets and liabilities
on a net basis.
Current and deferred tax for the year
Current and deferred tax are recognised in profit or loss, except when they related to items that are recognised in other comprehensive
income or directly in equity, in which case, the current and deferred tax are also recognised in other comprehensive income or directly in
equity respectively. Where current tax or deferred tax arises from the initial accounting for a business combination, the tax effect is included in
the accounting for the business combination.
3.11 Share-based payments
The Group operates a number of equity-settled, share-based compensation plans, under which the entity receives services from employees
as consideration for equity instruments (options and jointly-owned shares) of the Company.
The fair value of the employee services received in exchange for the grant of the options is recognised as an expense. The total amount to be
expensed is determined by reference to the fair value of the options granted:
•
including any market performance conditions;
• excluding the impact of any service and non-market performance vesting conditions; and
•
including the impact of any non-vesting conditions.
Non-market vesting conditions are included in assumptions about the number of options and jointly-owned shares that are expected to vest.
The total expense is recognised over the vesting period, which is the period over which all of the specified vesting conditions are to be
satisfied. At the end of each reporting period, the entity revises its estimates of the number of options and jointly-owned shares that are
expected to vest based on the non-market vesting conditions. It recognises the impact of the revision to original estimates, if any, in the
income statement, with a corresponding adjustment to equity.
When options are exercised, the Company issues new shares. The proceeds received net of any directly attributable transaction costs are
credited to share capital and share premium when the options are exercised.
3.12 Reserves
Equity comprises the following:
•
•
‘Share capital’ represents the nominal value of equity shares in issue.
‘Share premium’ represents the excess over nominal value of the fair value of consideration received for equity shares, net of issuance costs.
FINANCIAL STATEMENTSAPG_AR18_26.03.19_BACK_PROOF 6Anglo Pacific Group PLC 2018 Annual Report & Accounts 99
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Other reserves
•
‘Merger reserve’ is created when more than 90% of the shares in a subsidiary are acquired and the consideration includes the issue of new
shares by the Company.
•
•
•
•
•
•
•
‘Warrant reserve’ was created in June 2014 in connection with the issue of share warrants as part consideration of the Maracás royalty.
’Investment revaluation reserve‘ represents gains and losses due to the revaluation of the investments in mining and exploration interests
and royalty instruments from the opening carrying values, including the effects of deferred tax and foreign currency changes.
‘Share-based payment reserve’ represents equity-settled share-based employee remuneration until such share options are exercised.
‘Foreign currency reserve’ represents the differences arising from translation of investments in overseas subsidiaries.
‘Special reserve’ represents the level of profit attributable to the Group for the period ended June 30, 2002 which was created as part of a
capital reduction performed in 2002.
‘Investment in own shares’ represents the shares held by the Anglo Pacific Group Employee Benefit Trust for awards made under the Joint
Share Ownership Plan (‘JSOP’) (note 29 and note 30).
‘Retained earnings’ represents retained profits.
Of these reserves £104,415,000 are considered distributable as at 31 December 2018 (31 December 2017: £88,601,000).
3.13 Revenue recognition
The revenue of the Group comprises mainly royalty income. It is measured at the fair value of the consideration received or receivable after
deducting discounts, value added tax and other sales tax. The royalty income becomes receivable on extraction and sale of the relevant
minerals, and once able to be reliably measured, the revenue is recognised.
Interest income is accrued on a time basis, by reference to the carrying value and at the effective interest rate applicable, which is the rate that
exactly discounts estimated future cash receipts through the expected life of the financial asset to that asset’s net carrying amount.
Dividend income from investments is recognised when the shareholders’ rights to receive payment have been established.
3.14 Leases
Rentals payable under operating leases are charged to income on a straight-line basis over the term of the lease except where another more
systematic basis is more representative of the time pattern in which economic benefits from the lease asset are consumed.
In the event that lease incentives are received to enter into operating leases, such incentives are recognised as a liability. The aggregate
benefit of incentives is recognised as a reduction of rental expense on a straight-line basis over the lease, except where another systematic
basis is more representative of the time pattern in which economic benefits from the leased asset are consumed.
3.15 Dividend distribution
Dividend distribution to the Company’s shareholders is recognised as a liability in the Group’s financial statements in the period in which the
dividends are approved by the Company’s shareholders or, in the case of the interim dividend, when it is paid to the shareholders.
3.16 Alternative Performance Measures
The financial statements include certain Alternative Performance Measures (APMs) which include adjusted earnings per share, dividend cover
and free cash flow per share. These APMs are defined in the table of contents and explained in the Strategic Report on page 30, and are
reconciled to GAAP measures in the notes 13, 14 and 35 respectively.
CRITICAL ACCOUNTING JUDGEMENTS AND KEY SOURCES OF ESTIMATION UNCERTAINT Y
4
In the application of the Group’s accounting policies, the Directors are required to make judgements and estimates that can have a significant
impact on the financial statements. Estimates and judgements are regularly evaluated and are based on historical experience and other
factors, including expectations of future events that are believed to be reasonable under the circumstances. The most critical accounting
judgement relates to the classification of royalty arrangements and the key sources of estimation uncertainty relate to the calculation of the
fair value of certain royalty arrangements and the key assumption used when assessing impairment of property, plant and equipment and
intangible assets. The use of inaccurate or unreasonable assumptions in assessments made for any of these estimates could result in a
significant impact on the financial results.
Critical accounting judgements
Classification of royalty arrangements: initial recognition and subsequent measurement
The Directors must decide whether the Group’s royalty arrangements should be classified as:
• Intangible Assets in accordance with IAS 38 Intangible Assets;
• Financial Assets in accordance with IFRS 9 Financial Instruments; or
• Investment properties in accordance with IAS 40 Investment Property.
The Directors use the following selection criteria to identify the characteristics which determine which accounting standard to apply to each
royalty arrangement:
Type 1 – Intangible assets (“vanilla” royalties): Royalties, in their simplest form, are classified as intangible assets by the Group. The Group
considers the substance of a simple vanilla royalty to be economically similar to holding a direct interest in the underlying mineral asset.
Existence risk (the commodity physically existing in the quantity demonstrated), production risk (that the operator can achieve production
and operate a commercially viable project), timing risk (commencement and quantity produced, determined by the operator) and price risk
(returns vary depending on the future commodity price, driven by future supply and demand) are all risks which the Group participates in on a
similar basis to an owner of the underlying mineral licence. Furthermore, in a vanilla royalty, there is only a right to receive cash to the extent
there is production and there are no interest payments, minimum payment obligations or means to enforce production or guarantee
repayment. These are accounted for as intangible assets under IAS 38.
APG_AR18_26.03.19_BACK_PROOF 6Anglo Pacific Group PLC 2018 Annual Report & Accounts
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended 31 December 2018
Type 2 – Financial assets (royalties with additional financial protection): In certain circumstances where the ‘vanilla’ risk is considered too high,
but the Group still fundamentally believes in the quality or potential of the underlying resource, the Group will look to introduce additional
protective measures. This has typically taken the form of performance milestone penalties (usually resulting in the receipt of cash or cash
equivalent), minimum payment terms and interest provisions or mechanisms to convert the initial outlay into the equity instruments of the
operator in the event of project deferral. Once an operation is in production, these mechanisms generally fall away such that the royalty will
display identical characteristics and risk profile to the vanilla royalties; however, it is the contractual right to enforce the receipt of cash
through to production which results in these royalties being accounted for as financial assets under IFRS 9.
Type 3 – Investment property: Royalties which are derived from the ownership of sub-stratum land are accounted for as investment
properties under IAS 40, even though the substance of their commercial terms is identical to vanilla royalties. The Group does not expect to
obtain royalties in this manner going forward, as it is unusual for sub-stratum minerals not to be the property of the state.
A summary of the Group’s accounting approach is set out below:
Accounting classification
Substance of contractual terms
Accounting treatment
Royalty intangible assets
• Simple royalty with no right to
•
receive cash other than through
a royalty related to production
Investment is presented as an
intangible asset and carried at cost
less accumulated amortisation
and any impairment provision
• Royalty financial instruments
• Royalty arrangement with
a contractual right to receive
cash (e.g. through a mandated
interest rate or milestones
which, if not met, trigger
repayment)
• Royalty income is recognised as
revenue in the income statement
• Intangible asset is amortised on a
systematic basis
• Intangible asset is assessed for
indicators of impairment at each
period end
• Financial asset is recognised at
fair value on the balance sheet
• Fair value movements taken
through the income statement
(FVTPL), with the exception of the
LIORC investment where fair value
movements are taken through
other comprehensive income
FVTOCI.
• Royalty income is not recognised
as revenue in the income
statement and instead reduces
the fair value of the asset.
Examples
•
Narrabri
• Maracás Menchen
• Four Mile
• Salamanca
• Pilbara
• Ring of Fire
• Ca~nariaco
• EVBC
• Dugbe 1
• McClean Lake
• Piauí
• LIORC
•
Investment property
•
Direct ownership of
sub-stratum land
•
Investment property is carried at
fair value on the balance sheet
•
Kestrel
• Crinum
• Returns based on royalty
• Movements in fair value
related production
recognised in income statement
• Royalty income is recognised as
revenue in the income statement
Key sources of estimation uncertainty
Assessment of fair value of royalty arrangements held at fair value
A number of the Group’s royalty arrangements are held at fair value. Fair value is determined based on discounted cash flow models (and other
valuation techniques) using assumptions considered to be reasonable and consistent with those that would be applied by a market
participant. The determination of assumptions used in assessing fair values is subjective and the use of different valuation assumptions could
have a significant impact on financial results.
In particular, expected future cash flows, which are used in discounted cash flows models are inherently uncertain and could materially
change over time. They are significantly affected by a number of factors including reserves and resources and timing/likelihood of mines
entering production together with economic factors such as commodity prices, discount rates and exchange rates.
The Group’s most significant royalty arrangement held at fair value is Kestrel, for which the key assumptions and sensitivity analysis are set out
in note 16. The key assumptions relating to the Group’s royalty financial instruments classified as fair value through profit or loss, are set out in
notes 17 and 34.
FINANCIAL STATEMENTSAPG_AR18_26.03.19_BACK_PROOF 6Anglo Pacific Group PLC 2018 Annual Report & Accounts 101
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I
Impairment review of intangible assets
Intangible assets are assessed for indicators of impairment at each reporting date with the assessment considering variables such as the
production profiles, production commissioning dates where applicable, forecast commodity prices and guidance from the mine operators.
Where indicators are identified, the starting point for the impairment review will be to measure the expected future cash flows expected from
the royalty arrangement should the project continue/come into production. A pre-tax nominal discount rate of between 8.00% and 12.50% is
applied to the future cash flows. The discount rate of each royalty arrangement is derived using a capital asset pricing model specific to the
underlying project, making reference to the risk-free rate of return expected on an investment with the same time horizon as the expected
mine life, together with the country risk associated with the location of the operation. Changes in discount rate are most sensitive to changes
in the risk-free rate and the expected mine life.
The outcome of this net present value calculation is then risk weighted to reflect management’s current assessment of the overall likelihood
and timing of each project coming into production and royalty income arising. This assessment is impacted by news flow relating to the
underlying operation in the period, in conjunction with management’s assessment of the economic viability of the project based on
commodity price projections.
Uncertain tax provisions
The Group operates across many tax jurisdictions. Application of tax law can be complex and requires judgement to assess risk and estimate
outcomes, particularly in relation to the Group’s cross-border operations and transactions. The evaluation of tax risks considers both
amended assessments received and potential sources of challenge from tax authorities. In some cases, it may not be possible to determine a
range of possible outcomes or a reliable estimate of the potential exposure.
Tax matters with uncertain outcomes arise in the normal course of business and occur due to changes in tax law, changes in interpretation of
tax law, periodic challenges and disagreement with tax authorities. Tax obligations assessed as having probable future economic outflows
capable of reliable measurement are provided for at 31 December 2018 (refer to note 12). Matters with a possible economic outflow and/or
presently incapable of being measured reliably are contingent liabilities and disclosed in note 37.
SEGMENT INFORMATION
5
The Group’s chief operating decision maker is considered to be the Executive Committee. The Executive Committee evaluates the financial
performance of the Group based on a portfolio view of its individual royalty arrangements. Royalty income and its associated impact on
operating profit is the key focus of the Executive Committee. The income from royalties is presented based on the jurisdiction in which the
income is deemed to be sourced as follows:
AUSTRALIA: Kestrel, Narrabri, Four Mile, Pilbara
AMERICAS: McClean Lake, Maracás Menchen, LIORC, Ring of Fire, Piauí, Ca~nariaco
EUROPE:
EVBC, Salamanca
OTHER:
Dugbe I, and includes the Group’s mining and exploration interests
The following is an analysis of the Group’s results by reportable segment. The key segment result presented to the Executive Committee for
making strategic decisions and allocation of resources is operating profit as analysed below.
The segment information for the year ended 31 December 2018 is as follows (noting that total segment operating profit corresponds to
operating profit before impairments, revaluations and gains/losses on disposals which is reconciled to profit/(loss) before tax on the face of
the consolidated income statement):
Royalty related revenue
Amortisation of royalties
Operating expenses
TOTAL SEGMENT OPERATING PROFIT/(LOSS)
TOTAL SEGMENT ASSETS
Total assets include:
Australia
Royalties
£’000
36,189
(2,469)
(2,380)
31,340
Americas
Royalties
£’000
9,838
(505)
–
9,333
Europe
Royalties
£’000
–
–
–
–
All other
segments
£’000
77
–
(3,652)
(3,575)
Total
£’000
46,104
(2,974)
(6,032)
37,098
169,051
82,914
6,702
10,580
269,247
Additions to non-current assets (other than financial instruments
and deferred tax assets)
–
2,098
–
4
2,102
TOTAL SEGMENT LIABILITIES
38,738
1,178
668
10,555
51,139
APG_AR18_26.03.19_BACK_PROOF 6Anglo Pacific Group PLC 2018 Annual Report & Accounts
102
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended 31 December 2018
The segment information for the year ended 31 December 2017 is as follows:
Royalty related revenue
Amortisation of royalties
Operating expenses
Australia
Royalties
£’000
33,692
(2,623)
(2,987)
Americas
Royalties
£’000
3,927
(493)
–
Europe
Royalties
£’000
1,689
–
–
TOTAL SEGMENT OPERATING PROFIT/(LOSS)
28,082
3,434
1,689
All other
segments
£’000
258
–
(2,903)
(2,645)
Total
£’000
39,566
(3,116)
(5,890)
30,560
TOTAL SEGMENT ASSETS
168,823
43,122
6,328
35,089
253,362
Total assets include:
Additions to non-current assets (other than financial instruments
and deferred tax assets
TOTAL SEGMENT LIABILITIES
–
30,539
–
–
–
–
–
676
2,732
33,947
The amounts provided to the Executive Committee with respect to total segment assets are measured in a manner consistent with that of the
financial statements. These assets are allocated based on the operations of the segment and the physical location of the asset.
The amounts provided to the Executive Committee with respect to total segment liabilities are measured in a manner consistent with that of
the financial statements. These liabilities are allocated based on the operations of the segment.
The royalty related revenue in Australia of £36,189,000 (2017: £33,692,000) includes the Kestrel and Narrabri royalties which generated
£32,648,000 and £3,445,000 respectively (2017: Kestrel £28,746,000; Narrabri: £4,946,000). Individually the revenue generated by Kestrel
represented greater than 10% of the Group’s revenue in both 2017 and 2018. In 2017 the revenue generated by Narrabri represented greater
than 10% of the Group’s revenue.
The royalty related revenue in the Americas of £9,838,000 (2017: £3,927,000) includes the Maracás Menchen royalty which generated
£5,877,000 (2017: £2,001,000). Individually the revenue generated by Maracás Menchen represented greater than 10% of the Group’s
revenue in 2018.
The royalty related revenue from Narrabri, Maracás Menchen detailed above, together with the £0.1m from Four Mile (2017: nil) represents
revenue recognised from contracts with customers as defined by IFRS 15.
Impairments
The Group recognised an impairment charge of £2.2m (A$4.0m) in relation to the Pilbara royalty, which is within the “Australia royalties”
segment during the year ended 31 December 2018. There was no impairment of the Group’s royalty intangible assets during the year ended
31 December 2017. Refer to note 18 for further details on the Group’s impairments.
6 ROYALT Y REL ATED REVENUE
GROUP
Royalty income
Interest from royalty related financial assets
Dividends from royalty financial instruments
7A EXPENSE BY NATURE
GROUP
Employee benefit expense (note 8a)
Professional fees
Listing fees
Operating lease payments
Other expenses
2018
£’000
2017
£’000
42,067
2,088
1,949
37,382
2,184
–
46,104
39,566
2018
£’000
2017
£’000
3,866
1,173
97
229
667
3,794
1,073
127
227
669
6,032
5,890
FINANCIAL STATEMENTSAPG_AR18_26.03.19_BACK_PROOF 6Anglo Pacific Group PLC 2018 Annual Report & Accounts 103
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R
V
I
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W
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A
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G
I
C
R
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P
O
R
T
G
O
V
E
R
N
A
N
C
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F
I
N
A
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C
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A
L
S
T
A
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M
E
N
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S
O
T
H
E
R
I
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F
O
R
M
A
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O
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I
7B AUDITOR’S REMUNER ATION
GROUP
Fees payable to Company’s auditor for the audit of Parent Company and consolidated financial statements
FEES PAYABLE TO THE COMPANY’S AUDITOR AND ITS ASSOCIATES FOR OTHER SERVICES:
– The audit of Company’s subsidiaries
TOTAL AUDIT FEES
– Other assurance services pursuant to legislation
– Other services
TOTAL NON-AUDIT FEES
2018
£’000
2017
£’000
147
26
173
56
7
63
83
34
117
30
23
53
Details of the Company’s policy on the use of auditors for non-audit services, the reasons why the auditor was used rather than another
supplier and how the auditor’s independence and objectivity are safeguarded are set out in the Audit Committee Report on page 63. No
services were provided pursuant to contingent fee arrangements.
8A EMPLOYEE COSTS
Wages and salaries
Share-based awards to directors and employees
Social security costs
Other pension costs
2018
£’000
2,174
1,323
276
93
Group
2017
£’000
2,293
1,174
261
66
3,866
3,794
2018
£’000
2,143
1,323
273
93
3,832
Company
2017
£’000
2,171
1,174
258
66
3,669
8B RETIREMENT BENEFITS PL ANS
The Group operates a money purchase group personal pension scheme. Under this scheme the Group makes contributions to personal
pension plans of individual Directors and employees. The pension cost charge represents contributions payable by the Group to these plans
in respect of the year.
The total cost charged to income of £93,000 (2017: £66,000) represents contributions payable to these schemes by the Group at rates
specified in the rules of the schemes. As at 31 December 2018, contributions of £11,600 (2017: £8,500) due in respect of the current reporting
period had not been paid over to the schemes.
8C AVER AGE NUMBER OF PEOPLE EMPLOYED
GROUP
Number of employees
GROUP
Average number of people (including executive directors) employed:
Executive directors
Administration
2018
2017
10
10
2018
2017
1
9
10
1
9
10
Company
The average number of administration staff employed by the Company during the year, including Executive Directors was 9 (2017: 9).
Directors’ salaries are shown in the Directors’ Remuneration Report on pages 66 to 77, including the highest paid Director.
APG_AR18_26.03.19_BACK_PROOF 6Anglo Pacific Group PLC 2018 Annual Report & Accounts
104
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended 31 December 2018
9
FINANCE INCOME
GROUP
Interest on bank deposits
10 FINANCE COSTS
GROUP
Professional fees
Revolving credit facility fees and interest
11 OTHER NET INCOME/(LOSSES)
GROUP
Revaluation of foreign exchange instruments
Gain on disposal of royalty financial instrument
Other losses
12
INCOME TA X EXPENSE
ANALYSIS OF CHARGE FOR THE YEAR
United Kingdom corporation tax credit
Overseas tax
Adjustments in respect of prior years
Current tax
Deferred tax charge in current year
Adjustments in respect of prior years
Deferred tax
INCOME TAX EXPENSE
2018
£’000
2017
£’000
82
82
2018
£’000
(574)
(468)
(1,042)
2018
£’000
387
1,720
(64)
2,043
2018
£’000
14
6,615
1,749
8,378
7,373
–
7,373
15,751
19
19
2017
£’000
(422)
(373)
(795)
2017
£’000
(188)
–
(300)
(488)
2017
£’000
3
2,132
(138)
1,997
853
(1,530)
(677)
1,320
FINANCIAL STATEMENTSAPG_AR18_26.03.19_BACK_PROOF 6Anglo Pacific Group PLC 2018 Annual Report & Accounts 105
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R
E
P
O
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T
G
O
V
E
R
N
A
N
C
E
F
I
N
A
N
C
I
A
L
S
T
A
T
E
M
E
N
T
S
O
T
H
E
R
I
N
F
O
R
M
A
T
O
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I
The effective tax rate for the year of 35.4% (2017: 11.2%) is higher (2017: lower) than the applicable weighted average statutory rate of
corporation tax in the United Kingdom of 19.00% (2017: 19.25%). The reconciling items are:
Factors affecting tax charge for the year:
PROFIT BEFORE TAX
Tax on profit calculated at United Kingdom corporation tax rate of 19.00% (2017: 19.25%)
TAX EFFECTS OF:
Items non-taxable/deductible for tax purposes:
Non-deductible expenses
Non-taxable income
Temporary difference adjustments
Utilisation of losses not previously recognised
Current year losses not recognised
Write down of deferred tax assets previously recognised
Adjustment in deferred tax due to change in tax rate
Other temporary difference adjustments
Other adjustments
Withholding taxes
Effect of differences between local and United Kingdom tax rates
Prior year adjustments to current tax
Other adjustments
INCOME TAX EXPENSE
2018
£’000
2017
£’000
44,544
8,463
11,847
2,281
1,393
(2,307)
1,120
–
(826)
(1,873)
–
1,841
369
2,851
4,732
1,108
–
(1,986)
199
1,016
(2,418)
(667)
2,132
1,309
(1,668)
2
15,751
1,320
The Group’s effective tax rate for the year ended 31 December 2018 was 35.4% (2017: 11.2%). The higher effective tax rate in 2018 compared
to the headline tax rate is mainly due to the majority of the Group’s revenue producing assets being held in Australian subsidiaries and as such
are subject to higher corporation tax rate.
In future periods, it is expected that the Group’s effective tax rate will mainly be driven by the prevailing Australian tax corporation tax rates.
Refer to note 27 for information regarding the Group’s deferred tax assets and liabilities.
Uncertain tax provisions
As outlined in note 4, tax matters with uncertain outcomes arise in the normal course of business and occur due to changes in tax law,
changes in interpretation of tax law, periodic challenges and disagreement with tax authorities. Where such matters are assessed as having
probable future economic outflows capable of reliable measurement they are provided for. During the year, the Group increased its provision
for uncertain tax positions by £1.7m (2017: nil). Matters with possible economic outflow and/or presently incapable of being measured reliably
are contingent liabilities and are disclosed in note 37.
The Group does not currently have any material unresolved tax matters or disputes with tax authorities. Recent changes to and the
interpretation of tax legislation in certain jurisdictions where the Group has established structures may however, be a potential source of
challenge from tax authorities. Due to the complexity of changes in international tax legislation, the Group has taken local advice and has
recognised provisions where necessary. None of these provisions are material in relation to the Group’s assets or liabilities.
13 EARNINGS PER SHARE
Earnings per ordinary share is calculated on the Group’s profit after tax of £28,793,000 (2017: £10,527,000) and the weighted average number
of shares in issue during the year of 180,277,848 (2017: 178,895,115).
NET PROFIT ATTRIBUTABLE TO SHAREHOLDERS
Earnings – basic
Earnings – diluted
2018
£’000
2017
£’000
28,793
28,793
10,527
10,527
APG_AR18_26.03.19_BACK_PROOF 6Anglo Pacific Group PLC 2018 Annual Report & Accounts
106
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended 31 December 2018
WEIGHTED AVERAGE NUMBER OF SHARES IN ISSUE
Basic number of shares outstanding
Dilutive effect of Employee Share Option Scheme
DILUTED NUMBER OF SHARES OUTSTANDING
Earnings per share – basic
Earnings per share – diluted
2018
2017
180,277,848 178,895,115
353,179
267,660
180,631,027 179,162,775
15.97p
15.94p
5.88p
5.88p
Earnings per ordinary share excludes the issue of shares under the Group’s JSOP, as the Employee Benefit Trust has waived its right to receive
dividends on the 925,933 ordinary 2p shares it holds as at 31 December 2018 (31 December 2017: 925,933).
Adjusted earnings per share
Adjusted earnings represent the Group’s underlying operating performance from core activities. Adjusted earnings is the profit attributable to
equity holders less all valuation movements, non-cash impairments and amortisation charges (which are non-cash adjustments that arise
primarily due to changes in commodity prices), finance costs, any associated deferred tax and any profit or loss on non-core asset disposals as
these are not expected to be ongoing.
Valuation and other non-cash movements such as these are not considered by management in assessing the level of profit and cash
generation available for distribution to shareholders. As such, an adjusted earnings measure is used which reflects the underlying
contribution from the Group’s royalties during the year.
NET PROFIT ATTRIBUTABLE TO SHAREHOLDERS
Earnings – basic and diluted for the year ended 31 December 2018
28,793
15.97p
15.94p
Earnings
£’000
Earnings
per share
p
Diluted
earnings
per share
p
Adjustment for:
Amortisation of royalty intangible assets
Gain on sale of royalty financial instruments
Impairment of royalty and exploration intangible assets
Receipts from royalty financial instruments
Revaluation of royalty financial instruments
Revaluation of coal royalties (Kestrel)
Revaluation of foreign currency instruments
Share-based payments and associated national insurance
Tax effect of the adjustments above
2,974
(1,720)
2,234
1,975
871
(10,061)
(387)
1,323
6,481
Adjusted earnings – basic and diluted for the year ended 31 December 2018
32,483
18.02p
17.98p
Net profit attributable to shareholders
Earnings – basic and diluted for the year ended 31 December 2017
10,527
5.88p
5.88p
Earnings
£’000
Earnings
per share
p
Diluted
earnings
per share
p
Adjustment for:
Amortisation of royalty intangible assets
Gain on sale of mining and exploration interests
Impairment of mining and exploration interests
Revaluation of royalty financial instruments
Revaluation of coal royalties (Kestrel)
Revaluation of foreign currency instruments
Share-based payments and associated national insurance
Tax effect of the adjustments above
Adjusted earnings – basic and diluted for the year ended 31 December 2017
3,116
(1,774)
219
6,324
11,933
188
1,173
(1,612)
30,094
16.82p
16.80p
FINANCIAL STATEMENTSAPG_AR18_26.03.19_BACK_PROOF 6Anglo Pacific Group PLC 2018 Annual Report & Accounts 107
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I
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P
O
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G
O
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A
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F
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In 2015 the Group recognised an impairment and a corresponding deferred tax asset and gain of £7.6m, which was excluded from adjusted
earnings. In subsequent years a deferred tax expense arose on utilisation of the losses which is therefore also excluded from adjusted
earnings. The adjustment included in tax effect of adjustments in the year ended 31 December 2018 was £3.5m (2017: £4.1m).
In calculating the adjusted earnings per share, the weighted average number of shares in issue takes into account the dilutive effect of the
Employee Share Option Scheme in those years where the Group has adjusted earnings. In years where the Group has an adjusted loss, the
Employee Share Option Scheme is considered anti-dilutive as including them in the diluted number of shares outstanding would decrease
the loss per share, as such they are excluded.
The weighted average number of shares in issue for the purpose of calculating basic and diluted earnings per share and basic and diluted
adjusted earnings per share are as follows
WEIGHTED AVERAGE NUMBER OF SHARES IN ISSUE
Basic number of shares outstanding
Dilutive effect of Employee Share Option Scheme
DILUTED NUMBER OF SHARES OUTSTANDING
2018
2017
180,277,848 178,895,115
353,179
267,660
180,631,027 179,162,775
14 DIVIDENDS AND DIVIDEND COVER
On 15 February 2018 an interim dividend of 1.50p per share was paid to shareholders in respect of the year ended 31 December 2017. On
31 May 2018 a final dividend of 2.50p per share was paid to shareholders to make a total dividend for the year ended 31 December 2017
of 7.00p per share. The first quarterly dividend of 1.625p for the year ended 31 December 2018 was paid to shareholders on 15 August 2018.
On 15 November 2018 the second quarterly dividend of 1.625p was paid to shareholders. Total dividends paid during the year were £12.9m
(2017 £15.9m).
On 14 February 2019 a further quarterly dividend of 1.625p per share was paid to shareholders in respect of the year ended 31 December
2018. This dividend has not been included as a liability in these financial statements. The Directors propose that a final dividend of 3.125p per
share be paid to shareholders on 30 May 2019, to make a total dividend for the year of 8.00p per share. This dividend is subject to approval by
shareholders at the AGM and has not been included as a liability in these financial statements.
The proposed final dividend for 2018 will be payable to all shareholders on the Register of Members on 17 May 2019. The total estimated
dividend to be paid is £5.6m. At the present time the Board has resolved not to offer a scrip dividend alternative.
Dividend cover
Dividend cover is calculated as the number of times adjusted earnings per share exceeds the dividend per share. The Group’s adjusted
earnings per share for the year ended 31 December 2018 is 18.02p per share (note 13) with dividends for the year totalling 8.00p, resulting
in dividend cover of 2.3x (2017: adjusted earnings per share 16.82p, dividends totalling 7.00p, dividend cover 2.4x).
15 PROPERT Y, PL ANT AND EQUIPMENT
Group
GROSS CARRYING AMOUNT
At 1 January 2018
Additions
At 31 December 2018
DEPRECIATION AND IMPAIRMENT
At 1 January 2018
Depreciation
At 31 December 2018
CARRYING AMOUNT 31 DECEMBER 2018
Other
assets
£’000
Equipment
and fixtures
£’000
1,356
–
1,356
(1,356)
–
(1,356)
–
276
4
280
(232)
(26)
(258)
22
Total
£’000
1,632
4
1,636
(1,588)
(26)
(1,614)
22
APG_AR18_26.03.19_BACK_PROOF 6Anglo Pacific Group PLC 2018 Annual Report & Accounts
108
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended 31 December 2018
Group
GROSS CARRYING AMOUNT
At 1 January 2017
At 31 December 2017
DEPRECIATION AND IMPAIRMENT
At 1 January 2017
Depreciation
At 31 December 2017
CARRYING AMOUNT 31 DECEMBER 2017
Other
assets
£’000
Equipment
and fixtures
£’000
1,356
1,356
(1,356)
–
(1,356)
–
276
276
(199)
(33)
(232)
44
Total
£’000
1,632
1,632
(1,555)
(33)
(1,588)
44
Other assets relate to the Group’s Panorama and Trefi coal projects in British Columbia, Canada and the Group’s talc deposit in Shetland,
Scotland.
Impairment
In 2014 the Directors took a view that the Group’s ability to monetise both the Trefi coal project and the Shetland talc deposit was inherently
uncertain and as a result fully impaired these assets resulting in an impairment charge of £1.4m. There were no impairments during 2017
or 2018.
Company
GROSS CARRYING AMOUNT
At 1 January 2018
Additions
At 31 December 2018
DEPRECIATION AND IMPAIRMENT
At 1 January 2018
Depreciation
At 31 December 2018
CARRYING AMOUNT 31 DECEMBER 2018
Company
GROSS CARRYING AMOUNT
At 1 January 2017
At 31 December 2017
DEPRECIATION AND IMPAIRMENT
At 1 January 2017
Depreciation
At 31 December 2017
CARRYING AMOUNT 31 DECEMBER 2017
16 COAL ROYALTIES (KESTREL)
At 1 January 2017
Foreign currency translation
Loss on revaluation of coal royalties
At 31 December 2017
Foreign currency translation
Gain on revaluation of coal royalties
At 31 December 2018
Other
assets
£’000
Equipment
and fixtures
£’000
821
–
821
(821)
–
(821)
–
Other
assets
£’000
821
821
(821)
–
(821)
–
276
4
280
(232)
(26)
(258)
22
Equipment
and fixtures
£’000
276
276
(199)
(33)
(232)
44
Total
£’000
1,097
4
1,101
(1,053)
(26)
(1,079)
22
Total
£’000
1,097
1,097
(1,020)
(33)
(1,053)
44
Group
£’000
116,885
(686)
(11,933)
104,266
(4,549)
10,061
109,778
FINANCIAL STATEMENTSAPG_AR18_26.03.19_BACK_PROOF 6Anglo Pacific Group PLC 2018 Annual Report & Accounts 109
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G
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G
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N
A
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F
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A
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The Group’s coal royalty entitlements comprise the Kestrel and Crinum coal royalties, and derive from mining activity carried out within the
Group’s private land area in Queensland, Australia. Rather uniquely to this royalty, the sub-stratum land is the property of the freeholder,
including the minerals contained within. The ownership of the land therefore entitles the Group to a royalty, equivalent to what the State
receives on areas outside the Group’s private land. This royalty is accounted for as Investment Property in accordance with IAS 40.
The coal royalty was valued during December 2018 at £109.8m (A$198.2m) (2017: £104.3m and A$180.2m) by an independent coal industry
advisor, on a net present value of the pre-tax cash flow discounted at a nominal rate of 7.50% (2017: 7.50%). The key assumptions in the
independent valuation relate to price and discount rate.
The price assumptions used in the 2018 valuation decrease from US$165/t in the short-term to a long-term flat nominal price of US$128/t.
If the price were to increase or decrease 10% over the life of the mine the valuation effect would be:
• a 10% reduction in the coal price would have resulted in the coal royalties being valued at A$167.7m (£92.8m) and an £17.1m reversal of the
revaluation gain in the income statement, resulting in a revaluation loss of £7.0m; and
• a 10% increase in the coal price would have resulted in the coal royalties being valued at A$229.5m (£127.1m) and an increase of £17.5m in
the revaluation gain in the income statement to £27.6m.
The pre-tax nominal discount rate used for the asset is 7.50%, if the discount rate used were to increase or decrease by 1% the valuation effect
would be:
• a 1% reduction in the nominal discount rate would have resulted in the coal royalties being valued at A$204.0m (£113.0m) and a £3.2m
increase in the revaluation gain in the income statement to £13.3m; and
• a 1% increase in the nominal discount rate would have resulted in the coal royalties being valued at A$192.8m (£106.8m) and a £3.1m
decrease in the revaluation gain in the income statement to £7.0m.
The net royalty income from this investment is currently taxed in Australia at a rate of 30%. The revaluation of the underlying Australian dollar
asset is recognised in the Income Statement with the retranslation to the Group’s sterling presentation currency recognised in the foreign
currency translation reserve.
Were the coal royalty to be realised at the revalued amount there are £5.1m (A$9.2m) of capital losses potentially available to offset against
taxable gains. As it is not the Group’s present intention to dispose of the coal royalty, these losses have not been included in the deferred tax
calculation (note 27). Were the coal royalty to be carried at cost the carrying value would be £0.2m (2017: £0.2m). The Directors do not
presently have any intention to dispose of the coal royalty.
Refer to note 34 for additional fair value disclosures relating to Kestrel.
The shares over the entity which is the beneficial owner of the Kestrel royalty have been guaranteed as security in connection with the
Group’s borrowing facility (note 26).
17 ROYALT Y FINANCIAL INSTRUMENTS
The details of the Group’s royalty financial instruments, which are held at fair value are summarised below:
Original Cost
’000
Royalty Rate
Escalation
Classification
31 December 2018
Carrying value
£’000
31 December 2017
Carrying value
£’000
Commodity
Gold, Silver,
Copper
EVBC
C$7,500
2.50%
3% gold >US$1,100/oz
Dugbe 1
Gold
US$15,000
2.00%
McClean Lake
Uranium
C$2,700
–
2.5% >US$1,800/oz &
production <50,000oz/qrt
22.5% of tolling milling receipt
on production >215Mlbs
Piaui
LIORC
Nickel-Cobalt
US$2,000
Iron Ore
C$66,105
1.00%
7.00%
–
–
FVTPL
FVTPL
FVTPL
FVTPL
FVTOCI
3,929
1,226
1,671
1,011
38,368
46,205
3,979
3,408
1,877
1,603
–
10,867
The Group’s royalty instruments are represented by four royalty agreements, EVBC, Dugbe 1, McClean Lake, and Piauí which entitle the Group
to either the repayment of principal and a net smelter return (“NSR”) royalty for the life of the mine or a gross revenue royalty (“GRR”) where
the project commences commercial production or the repayment of principal where it does not. All four royalty agreements are classified as
fair value through profit or loss (‘FVTPL’).
The Group’s entitlements to cash by way of the repayment of the principal and the NSR royalty or the GRR have been classified as fair value
through profit or loss in accordance with IFRS 9 and are carried at fair value in accordance with the Group’s classification of royalty
arrangements criteria set out in note 4.
The Group’s fifth royalty financial instrument, is its equity investment in Labrador Iron Ore Company (‘LIORC’), which was acquired during 2018
and entitles the Group to a share of the 7% GRR LIORC receives from the Iron Ore Company of Canada (‘IOC’) mine and distributes to its
shareholders via dividends. As LIORC is a single asset company, being GRR over the IOC mine, the Group has classified its investment in LIORC
as a royalty financial instrument and made an irrevocable election to designate it as FVTOCI.
APG_AR18_26.03.19_BACK_PROOF 6Anglo Pacific Group PLC 2018 Annual Report & Accounts
110
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended 31 December 2018
The movement in the Group’s royalty financial instruments is summarised in the table below.
FAIR VALUE
At 1 January 2017
Additions
Revaluation of royalty financial instruments recognised in profit or loss
Revaluation of royalty financial instruments recognised in equity
Foreign currency translation
At 31 December 2017
Additions
Royalties due or received from royalty financial instruments
Revaluation of royalty financial instruments recognised in profit or loss
Revaluation of royalty financial instruments recognised in equity
Foreign currency translation
At 31 December 2018
Group
£’000
Company
£’000
13,556
3,323
(6,324)
496
(184)
10,867
38,408
(1,975)
(871)
290
(514)
6,724
–
(3,076)
496
(165)
3,979
–
(1,975)
1,925
–
–
46,205
3,929
Jogjakarta
The Group received £1.7m (US$2.5m) during 2018 in final settlement of its outstanding US$4m 8% secured debenture with Indo Mines, that
was fully impaired at 31 December 2017. Given the challenges which the project encountered, the Group commenced discussions with the
majority shareholder of Indo Mines in 2017 which ultimately culminated in a takeover, including the Group’s outstanding debenture. As a
result, the Group received US$4.9m over the life of the debenture and represents a highly satisfactory exit considering the many challenges
which the project has faced.
EVBC
The Group’s EVBC royalty acquired in 2008 was initially accounted for as an available-for-sale equity financial asset, carried at fair value with all
movements in fair value recognised in the investment revaluation reserve in equity. Following the adoption of IFRS 9, EVBC was classified as
FVTPL resulting in movements in the fair value being recognised directly in the income statement. In addition, the royalties received from
EVBC following the adoption of IFRS 9 are no longer recognised in the income statement but instead reduce the fair value.
The Group received royalties from EVBC totalling £2.0m during the year ended 31 December 2018, which initially reduced the carrying value.
As at 31 December 2018 the Group determined the fair value of EVBC by calculating the discounted future flows of the royalty with an 8.75%
(2017: 7.00%) pre-tax nominal discount rate, resulting in a valuation of £3.9m (2017: £3.9m). As a result of the fair value remaining constant
year on year, the royalties received equated to the royalty financial instrument valuation gain recognised in the income statement.
Dugbe 1
On February 23, 2016, Hummingbird Resources PLC (‘Hummingbird’), the operator of the Dugbe 1 project, gave notice under the US$15.0m
royalty financing arrangement with the Group that a Mineral Development Agreement (‘MDA’) had been approved by the Liberian
Government although this is yet to be signed into law. There are certain mechanisms available to the Group to recover the US$15.0m
investment, although at present these seem unlikely to be triggered.
The net smelter return royalty over the Dugbe 1 project is classified as FVTPL as outlined in note 4. As at 31 December 2018 the Group
assessed the likely start date of commercial production at Dugbe 1 to be 2030 (2017: 2025), and have applied a 75% (2017: 75%) probability
factor to the project reaching commercial production to the discounted future flows of the royalty with an 22.00% (2017: 18.00%) pre-tax
nominal discount rate, resulting in a valuation of £1.2m (2017: £3.4m). The £2.1m decrease (2017: £3.4m decrease) in carrying value has been
recognised as a royalty financial instrument valuation charge to the income statement for the year.
McClean Lake
On February 13, 2017, the Group completed a C$43.5m (£26.6m) financing and streaming agreement with Denison Mines Inc (‘Denison’). The
financing agreement comprises two separate transactions: a 13-year amortising secured loan of C$40.8m (£24.9m) with an interest rate of
10% per annum payable to the Group and is classified as non-current other receivables (note 22); and a streaming agreement, which entitles
the Group to receive Denison’s portion of toll milling proceeds from the McClean Lake Mill after the first 215Mlbs of throughput from July 1,
2016, was acquired for C$2.7m (£1.7m) and is classified as FVTPL in accordance with note 4.
As at 31 December 2018, the Group assessed the probability of the McClean Lake Mill achieving throughput in excess of 215Mlbs at 50%
(2017: 50%), and applied this to the discounted future cash flows of the stream with a 7.50% (2017: 6.5%) pre-tax nominal discount rate,
resulting in a valuation of £1.7m (2017: £1.9m). The £0.2m decrease (2017: £0.2m increase) in the carrying value of the stream has been
recognised in the income statement for the year.
Piaui
On September 14, 2017, the Group acquired a 1% gross revenue royalty over the Piauí nickel-cobalt project in Brazil for US$2.0m (£1.6m).
Under the acquisition agreement, subject to certain development milestones, the Group has the option to acquire up to a total of US$70.0m
in additional gross revenue royalties. On initial recognition the Group decided to invoke the fair value option in classifying this royalty financial
instrument, due to there being one or more embedded options that are not closely related in the underlying contract. Following the adoption
of IFRS 9 the Group continues classify the Piauí royalty as FVTPL.
FINANCIAL STATEMENTSAPG_AR18_26.03.19_BACK_PROOF 6Anglo Pacific Group PLC 2018 Annual Report & Accounts 111
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R
V
I
E
W
S
T
R
A
T
E
G
I
C
R
E
P
O
R
T
G
O
V
E
R
N
A
N
C
E
F
I
N
A
N
C
I
A
L
S
T
A
T
E
M
E
N
T
S
O
T
H
E
R
I
N
F
O
R
M
A
T
O
N
I
As at 31 December 2018 the Group assessed the probability of the Piauí project reaching commercial production at 25% (2017: 30%) and
applied this to the discounted future cash flows of the royalty with a 13.50% (2017: 12.00%) pre-tax nominal discount rate, resulting in a
valuation of £1.0m (2017: £1.6m) which is equal to the acquisition cost. The £0.5m decrease in carrying value has been recognised as a royalty
financial instrument valuation charge to the income statement for the year.
LIORC
During the year ended 31 December 2018, the Group acquired 2,747,890 shares in Labrador Iron Ore Royalty Company (‘LIORC’) at a cost of
C$60.1m (£38.4m). As the dividend income the Group receives from LIORC is derived from the 7% GRR that LIORC holds over the Labrador
operations of the Iron Ore Company of Canada (‘IOC’), and the 10% commission LIORC earns on all iron ore product produced, sold and
shipped by IOC, together with any dividends LIORC receives from its 15.10% equity interest IOC, the Group has classified its investment in
LIORC as a royalty financial instrument. On initial recognition the Group made the irrevocable election to designate this investment as FVTOCI.
As at 31 December 2018, the Group’s investment in Labrador was valued at £38.7m, resulting in a £0.3m gain on revaluation being recognised
in the investment revaluation reserve. The resulting dividends from the Group’s investment in Labrador Iron Ore have been classified as
royalty related revenue (as described in note 2(c)).
18 ROYALT Y AND EXPLOR ATION INTANGIBLE ASSETS
The Group’s intangibles comprise capitalised exploration and evaluation costs and royalty interests.
Group
GROSS CARRYING AMOUNT
At 1 January 2018
Additions
Foreign currency translation
At 31 December 2018
AMORTISATION AND IMPAIRMENT
At 1 January 2018
Amortisation charge
Impairment charge
Foreign currency translation
At 31 December 2018
CARRYING AMOUNT 31 DECEMBER 2018
Group
GROSS CARRYING AMOUNT
At 1 January 2017
Additions
Foreign currency translation
At 31 December 2017
AMORTISATION AND IMPAIRMENT
At 1 January 2017
Amortisation charge
Foreign currency translation
At 31 December 2017
CARRYING AMOUNT 31 DECEMBER 2017
Company
ROYALTY INTERESTS
At 1 January and 31 December
Exploration and
evaluation costs
£’000
Royalty
interests
£’000
Total
£’000
697
115,069
115,766
–
–
2,098
(4,541)
2,098
(4,541)
697
112,626
113,323
(697)
(37,648)
(38,345)
–
–
–
(2,974)
(2,234)
1,424
(697)
(41,432)
–
71,194
(2,974)
(2,234)
1,424
(42,129)
71,194
Exploration and
evaluation costs
£’000
Royalty
interests
£’000
Total
£’000
697
115,017
115,714
–
–
1,125
(1,073)
1,125
(1,073)
697
115,069
115,766
(697)
(34,970)
(35,667)
–
–
(3,116)
438
(3,116)
438
(697)
(37,648)
(38,345)
–
77,421
77,421
2018
£’000
2017
£’000
2,349
2,349
Exploration and evaluation costs
The exploration and evaluation costs comprise expenditure that was directly attributable to the Trefi coal project in British Columbia, Canada.
Due to the inherent uncertainty that the Trefi coal project will be developed, the Group fully impaired it in 2014.
APG_AR18_26.03.19_BACK_PROOF 6Anglo Pacific Group PLC 2018 Annual Report & Accounts
112
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended 31 December 2018
Acquisition of royalty interests
Under the terms of the Maracás Menchen royalty sale agreement entered into in 2014, a further US$3.0m of cash is payable when the project
reaches certain annualised production milestones. The first of these milestones was annualised production over a quarter of 9,500t which
was achieved in Q3 2017, resulting in the Group paying the first tranche of deferred consideration of US$1.5m (£1.1m) in November 2017. This
amount had previously been provided for with a corresponding deferred acquisition cost asset (see note 20) which was transferred to
intangibles on payment in the year.
The Group has recognised the second tranche of deferred consideration of U$1.5m (£1.2m) due under the royalty agreement to acquire the
Maracás Menchen royalty. This follows the record production achieved by Largo throughout H1 2018, and Group’s expectation that Largo will
achieve, in a quarter, an annualised rate of production of 12,000t in the next 12 to 18 months. A corresponding liability has been included in
trade and other payables on the balance sheet as at 31 December 2018 (refer to note 28).
On 11 June 2018, the Group completed its acquisition of the 0.5% NSR over the Canariaco copper royalty from Entrée Resources Limited in
exchange for 478,951 new ordinary shares of 2p each, issued at 156.6p per share resulting total consideration for the royalty £0.8m (US$1.0m).
Amortisation of royalty interests
The Group’s royalty intangible assets are amortised on a straight-line basis, upon the commencement of production at the underlying mining
operation, over the life of mine.
Three of the underlying mining operations of the Group’s royalty intangibles assets were in production during 2018, and were amortised on
the following basis:
Royalty interest
Narrabri
Maracás Menchen
Four Mile
Carrying value
31 December 2018
A$’000
72,675
24,680
2,226
Carrying value
31 December 2017
A$’000
76,715
Estimated life
of mine
22 years
Remaining life
of mine
18 years
23,456
2,597
29 years
10 years
25 years
6 years
The amortisation charge for the period, of £3.0m (31 December 2017: £3.1m) relates to the Group’s producing royalties, Narrabri, Maracás
Menchen and Four Mile. Amortisation of the remaining interests will commence once they begin commercial production.
at 31 December 2018, the shares over the entity which is the beneficial owner of the Narrabri royalty have been guaranteed as security in
connection with the Group’s borrowing facility (note 26).
Impairments of royalty intangible assets
As described in notes 3.6 and 3.7, at each reporting date the Group’s royalty intangible assets are reviewed for any impairment indicators.
Consideration is given to the presence or occurrence of adverse operational developments at the underlying mines, together with any
significant declines in commodity prices. Where impairment indicators exist, a full impairment review is carried out to determine whether the
discounted future expected cash flows (calculated on a value-in-use basis) exceed cost. Note 4 outlines the impairment methodology applied.
Pilbara iron ore royalty
Despite recent announcements by BHP in relation to the expansion of Mining Area C, and in particular the South Flank development in the
Pilbara, limited information is publicly available for the Group to assess the likely timing of the development of tenements covered by the
Group’s royalty, the largest of which covers the Railway Deposit which is located to the north of the South Flank development.
In the absence of any public available information, the Group has estimated the likely start date for production from tenements covered by
the Group’s royalty to be 2030 (2017: start date 2027). Applying this start date to the Group’s valuation model, together with a pre-tax nominal
discount rate of 8.00% and a long-term iron ore price of US$106/dmtu for lump and US$94/dmtu for fines resulted in a net present value of
the discount future royalty cash flows of A$17.5m, compared to the carrying value of A$21.5m. As a result of the net present value being lower
than the carrying value, the Group recognised an impairment charge of A$4.0m (£2.2m) for the year ended 31 December 2018.
There were no impairments recognised during the year ended 31 December 2017.
19 MINING AND EXPLOR ATION INTERESTS
FAIR VALUE THROUGH OTHER COMPREHENSIVE INCOME
At 1 January 2017
Disposals
Revaluation adjustment
Foreign currency translation
At 31 December 2017
Return of capital
Disposals
Revaluation adjustment
Foreign currency translation
At 31 December 2018
Group
£’000
Company
£’000
17,062
(2,424)
1,737
56
13,861
(2,424)
1,836
–
16,431
13,273
(827)
(612)
–
(562)
(12,147)
(10,154)
3
2,848
2
2,559
FINANCIAL STATEMENTSAPG_AR18_26.03.19_BACK_PROOF 6Anglo Pacific Group PLC 2018 Annual Report & Accounts 113
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A
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The fair values of listed securities are based on quoted market prices. Unquoted investments and royalty options are initially recognised using
cost where fair value cannot be reliably determined. In the absence of an active market for these securities, the Group considers each
unquoted security to ensure there has been no material change in the fair value since initial recognition.
Following the transition to IFRS 9 on 1 January 2018, mining and exploration interests are now held at fair value through other comprehensive
income, with the effect that the gains and losses on disposal and impairment losses are no longer recycled from reserves to the income
statement for this category of asset, but rather are transferred to retained earnings.
For the year ended 31 December 2018 the Group realised £0.6m in cash (2017: £2.4m) through its disposal of a number of its mining and
exploration interests from which management no longer considered royalty opportunities to exist. These disposals resulted in a gain of £0.4m
for the year ended 31 December 2018 which was transferred to retained earnings following the adoption of IFRS 9 (2017: £1.8m recycled to
the income statement).
In addition to the disposals outlined above, the Group received £0.8m in cash (2017: £nil) from one of its unquoted investments following a
capital reduction.
Total mining and exploration interests at 31 December are represented by:
Quoted investments
Unquoted investments
Number of investments
20 DEFERRED COSTS
Group
CARRYING AMOUNT
At 1 January 2018
Additions
Released to income during the year
Foreign currency translation
CARRYING AMOUNT AT 31 DECEMBER 2018
Group
CARRYING AMOUNT
At 1 January 2017
Transferred from borrowings
Additions
Transfer to royalty intangible assets
Transfer to royalty financial instrument
Transfer to interest bearing receivable
Released to income during the year
Foreign currency translation
CARRYING AMOUNT AT 31 DECEMBER 2017
Company
CARRYING AMOUNT
At 1 January 2018
Additions
Released to income during the year
CARRYING AMOUNT AT 31 DECEMBER 2018
Group
£’000
2,443
405
2,848
2018
Company
£’000
2,386
173
2,559
Group
£’000
13,270
3,161
16,431
2017
Company
£’000
13,095
178
13,273
9
7
10
8
Deferred
acquisition costs
£’000
Deferred
financing costs
£’000
202
219
(202)
–
219
487
796
(574)
(2)
707
Deferred
acquisition costs
£’000
Deferred
financing costs
£’000
1,370
–
224
(1,125)
(11)
(153)
(13)
(90)
202
–
133
632
–
–
–
(279)
1
487
Deferred
acquisition costs
£’000
Deferred
financing costs
£’000
202
219
(202)
219
247
398
(280)
365
Total
£’000
689
1,015
(776)
(2)
926
Total
£’000
1,370
133
856
(1,125)
(11)
(153)
(292)
(89)
689
Total
£’000
449
617
(482)
584
APG_AR18_26.03.19_BACK_PROOF 6Anglo Pacific Group PLC 2018 Annual Report & Accounts
114
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended 31 December 2018
Company
CARRYING AMOUNT
At 1 January 2017
Additions
Transfer to interest bearing receivable
Released to income during the year
Transfer to subsidiary
CARRYING AMOUNT AT 31 DECEMBER 2017
Deferred
acquisition costs
£’000
Deferred
financing costs
£’000
155
224
(153)
(13)
(11)
202
–
355
–
(108)
–
247
Total
£’000
155
579
(153)
(121)
(11)
449
Deferred acquisition costs
As at 31 December 2018 deferred acquisition costs of £0.2m (2017: £0.2m) represent those costs associated with royalty acquisitions that the
Group are actively pursuing and expect to complete in 2019.
Deferred financing costs
As at 31 December 2017 deferred financing costs represent the costs associated with entering into the US$30.0m, three-year secured
revolving credit facility with a US$10.0m accordion that have been deferred and will be amortised over the term of the facility.
During the year ended 31 December 2018 all costs associated with the 2017 refinancing were amortised in full following a further refinancing
of the Group’s revolving credit facility in September 2018. As at 31 December 2018 deferred financing costs of £0.7m represent the
arrangement fees and legal costs associated with the new US$60.0m revolving credit facility with a US$30.0m accordion. The new facility has
been provided by a syndicate of three banks with a three-year term, together with an option to extend the facility by 12 months (refer to
note 26). The deferred costs will be amortised over the term of facility.
21 INVESTMENTS IN SUBSIDIARIES
The Group’s full listing of subsidiaries is provided in note 38. The Company’s investment in subsidiaries as 31 December 2018 and
31 December 2017 is as follows:
COST
At 1 January 2018
Capital injection into subsidiaries
Return of capital from subsidiaries
At 31 December 2018
IMPAIRMENT OF INVESTMENT IN SUBSIDIARY
At 1 January 2018
Impairment of investment in subsidiaries
At 31 December 2018
Carrying amount 31 December 2018
COST
At 1 January 2017
Capital injection into subsidiaries
AT 31 DECEMBER 2017
IMPAIRMENT OF INVESTMENT IN SUBSIDIARY
At 1 January 2017
Reversal of previous impairment of investment in subsidiaries
At 31 December 2017
Carrying amount 31 December 2017
£’000
85,865
39,346
(4,789)
120,422
(15,658)
(5,325)
(20,983)
99,439
£’000
70,734
15,131
85,865
(14,191)
(1,467)
(15,658)
70,207
FINANCIAL STATEMENTSAPG_AR18_26.03.19_BACK_PROOF 6Anglo Pacific Group PLC 2018 Annual Report & Accounts 115
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U
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O
V
E
R
V
I
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W
S
T
R
A
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E
G
I
C
R
E
P
O
R
T
G
O
V
E
R
N
A
N
C
E
F
I
N
A
N
C
I
A
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S
T
A
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E
M
E
N
T
S
O
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H
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I
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F
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A
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I
22 TR ADE AND OTHER RECEIVABLES
CURRENT
Income tax receivable
Prepayments
Royalty receivables
Other receivables
NON-CURRENT
Other receivables
Amounts due from subsidiaries
Group
£’000
398
141
9,464
264
10,267
Group
£’000
19,335
–
19,335
2018
Company
£’000
–
127
424
213
764
2018
Company
£’000
19,335
37,197
56,532
Group
£’000
388
130
8,131
53
8,702
Group
£’000
21,259
–
21,259
2017
Company
£’000
–
116
264
47
427
2017
Company
£’000
21,259
35,603
56,862
Current trade and other receivables
Trade and other receivables principally comprise amounts relating to royalties receivable for the final quarter in each year. The increase
in royalty receivables as at 31 December 2018 is the result of increased Q4 2018 royalties from both Kestrel and Maracás Menchen.
The Directors consider that the carrying amount of trade and other receivables is approximately their fair value.
Non-current other receivables
On 13 February 2017 the Group completed a C$43.5m (£26.6m) financing and streaming agreement with Denison. The streaming agreement
is classified as a royalty financial instrument (note 17), with an initial value of C$2.7m (£1.7m).
The financing agreement is structured as a 13-year secured loan of C$40.8m (£24.9m) with an interest rate of 10% per annum payable to the
Group. The loan contains mandatory repayment provisions in any period where the equivalent toll revenues exceed the interest liability.
Conversely, in any period when toll revenues are less than the interest payment, the shortfall is capitalised and carried forward to the next
period. The loan principal, along with any capitalised interest, is repayable in full at maturity.
During 2018 the Group has earned £2.0m in interest revenue (2017: £1.9m) and received principal repayments of £1.3m (2017: £3.1m).
Following the adoption of IFRS 9, the Group has assessed the carrying value of the Denison financing agreement for expected credit losses
over the next 12 months by making reference to the security held by the Group and the financial position of Denison as at 31 December 2018.
The implied probability of default has been assessed at 0.98% resulting in the Group recognising expected credit losses of £0.1m. On transition
to IFRS 9, the Group recognised expected credit losses of £0.1m directly in retained earnings.
The movement in non-current other receivables is summarised as follows:
Group and Company
At 1 January 2017
Advances
Deferred acquisition costs
Interest
Repayments of principal and interest
Foreign currency translation
At 31 January 2017
Provision for expected credit losses on transition to IFRS 9
Interest
Repayments of principal and interest
Amortisation of deferred acquisition costs
Expected credit losses
Foreign currency translation
£’000
–
24,990
140
1,939
(4,984)
(826)
21,259
(50)
2,011
(3,286)
(14)
(64)
(521)
19,335
APG_AR18_26.03.19_BACK_PROOF 6Anglo Pacific Group PLC 2018 Annual Report & Accounts
116
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended 31 December 2018
Non-current amounts due from subsidiaries
Amounts due from subsidiaries are considered long-term loans. The Directors consider that the carrying amount of amounts due from
subsidiaries is approximately their fair value.
23 DERIVATIVE FINANCIAL INSTRUMENTS
In 2016, the Group implemented a policy whereby foreign exchange forward contracts can be entered into to manage its exposure to foreign
exchange risk associated with its Australian dollar denominated royalty income (note 34). These foreign exchange forward contracts are
accounted for as financial assets or liabilities carried at fair value through profit or loss in accordance with note 3.8(c). The fair value of the
foreign exchange forward contracts as at 31 December is as follows:
FINANCIAL ASSETS CARRIED AT FAIR VALUE THROUGH PROFIT OR LOSS
Fair value as at 31 December
Group
£’000
188
2018
Company
£’000
–
Group
£’000
100
2017
Company
£’000
–
As at 31 December 2018 the Group had outstanding forward contracts totalling A$12.7m (2017: A$19.4m) to receive £7.2m (2017: £11.3m).
24 CASH AND CASH EQUIVALENTS
Cash and cash equivalents include the following for the purposes of the statement of cash flows:
Cash at bank and on hand
Trading deposits with brokers
Cash and cash equivalents
Group
£’000
4,240
983
5,223
2018
Company
£’000
1,024
–
1,024
Group
£’000
8,099
–
8,099
2017
Company
£’000
1,349
–
1,349
25 NET DEBT
See note 3.8(a) and note 3.8(h) for the Group’s accounting policy on cash and debt.
Net debt is a measure of the Group’s financial position. The Group uses net debt to monitor the sources and uses of financial resources, the
availability of capital to invest or return to shareholders, and the resilience of the balance sheet. Net debt is calculated as total borrowings less
cash and cash equivalents.
The Group and Company’s net (debt)/cash and cash equivalents position after offsetting the revolving credit facility against cash and cash
equivalents is as follows:
Revolving credit facility
Cash and cash equivalents
Net cash and cash equivalents/(debt)
Movement in net debt
At 1 January 2017
Cash flow
Currency movements
At 31 December 2017
Cash flow
Currency movements
At 31 December 2018
Group
£’000
(8,300)
5,223
(3,077)
2018
Company
£’000
(8,300)
1,024
(7,276)
Group
£’000
–
8,099
8,099
Cash and cash
equivalents
£’000
5,331
Medium and
long-term
borrowings
£’000
6,300
2,587
181
8,099
(2,795)
(81)
5,223
(6,153)
(147)
–
8,300
–
8,300
2017
Company
£’000
–
1,349
1,349
Net debt
£’000
(969)
8,740
328
8,099
(11,689)
513
(3,077)
FINANCIAL STATEMENTSAPG_AR18_26.03.19_BACK_PROOF 6Anglo Pacific Group PLC 2018 Annual Report & Accounts 117
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26 BORROWINGS
SECURED BORROWING AT AMORTISED COST
Revolving credit facility
Group
£’000
8,300
8,300
2018
Company
£’000
8,300
8,300
Amount due for settlement within 12 months
–
–
Amount due for settlement after 12 months
8,300
8,300
Group
£’000
2017
Company
£’000
–
–
–
–
–
–
–
–
In February 2017, the Group refinanced its existing facility with a further three-year revolving credit facility of US$30.0m with a US$10.0m
accordion, maturing in February 2020, which is available at LIBOR plus 300bps. The Group triggered the accordion in November 2017, and as
at December 31, 2017 had access to US$40.0m (£29.6m).
In September 2018, the Group refinanced the facility agreed in 2017 with a three-year revolving credit facility of US$60.0m with a US$30.0m
accordion, maturing in September 2021, which is available at LIBOR plus 300bps. Under the terms of the new facility, the Group has an option
to extend the facility by 12 months. The Group’s option to extend the term of the facility expires in March 2020.
Deferred borrowing costs detailed in note 20, relate to the establishment fees and legal fees associated with the 2018 facility and will be
amortised over its three-year term. Deferred borrowing costs relating to the 2017 facility were fully amortised at the time of entering the new
facility.
The Group’s revolving credit facility is secured by way of a floating charge over the Group’s assets and is subject to a number of financial
covenants, all of which have been met during the year ended 31 December 2018.
27 DEFERRED TA X
The following are the major deferred tax liabilities and assets recognised by the Group and the movements thereon during the period:
Group
At 1 January 2017
Charge/(credit) to profit or loss
Reclassification from current to
deferred tax asset
Charge/(credit) to other
comprehensive income
Exchange differences
Effect of change in tax rate:
– income statement
– equity
At 31 December 2017
Charge/(credit) to profit or loss
Reclassification from current to
deferred tax asset
Charge/(credit) to other
comprehensive income
Exchange differences
Effect of change in tax rate:
– income statement
– equity
At 31 December 2018
Revaluation of
coal royalty
£’000
34,543
(2,908)
Coal royalties
Effects of
tax losses
£’000
(1,605)
1,636
Revaluation
of royalty
instruments
£’000
(920)
(316)
–
–
–
–
(356)
(31)
(2,154)
–
29,125
2,232
–
–
(1,331)
2,906
–
32,932
–
–
–
–
–
–
–
–
–
–
–
84
14
(264)
(70)
(1,472)
(1,618)
–
–
92
430
–
(2,568)
Revaluation of
mining interests
£’000
164
190
–
(356)
10
–
–
8
–
–
(8)
–
–
–
–
Accrual of
royalty
receivable
£’000
2,667
(964)
–
–
3
–
–
Other tax
losses
£’000
(7,338)
4,103
–
–
(109)
–
–
1,706
(79)
(3,344)
3,502
–
–
–
–
Total
£’000
27,511
1,741
–
(272)
(469)
(2,418)
(70)
26,023
4,037
–
(8)
(72)
(182)
(1,493)
–
–
1,555
3,336
–
31,895
–
(24)
APG_AR18_26.03.19_BACK_PROOF 6Anglo Pacific Group PLC 2018 Annual Report & Accounts
118
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended 31 December 2018
Deferred tax assets and liabilities are offset where the Group has a legally enforceable right to do so. The following is the analysis of the
deferred tax balances (after offset) for financial reporting purposes:
Deferred tax liabilities
Deferred tax assets
2018
£’000
(35,156)
3,261
2017
£’000
(31,507)
5,484
(31,895)
(26,023)
As at 31 December 2018, the Group has no unused tax losses (2017: £11.0m) available for offset against future profits. A deferred tax asset has
been recognised in respect of these losses which may be carried forward indefinitely.
The Group has the following balances in respect of which no deferred tax asset has been recognised:
EXPIRY DATE
Within one year
Greater than one year, less
than five years
Greater than five years
No expiry date
Tax losses –
trading
£’000
Tax losses –
capital
£’000
Other
temporary
differences
–
–
–
–
–
–
–
–
–
2018
Total
£’000
–
–
–
Tax losses –
trading
£’000
Tax losses –
capital
£’000
Other
temporary
differences
–
–
–
–
–
–
–
–
–
2017
Total
£’000
–
–
–
12,499
12,499
43,058
43,058
5,991
5,991
61,548
61,548
17,683
17,683
36,959
36,959
5,899
5,899
60,541
60,541
Temporary differences associated with investments in subsidiaries, joint ventures and associates are insignificant.
The following are the major deferred tax liabilities recognised by the Company and the movements thereon during the period:
Company
At 1 January 2017
Charge to equity for the year
At 31 December 2017
Released to income for the year
At 31 December 2018
Revaluation
of royalty
instruments
£’000
662
14
676
(8)
668
Total
£’000
662
14
676
(8)
668
Deferred tax assets and liabilities are offset where the Company has a legally enforceable right to do so. The following is the analysis of the
deferred tax balances (after offset) for financial reporting purposes:
COMPANY
Deferred tax liabilities
Deferred tax assets
2018
£’000
668
–
668
2017
£’000
676
–
676
FINANCIAL STATEMENTSAPG_AR18_26.03.19_BACK_PROOF 6Anglo Pacific Group PLC 2018 Annual Report & Accounts 119
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28 TR ADE AND OTHER PAYABLES
CURRENT
Other taxation and social security payables
Trade payables
Borrowings from subsidiaries
Accruals and other payables
Deferred consideration
Group
£’000
74
34
–
1,737
1,178
3023
2018
Company
£’000
72
28
19,278
1,358
–
20,736
Group
£’000
72
16
–
2,406
–
2017
Company
£’000
68
14
10,726
1,908
–
2,494
12,716
Deferred consideration of £1.2m as a 31 December 2018 relates to the second tranche of deferred consideration of US$1.5m due under the
royalty agreement to acquire the Maracás Menchen royalty. This follows the record production achieved by Largo throughout H1 2018, and
Group’s expectation that Largo will achieve, in a quarter, an annualised rate of production of 12,000t during the next 12 to 18 months.
The average credit period taken for trade purchases is 26 days (2017: 25 days). The Directors consider that the carrying amount of trade and
other payables approximates their fair value. All amounts are considered short-term and none are past due.
NON-CURRENT
Other taxation and social security payables
Group
£’000
575
575
2018
Company
£’000
575
575
Group
£’000
419
419
2017
Company
£’000
419
419
Non-current other taxation and social security payables relates to employer national insurance due on vesting of the certain share-based
payments.
29 SHARE CAPITAL AND SHARE PREMIUM
Issued share capital
GROUP AND COMPANY
ORDINARY SHARES OF 2p EACH AT 1 JANUARY 2017
Issue of share capital under placing (a)
ORDINARY SHARES OF 2p AT 31 DECEMBER 2017
Issue of share capital on exercise of employee options (b)
Issue of share capital on completion of royalty acquisition (c)
Number of
shares
Share
capital
£’000
Share
premium
£’000
Merger
reserve
£’000
169,942,034
10,960,000
180,902,034
89,407
478,951
3,399
219
3,618
2
9
49,211
12,755
61,966
73
740
29,134
–
29,134
–
–
Total
£’000
81,744
12,974
94,718
75
749
ORDINARY SHARES OF 2p AT 31 DECEMBER 2018
181,470,392
3,629
62,779
29,134
95,542
(a)
(b)
On 6 February 2017 the Group issued 10,960,000 new ordinary shares of 2p each to part fund the Denison transaction (refer to notes 17
and 22). The shares were placed at 125p per share raising gross proceeds of £13.7m (C$22.4m), and net proceeds of £13.0m.
On 16 May 2018, the Group issued 37,954 new ordinary shares of 2p each following the exercise of options awarded to employees under
the Company Share Option Plan (‘CSOP’). The shares were issued at the exercise price of 99.21p per share. On 10 October 2018, the Group
issued 51,453 new ordinary shares of 2p each following the exercise of options awarded to employees under the CSOP. The shares were
issued at the exercise price of 77p per share.
(c)
On 11 June 2018, the Group issued 478,951 new ordinary shares of 2p each to Entrée Resources Limited as consideration for acquiring the
Canariaco copper royalty (note 9). The shares were issued at 156.6p per share with the total consideration for the Canariaco copper
royalty being £0.8m (US$1.0m).
APG_AR18_26.03.19_BACK_PROOF 6Anglo Pacific Group PLC 2018 Annual Report & Accounts
120
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended 31 December 2018
Own shares
Included in the Company’s issued share capital are shares held by the Anglo Pacific Group Employee Benefit Trust (‘EBT’) in accordance with
the Group’s JSOP as follows:
OWN SHARES
Own shares held by the Anglo Pacific Group Employee Benefit Trust
TOTAL
Number of
shares
2018
£’000
Number of
shares
2017
£’000
925,933
925,933
(2,601)
(2,601)
925,933
925,933
(2,601)
(2,601)
As the EBT has waived its right to receive dividends, the Company’s shares held by the EBT are excluded from the weighted average number of
shares in issue for the purposes of calculating earnings per share in note 13.
30 SHARE-BASED PAYMENTS
The Group operates four equity-settled share-based compensation plans as follows:
• The HMRC approved Company Share Ownership Plan (the ‘CSOP’);
• The Unapproved Share Ownership Plan (the ‘USOP’);
• The JSOP operated through the Anglo Pacific Group Employee Benefit Trust; and
• The Value Creation Plan (the ‘VCP’).
(a) Company Share Ownership Plan
Under the CSOP, share options are granted to Executive Directors and to selected employees. The exercise price of the granted options is equal
to the average mid-market closing price of an ordinary share for the three days before the grant. The options are conditional on the employee
completing three years’ service (the vesting period). The options are exercisable starting three years from the grant date, subject to the Group
achieving its target growth in absolute TSR over the period of 3% per annum (not compounded) in excess of the UK Retail Price Index; the
options have a contractual option term of ten years. The Group has no legal or constructive obligation to repurchase or settle the options in cash.
Movements in the number of share options outstanding and their related weighted average exercise prices are as follows:
Outstanding at 1 January
Granted during the year
Exercised during the year
Surrendered during the year
Forfeited during the year
Outstanding at 31 December
2018
Weighted
average exercise
price (£)
0.9764
2017
Weighted
average exercise
price (£)
0.9764
Options
133,981
1.6367
0.8346
1.6258
–
–
–
–
–
–
–
–
–
Options
133,981
21,378
(89,407)
(18,450)
–
47,502
1.2884
133,981
0.9764
Out of the 47,502 outstanding options (2017: 133,981), 19,974 options (2017: nil) were exercisable.
FINANCIAL STATEMENTSAPG_AR18_26.03.19_BACK_PROOF 6Anglo Pacific Group PLC 2018 Annual Report & Accounts 121
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Share options outstanding at the end of the year have the following expiry date and exercise prices:
Expiry date
2024
2025
2025
2028
Exercise price in
£ per share
1.6258
0.9221
0.7700
1.6367
Options
2017
24,600
37,954
71,427
–
133,981
2018
6,150
–
19,974
21,378
47,502
Weighted average remaining contractual life
8.00
7.82
The weighted average fair value of options granted during 2018 determined using a Black-Scholes valuation model was £0.82 per option
granted in May 2018. The significant inputs into the model were the weighted average share price of £1.637 at the grant date, exercise price of
£1.637, volatility of 40%, expected option life of three years and an annual risk-free rate of 1.16%.
No awards were made under the CSOP during 2017.
(b) Unapproved Share Option Plan
The Group’s USOP was approved by shareholders at the 2016 AGM. The plan was established to provide the Group additional scope to
incentivise employees, particularly those who do not participate in the VCP, over and above the limit of the CSOP. In addition, the USOP is
intended to replace the Group’s JSOP.
The exercise price of the granted options is equal to the average mid-market closing price of an ordinary share for the three days before the
grant. The options are conditional on the employee completing three years’ service (the vesting period). The options are exercisable starting
three years from the grant date and have a contractual option term of five years. The Group has no legal or constructive obligation to
repurchase or settle the options in cash.
No awards were made under the USOP during 2018. The weighted average fair value of options granted during 2017 determined using a
Black-Scholes valuation model was £0.39 per option granted in April 2017. The significant inputs into the model were the weighted average
share price of £1.258 at the grant date, exercise price of £0.88, volatility of 40.21%, expected dividend yield of 4.77%, expected option life of
four years and an annual risk-free rate of 0.21%.
Movements in the number of share options outstanding and their related weighted average exercise prices are as follows:
Outstanding at 1 January
Granted during the year
OUTSTANDING AT 31 DECEMBER
2018
Weighted
average exercise
price (£)
Options
2,097,593
0.8801
Options
–
–
–
2,097,593
2,097,593
0.8801
2,097,593
2017
Weighted
average exercise
price (£)
–
0.8801
0.8801
Out of the 2,097,593 outstanding options (2017: nil), nil options (2017: nil) were exercisable.
Share options outstanding at the end of the year have the following expiry date and exercise prices:
Expiry date
2027
2027
Exercise price in
£ per share
–
2018
633,334
Options
2017
633,334
1.2607
1,464,259
1,464,259
2,097,593
2,097,593
Weighted average remaining contractual life
3.28
4.28
APG_AR18_26.03.19_BACK_PROOF 6Anglo Pacific Group PLC 2018 Annual Report & Accounts
122
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended 31 December 2018
(c) Joint Share Ownership Plan
Under the JSOP, the Remuneration Committee invites selected Executive Directors and employees to enter into an agreement with the Anglo
Pacific Group Employee Benefit Trust (the ‘Co-owner’) to acquire a number of ordinary shares in the capital of the Company. The shares are
held in the name of the co-owner; however, the selected Directors and employees maintain a beneficial interest in these shares.
Awards under the JSOP are conditional on the employee completing three years’ service (the vesting period) and the Group’s absolute total
shareholder return growing at an annual rate (not compounded) of 3% in excess of the UK Retail Price Index over the three-year vesting
period. In addition, the Company’s share price must reach a hurdle price during the three-year vesting period as determined by the
Remuneration Committee at the time of making the award.
Upon satisfying the performance targets and service requirements, the beneficial interest conferred will entitle the Director or employee to
receive a proportion of the proceeds of sale of the ordinary shares. Their entitlement will be to receive the equivalent of all sales proceeds in
excess of the threshold amount, settled in ordinary shares of the Company. The threshold amount is fixed by the Remuneration Committee
and will not be set less than the market value of the ordinary shares of the Company at the time the JSOP award is made. No shares were
awarded under the JSOP during 2017 or 2018, as a result there are no outstanding awards under this plan.
(d) Value Creation Plan
Following the approval at the 2014 AGM, the Group implemented a new long-term incentive arrangement for the Executive Directors and
selected senior management. The VCP was designed by the Remuneration Committee to incentivise the Executive Directors and senior
management to drive growth in shareholder return over a five-year measurement period. At the 2016 AGM, shareholders approved the
extension of the measurement period from five to seven years.
Under the terms of the VCP, no value would accrue to the participants unless growth in the Group’s total shareholder return over the
measurement period is at least equal to 7% per annum. Subject to such threshold growth, participants would become entitled to receive nil or
nominal cost options over the ordinary shares of the Company, subject to a cap, set by reference to a share of a pool value equal to 10% of the
growth in the Company’s total shareholder return over the measurement period or, if less, 50% of the growth in the Company’s total
shareholder return over the measurement period in excess of the threshold growth.
Options granted under the VCP will comprise three equal tranches, the first tranche exercisable as from the time of the grant of the options
and the other tranches exercisable as from one and two years thereafter respectively. Subject to appropriate adjustments in accordance with
the terms of the VCP, the maximum number of shares set under the option grants will not be capable of exceeding such number equating to
7.5% of the Company’s issued share capital as at the end of the measurement period.
VCP awards outstanding at 31 December 2018 and 31 December 2017 are as follows:
Expiry date
Outstanding at 1 January
Awarded in May 2017
Forfeited during the year
Outstanding at 31 December
Weighted average remaining contractual life
Units
2018
86,867
–
–
86,867
Units
2017
66,880
24,000
(4,013)
86,867
2.50
3.50
At the 2016 AGM, the shareholders approved an amendment to the VCP extending the performance period from five years to seven years,
resulting in the weighted average remaining contractual life increasing by two years to 4.5 years.
The weighted average fair value of options granted during 2017 determined using a Monte Carlo valuation model was £35.46 per option
granted in May 2017. The significant inputs into the model were the weighted average share price of £1.145 at the grant date, exercise price of
nil, volatility of 40.25%, expected dividend yield of 5.25%, expected option life of four years and an annual risk-free rate of 0.30%.
Refer to note 8(a) for the total expense recognised in the income statement for awards under the Group’s CSOP, JSOP and VCP granted to
Directors and employees.
31 SPECIAL RESERVE
As part of the capital reduction in 2002, a special reserve was created, which represents the level of profit attributable to the Group for the
period ended 30 June 2002. At 31 December 2018, this reserve remains unavailable for distribution.
At 1 January 2018 and 31 December 2018
Group
£’000
632
Company
£’000
632
FINANCIAL STATEMENTSAPG_AR18_26.03.19_BACK_PROOF 6Anglo Pacific Group PLC 2018 Annual Report & Accounts 123
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I
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32 FINANCIAL COMMITMENTS
Operating leases
The Group’s most significant operating lease commitments relate to premises maintained in both London, England and Shetland, Scotland.
At the balance sheet date, the Group had outstanding commitments under non-cancellable operating leases. The total commitments due
under these leases are shown according to the scheduled expiry dates of the leases as follows:
GROUP
Within one year
In the second to fifth years inclusive
After five years
Capital commitments
At the year end the Group had capital commitments of £nil (2017: £nil).
33 REL ATED PART Y TR ANSACTIONS
During the year, the Company entered into the following transactions with subsidiaries:
Net financing of related entities
Management fee
Amounts owed by related parties at year end
2018
£’000
252
–
–
252
2017
£’000
330
252
–
582
2018
£’000
(728)
1,907
37,197
Company
2017
£’000
1,969
2,778
35,603
All transactions were made in the course of funding the Group’s continuing activities.
Remuneration of key management personnel
The remuneration of the key management personnel including Directors of the Group is set out below in aggregate for each of the categories
specified in IAS 24 Related Party Disclosures. Further information about the remuneration of individual Directors is provided in the audited
part of the Directors’ Remuneration Report on pages 72 to 77.
Short-term employee benefits
Post-employment benefits
Share-based payment
2018
£’000
1,566
65
985
2,616
2017
£’000
1,559
52
936
2,547
Directors’ transactions
The Group received £100,114.31 from Audley Capital Advisors LLP, a company which Mr. J.A. Treger, Chief Executive Officer, is both a director
and shareholder, for the reimbursement of travel costs and the subletting of office space during the year ended 31 December 2018 (2017:
£68,547.76). At 31 December 2018 there was £2,411.94 owing from Audley Capital Advisors LLP (2017: £nil).
The Group paid £14,137.45 to Audley Capital Advisors LLP, a company which Mr. J.A. Treger, Chief Executive Officer, is both a director and
shareholder, for office expenses and subscriptions during the year ended 31 December 2018 (2017: £4,562.50). No amounts were owing to
Audley Capital Advisors LLP as at 31 December 2018 or 2017.
APG_AR18_26.03.19_BACK_PROOF 6Anglo Pacific Group PLC 2018 Annual Report & Accounts
124
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended 31 December 2018
34 FINANCIAL RISK MANAGEMENT
The Group’s principal treasury objective is to provide sufficient liquidity to meet operational cash flow and dividend requirements and to allow
the Group to take advantage of new growth opportunities whilst maximising shareholder value. The Group’s activities expose it to a variety of
financial risks including liquidity risk, credit risk, foreign exchange risk and price risk. The Group operates controlled treasury policies which are
monitored by management to ensure that the needs of the Group are met while minimising potential adverse effects of unpredictability of
financial markets on the Group’s financial performance. The Group’s financial risk management should be read in conjunction with the
principal risks outlined on pages 8 to 54 of the Strategic Report.
Financial instruments
The Group and Company held the following investments in financial instruments (this includes investment properties):
Investment property (held at fair value)
Coal royalties (Kestrel)
Fair value through other comprehensive income
Royalty financial instruments
Mining and exploration interests
Fair value through profit of loss
Royalty financial instruments
Derivative financial instruments1
Loans and receivables
Trade and other receivables2
Cash at bank and in hand
Financial liabilities
Trade and other payables3
Borrowings4
Deferred consideration5
Group
£’000
109,778
38,368
2,848
7,837
188
2018
Company
£’000
Group
£’000
2017
Company
£’000
–
–
2,559
3,929
–
104,266
–
3,979
16,431
3,979
13,273
6,888
100
–
–
29,063
5,223
57,169
1,024
29,444
8,099
57,173
1,349
34
8,300
1,178
19,306
8,300
–
16
–
–
10,740
–
–
1 Derivative financial instruments include the Group’s foreign exchange forward contracts, as set out in note 23.
2 Trade and other receivables include royalty receivables, other receivables and other non-current receivables only, as set out in note 22.
3 Trade and other payables include trade payables only, as set out in note 28.
4 Borrowings include the revolving credit facility only, as set out in note 26.
5 Other payables include the deferred consideration only, as set out in note 28.
Cash and cash equivalents comprise cash and short-term deposits held by the Group treasury function. The carrying amount of these assets
approximates their fair value.
Liquidity and funding risk
The objective of the Company in managing funding risk is to ensure that it can meet its financial obligations as and when they fall due.
At 31 December 2018 the Group borrowings of £8.3m (2017: £nil) and continued to have access to a further £38.8m (U$49.4m) through its
secured U$60.0m revolving credit facility.
The following tables detail the Group’s remaining contractual maturity for its non-derivative financial liabilities with agreed repayments
periods. The table has been drawn up based on the undiscounted cash flows of financial liabilities based on the earliest date on which the
Group can be required to pay. The table includes both interest and principal cash flows. To the extent that interest flows are floating rate, the
undiscounted amount is derived from the interest rate at the balance sheet date. The contractual maturity is based on the earliest date on
which the Group may be required to pay.
31 DECEMBER 2018
Interest bearing revolving credit facility
31 DECEMBER 2017
Interest bearing revolving credit facility
Weighted
average effective
interest rate
%
3.69
3.50
1-5 years
£’000
Total
£’000
8,300
8,300
8,300
8,300
–
–
–
–
FINANCIAL STATEMENTSAPG_AR18_26.03.19_BACK_PROOF 6Anglo Pacific Group PLC 2018 Annual Report & Accounts 125
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Credit risk
The Group’s principal financial assets are bank balances, royalty financial instruments (excluding the investment in LIORC), trade and other
receivables and investments. These represent the Group’s maximum exposure to credit risk in relation to financial assets and total £42.1m at
31 December 2018 (£48.4m at 31 December 2017).
The Group’s credit risk is primarily attributable to its other receivables, including royalty receivables. It is the policy of the Group to present the
amounts in the balance sheet net of allowances for doubtful receivables, estimated by the Group’s management based on prior experience
and the current economic environment. In certain cases, the Group has the right to audit the reported royalty income.
The Group’s credit risk on royalty interests held as financial instruments has been reviewed and the estimated current exposure is as disclosed
in note 17 where the future contractual right to cash flows from these instruments is reflected in their fair value.
The credit risk on bank deposits is mitigated by banking with household name financial institutions in reputable jurisdictions. The Group has
no significant concentration of credit risk, with exposure spread over a large number of currencies and counterparties.
The Group’s credit risk on foreign exchange forward contracts is mitigated by entering into these agreements with large financial institutions.
The Group limits its exposure to credit risk, together with that of the contracting financial institution, by restricting the settlement date to no
more than a year from the contract date. In addition, the Group limits the quantum of the forward contracts to no more than an average 70%
of forecast royalty revenue expected to be received by the date of settlement.
Share price risk
The Group is exposed to share price risk in respect of its mining and exploration interests which include listed and unlisted equity securities
and any convertible instruments.
A 10% increase or decrease in the fair value of our mining and exploration interests (listed and unlisted) would increase/decrease the
mining and exploration interests balance (and investment revaluation reserve in equity) by £0.3m at 31 December 2018 (£1.6m at
31 December 2017).
Similarly, had there been a 10% increase or decrease in the underlying share price of the Group’s investment in LIORC, the Group’s royalty
financial instrument designated as FVTOCI (and the investment revaluation reserve in equity) would have increased/decreased by £3.8m
as at 31 December 2018.
The Group’s mining and exploration interests are held for the purposes of generating additional royalties and are considered long-term,
strategic investments. This strategy is unaffected by recent fluctuations in prices for mining and exploration equities; however, interests are
continually monitored for indicators that may suggest problems for these companies raising capital or continuing their day-to-day business
activities to ensure remedial action can be taken if necessary. This is expected to be a less significant part of the Group’s strategy going forward.
No specific hedging activities are undertaken in relation to these interests and the voting rights arising from these equity instruments are
utilised in the Group’s favour.
Other price risk
The royalty portfolio exposes the Group to other price risk through fluctuations in commodity prices, particularly the prices of coking coal,
vanadium, iron ore, gold and uranium. As the Directors obtain independent commodity price forecasts, the generation of which takes into
account fluctuations in prices, limited analysis of the impact of fluctuations on the valuations of the royalties has been undertaken in note 16
and note 17.
Foreign exchange risk
The Group’s transactional foreign exchange exposure arises from income, expenditure and purchase and sale of assets denominated in
foreign currencies. With royalty income from Kestrel and Narrabri accounting for over 70% of the Group’s income (2017: 80%), the Group’s
primary foreign exchange exposure is to the Australian dollar, which these royalties are denominated in. In 2016, the Group implemented a
hedging policy whereby foreign exchange forward contracts can be entered into with a maximum exposure of 70% of forecast Australian
dollar denominated royalty revenue expected to be received during a period not exceeding 12 months from contract date to settlement.
Refer to note 23 for further details on the fair value of the foreign exchange forward contracts outstanding at 31 December 2018. The Group
has no other hedging programme in place.
In terms of material commitment, the risk in relation to currency fluctuations is assessed by the Executive Committee at the time the
commitment is made and regularly reviewed.
Financial assets and liabilities are split by currency as follows:
Financial assets
Financial liabilities
Net exposure
GBP
£’000
AUD
£’000
CAD
£’000
6,525
123,140
61,060
8,329
–
5
(1,804)
123,140
61,055
USD
£’000
2,561
1,178
1,383
2018
EUR
£’000
19
–
19
GBP
£’000
9,984
14
AUD
£’000
131,915
CAD
£’000
23,092
–
2
USD
£’000
4,192
–
9,970
131,915
23,090
4,192
2017
EUR
£’000
24
–
24
Foreign exchange sensitivities
With the exception of the cash balances, the majority of the financial instruments not denominated in GBP are held in entities with the same
functional currency and for the purpose of this sensitivity analysis, the impact of changing exchange rates on the translation of foreign
subsidiaries into the Group’s presentation currency has been excluded.
In terms of the cash balance, the significant sensitivities are as follows:
• A +/- 10% change in the GBP: AUD rate would increase/decrease profit after tax and equity by £3k (2017: £243k);
• A +/- 10% change in the GBP:CAD rate would increase/decrease profit after tax and equity by £207k (2017: £117k);
• A +/- 10% change in the GBP: USD rate would increase/decrease profit after tax and equity by £12k (2017: £50k).
APG_AR18_26.03.19_BACK_PROOF 6Anglo Pacific Group PLC 2018 Annual Report & Accounts
126
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended 31 December 2018
Exposures to foreign exchange rates vary during the year depending on the volume of overseas transactions. Nonetheless, the analysis above
is considered to be representative of the Group’s exposure to currency risk.
Capital management and procedures
The Group’s capital management objectives are to safeguard the Group’s ability to continue as a going concern in order to realise the full value
of its assets and to enhance shareholder value in the company and returns to shareholders by acquiring further royalty assets.
The Directors continue to monitor the capital requirements of the Group by reference to expected future cash flows. Capital for the reporting
periods presented is summarised in the consolidated statement of changes in equity.
In funding the business activities of the Group, the Directors consider both debt and equity, having regard to the Group’s available debt facility
and the prevailing share price at the time funding is required. Where funding is obtained through debt, the Group maintains its targeted debt
capacity of 1.5-2 times free cash flow, although a higher ratio can be tolerated for shorter periods when there is a reasonable expectation of a
recovery in free cash flow.
Fair value hierarchy
The following tables present financial assets and liabilities measured at fair value in the balance sheet in accordance with the fair value
hierarchy. This hierarchy aggregates financial assets and liabilities into three levels based on the significance of the inputs used in measuring
the fair value of the financial assets and liabilities. The fair value hierarchy has the following levels:
• Level 1: quoted prices (unadjusted) in active markets for identical assets and liabilities;
• Level 2: inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e. as prices)
or indirectly (i.e. derived from prices); and
• Level 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs).
The level within which the financial asset or liability is classified is determined based on the lowest level of significant input to the fair
value measurement.
The following table presents the Group’s assets that are measured at fair value at 31 December 2018:
Group
ASSETS
Coal royalties (Kestrel)
Royalty financial instruments
Mining and exploration interests – quoted
Mining and exploration interests – unquoted
Financial derivative instruments
NET FAIR VALUE
Notes
Level 1
£’000
Level 2
£’000
Level 3
£’000
2018
Total
£’000
(a)
(b)
(c)
(d)
(e)
–
38,368
2,443
–
–
40,811
–
–
–
405
188
593
109,778
109,778
7,837
–
–
–
46,205
2,443
405
188
117,615
159,019
The following table presents the Group’s assets that are measured at fair value at 31 December 2017:
Notes
Level 1
£’000
Level 2
£’000
Level 3
£’000
2017
Tota
£’000 l
Group
ASSETS
Coal royalties (Kestrel)
Royalty financial instruments
Mining and exploration interests – quoted
Mining and exploration interests – unquoted
Financial derivative instruments
NET FAIR VALUE
The following table presents the Company’s assets that are measured at fair value at 31 December 2018:
Company
ASSETS
Royalty financial instruments
Mining and exploration interests – quoted
Mining and exploration interests – unquoted
NET FAIR VALUE
Notes
(a)
(b)
(c)
Level 1
£’000
–
2,386
–
2,386
(a)
(b)
(c)
(d)
(e)
–
–
13,270
–
–
13,270
–
–
–
3,161
100
3,261
Level 2
£’000
–
–
173
173
104,266
104,266
10,867
–
–
–
10,867
13,270
3,161
100
115,133
131,664
Level 3
£’000
3,929
–
–
3,929
2018
Total
£’000
3,929
2,386
173
6,488
FINANCIAL STATEMENTSAPG_AR18_26.03.19_BACK_PROOF 6Anglo Pacific Group PLC 2018 Annual Report & Accounts 127
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G
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P
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G
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N
A
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F
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N
A
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The following table presents the Company’s assets that are measured at fair value at 31 December 2017:
Company
ASSETS
Royalty financial instruments
Mining and exploration interests – quoted
Mining and exploration interests – unquoted
NET FAIR VALUE
Notes
Level 1
£’000
Level 2
£’000
(a)
(b)
(c)
–
13,095
–
13,095
–
–
178
178
Level 3
£’000
3,979
–
–
3,979
2017
Total
£’000
3,979
13,095
178
17,252
There have been no significant transfers between Levels 1 and 2 in the reporting period.
The methods and valuation techniques used for the purposes of measuring fair value of royalty financial instruments gives more prominence
to the probability of production by applying a risk weighting to the discounted net present value outcome in order to fully reflect the risk that
the operation never comes into production rather than factoring this risk into the discount rate applied to the future cash flow.
(a) Coal royalties (Investment Property)
The Group’s coal royalties derive from its ownership of certain sub-stratum land in Queensland, Australia. In accordance with IAS 40, this land
is revalued at each reporting date on the basis of future expected income discounted at 7.50% (2017: 7.50%) by an independent valuation
consultant. Refer to note 16 for details of the key inputs into the valuation, together with a sensitivity analysis for fluctuations in the price
assumptions and discount rate. All unobservable inputs are obtained from third parties.
(b) Royalty financial instruments
The Group’s royalty financial instruments comprise of the investment in LIORC and the McClean Lake streaming agreement, together with the
NSR and GRR royalties over EVBC, Dugbe 1 and Paiuí as detailed in note 17.
At the reporting date, the fair value of the Group’s investment in LIORC has been determined by reference to the quoted bid price of the
instrument. As LIORC has a quoted share price in an active market, it has been categorised as level 1 in the fair value hierarchy.
The Group’s remaining royalty financial instruments are valued based on the net present value of pre-tax cash flows discounted at a rate
between 7.50% and 22.00% at reporting date. The discount rate of each royalty arrangement is derived using a capital asset pricing model
specific to the underlying project, making reference to the risk-free rate of return expected on an investment with the same time horizon as
the expected mine life, together with the country risk associated with the location of the operation.
For those royalty financial instruments not in production, the outcome of this net present value calculation is then risk weighted to reflect
management’s current assessment of the overall likelihood and timing of each project coming into production and royalty income arising.
This assessment is impacted by news flow relating to the underlying operation in the period, in conjunction with management’s assessment
of the economic viability of the project based on commodity price projections.
The table below outlines the discount rate and risk weighting applied in the valuation of the Group’s royalty financial instruments:
EVBC
Jogjakarta
Dugbe 1
McClean Lake
Piaui
Classification
FVTPL
FVTPL
FVTPL
FVTPL
FVTPL
Discount rate
8.75%
–
22.00%
7.50%
13.50%
31 December 2018
Risk weighting
100%
–
75%
50%
25%
Discount rate
7.00%
10.00%
18.00%
6.50%
12.00%
31 December 2017
Risk weighting
100%
100%
75%
50%
30%
The Group has reviewed the impact on the carrying value of its royalty financial instruments, and does not consider a +/- 1% change in the
discount rate or a +/- 10% change in the underlying commodity prices to have a material impact.
(c) Mining and exploration interests – quoted
All the quoted mining and exploration interests have been issued by publicly traded companies on well established security markets. Fair
values for these securities have been determined by reference to their quoted bid prices at the reporting date.
(d) Mining and exploration interests – unquoted
All the unquoted mining and exploration interests are initially recognised using cost as the best approximation of fair value. The Group notes
any trading activity in the unquoted instruments and will value its holding accordingly. At present the Group holds these investments with a
view to generating future royalties and there is no present intention to sell. The vast majority of these are in investments which the Group
anticipates a realistic possibility of a future listing.
(e) Derivative financial instruments
The derivative financial instruments consist of the foreign exchange forward contracts entered into to hedge the Group’s Australian dollar
denominated royalty income. At the reporting date the foreign exchange forward contracts are valued based on the net present value of the
discounted future cash flows estimated based on forward exchange rates and contract forward rates, discounted at rates that reflect the
credit risk of various counterparties.
APG_AR18_26.03.19_BACK_PROOF 6Anglo Pacific Group PLC 2018 Annual Report & Accounts
128
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended 31 December 2018
Fair value measurements in Level 3
The Group’s financial assets classified in Level 3 use valuation techniques based on significant inputs that are not based on observable
market data.
The following table presents the changes in Level 3 instruments for the year ended 31 December 2018.
At 1 January 2018
Revaluation gains or losses recognised in:
Income statement
Royalties due or received from royalty financial instruments
Foreign currency translation
At 31 December 2018
The following table presents the changes in Level 3 instruments for the year ended 31 December 2017.
At 1 January 2017
Additions
Revaluation gains or losses recognised in:
Other comprehensive income
Income statement
Foreign currency translation
At 31 December 2017
Royalty
financial
instruments
£’000
10,867
Coal royalties
(Kestrel)
£’000
104,266
Total
£’000
115,133
9,190
(1,975)
(4,734)
10,061
–
(4,549)
109,778
117,614
Coal royalties
(Kestrel)
£’000
116,885
–
–
Total
£’000
130,441
3,323
496
(11,933)
(18,257)
(686)
(870)
(871)
(1,975)
(185)
7,836
Royalty
financial
instruments
£’000
13,556
3,323
496
(6,324)
(184)
10,867
104,266
115,133
There have been no transfers into or out of Level 3 in any of the years.
The Group measures its entitlement to the royalty income and any optionality embedded within the royalty instruments using discounted
cash flow models. In determining the discount rate to be applied, management considers the country and sovereign risk associated with the
projects, together with the time horizon to the commencement of production and the success or failure of projects of a similar nature.
35 FREE CASH FLOW
The structure of a number of the Group’s royalty financing arrangements, such as the Denison transaction completed in February 2017, result
in a significant amount of cash flow being reported as principal repayments, which are not included in the income statement. As the Group
considers dividend cover based on the free cash flow generated by its assets, management have determined that free cash flow per share is a
key performance indicator, going forward.
Free cash flow per share is calculated by dividend net cash generated from operating activities, proceeds from the disposal of non-core assets,
less finance costs divided by the weighted average number of shares in issue.
NET CASH GENERATED FROM OPERATING ACTIVITIES
Net cash generated from operating activities for the year ended 31 December 2018
Adjustment for:
Proceeds on disposal of mining and exploration interests
Proceeds on return of capital from mining and exploration interests
Finance income
Finance costs
Proceeds from royalty financial instruments
Repayments under commodity related financing agreements
2018
£’000
Free cash flow
per share
p
36,912
612
827
82
(1,264)
1,720
1,276
Free cash flow for the year ended 31 December 2018
40,165
22.28p
FINANCIAL STATEMENTSAPG_AR18_26.03.19_BACK_PROOF 6Anglo Pacific Group PLC 2018 Annual Report & Accounts 129
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R
O
U
P
O
V
E
R
V
I
E
W
S
T
R
A
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E
G
I
C
R
E
P
O
R
T
G
O
V
E
R
N
A
N
C
E
F
I
N
A
N
C
I
A
L
S
T
A
T
E
M
E
N
T
S
O
T
H
E
R
I
N
F
O
R
M
A
T
O
N
I
NET CASH GENERATED FROM OPERATING ACTIVITIES
Net cash generated from operating activities for the year ended 31 December 2017
Adjustment for:
Proceeds on disposal of mining and exploration interests
Finance income
Finance costs
Proceeds from royalty financial instruments
Repayments under commodity related financing agreements
2017
£’000
Free cash flow
per share
p
37,302
2,424
19
(795)
258
3,051
Free cash flow for the year ended 31 December 2017
42,259
23.62p
The weighted average number of shares in issue for the purpose of calculating the free cash flow per shares is as follows:
WEIGHTED AVERAGE NUMBER OF SHARES IN ISSUE
2018
2017
180,277,848 178,895,115
36 PORTFOLIO CONTRIBUTION
Portfolio contribution represents the funds received or receivable from the Group’s underlying royalty related assets. A number of the Group’s
royalty financing arrangements result in a significant amount of cash flow being reported as principal repayments, which are not included in
the income statement. In addition, following the adoption of IFRS 9 royalty receipts from those royalty financial instruments classified as
FVTPL such as EVBC, are no longer recognised in the income statement. The Group considers total portfolio contribution as a means of
assessing the overall performance of the Group’s underlying royalty related assets.
Portfolio contribution is royalty related revenue (note 6) plus royalties received or received from royalty financial instruments carried at FVTPL
and principal repayments received under the Denison financing agreement as follows:
Royalty related revenue (note 6)
Royalties due or received from royalty financial instruments
Repayments under commodity related financing agreements
2018
£’000
46,104
1,975
1,276
49,355
2017
£’000
39,566
–
3,051
42,617
37 CONTINGENT LIABILITIES
During 2017 on advice from professional advisors, the Group undertook the capital restructuring of a number of subsidiaries with significant
historical losses and impairment charges. This advice involved the interpretation of certain tax legislation for which there is no clear precedent
or guidance. Absent clear guidance from relevant tax authorities there is the possibility that those tax authorities could interpret the
legislation in a different way from the Group, which could result in a material reduction in the deferred tax asset and the recognition of a
material current tax provision at 31 December 2017. These amounts were estimated at £3.3m and £3.6m respectively. There has been no
change in this position as at 31 December 2018.
38 EVENTS OCCURRING AFTER YEAR END
No events have occurred subsequent to year end that require additional disclosure.
APG_AR18_26.03.19_BACK_PROOF 6Anglo Pacific Group PLC 2018 Annual Report & Accounts
130
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended 31 December 2018
39 SUBSIDIARIES
The following tables outline the Group’s subsidiaries, as defined in Regulation 7 of the UK Companies Act 2006. All subsidiaries are included in
the Group consolidation.
Company and country of incorporation/operation
AUSTRALIA1
Principal activities
Class of shares held
Proportion
of class held at
31 December
2018
%
Proportion
of class held at
31 December
2017
%
Alkormy Pty Ltd
APG Aus No 1 Pty Ltd
APG Aus No 2 Pty Ltd
APG Aus No 3 Pty Ltd
APG Aus No 4 Pty Ltd
APG Aus No 5 Pty Ltd
APG Aus No 6 Pty Ltd
APG Aus No 7 Pty Ltd
APG Aus No 8 Pty Ltd
APG Aus No 9 Pty Ltd
Argo Royalties Pty Ltd
Gordon Resources Ltd
Investments
Owner of iron ore royalties
Owner of iron ore royalties
Owner of uranium royalties
Owner of iron ore royalties
Owner of iron ore royalties
Owner of vanadium royalties
Owner of coal royalties
Owner of nickel royalties
Investments
Investments
Owner of coal royalties
HydroCarbon Holdings Pty Ltd
Indian Ocean Resources Pty Ltd
Indian Ocean Ventures Pty Ltd
Starmont Holdings Pty Ltd
Starmont Ventures Pty Ltd
Woodford Wells Pty Ltd
Dormant
Investments
Dormant
Investments
Investments
Dormant
Ordinary A$1.00
Ordinary A$1.00
Ordinary A$1.00
Ordinary A$1.00
Ordinary A$1.00
Ordinary A$1.00
Ordinary A$1.00
Ordinary A$1.00
Ordinary A$1.00
Ordinary A$1.00
Ordinary A$1.00
Ordinary A$0.20
Ordinary A$1.00
Ordinary A$0.25
Ordinary A$0.20
Ordinary A$1.00
Ordinary A$1.00
Ordinary A$0.25
1 The registered office of all of the entities listed above is 6 Price Street, Subiaco, Western Australia 6008
BARBADOS2
Entrée International Holdings Inc
Intermediate holding company
Entrée Peru Holdings Inc
Intermediate holding company
Ordinary U$1.00
Ordinary U$1.00
2 The registered office of all of the entities listed above is Suite 203, Building No 8, Harbour Road, Bridgetown, St Michael, Barbados
CANADA3
Advance Royalty Corporation
Owner of uranium royalties
Albany River Royalty Corporation
Owner of chromite royalties
Panorama Coal Corporation
Owner of coal royalties
Polaris Royalty Corporation
Intermediate holding company
Trefi Coal Corporation
Owner of coal tenures
Ordinary C$0.01
Ordinary C$1.00
Ordinary C$1.00
Ordinary C$1.00
Ordinary C$0.01
3 The registered office of all of the entities listed above is 1720 Queens Avenue, West Vancouver, British Columbia, Canada V7V 2X7
ENGLAND4
Anglo Pacific Cygnus Ltd
Centaurus Royalties Ltd
Southern Cross Royalties Ltd
Investments
Investments
Investments
4 The registered office of all o the entities listed above is 1 Savile Row, London, England W1S 3JR
GUERNSEY5
Ordinary £1.00
Ordinary £1.00
Ordinary £1.00
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
N/A
N/A
100%
100%
100%
100%
100%
100%
100%
100%
Anglo Pacific Group Employee Benefit Trust Administering Group incentive plans
100%
100%
5 The registered office of the entity listed above is, Frances House, Sir William Place, St Peter Port GY1 4HQ
IRELAND6
Anglo Pacific Finance Ltd
Treasury
Ordinary £1.00
100%
100%
6 The registered office of the entity listed above is Atlantic Avenue, Westpark Business Campus, Shannon, Co Clare
PERU7
Exploraciones Apolo Resources SAC
Owner of copper royalties
Ordinary S/1.00
100%
N/A
7 The registered office of the entity listed above is Av. Ricardo Angulo No 776, Office 301, District of San Isidro, Lima, Peru
SCOTLAND8
Shetland Talc Ltd
Mineral exploration
Ordinary £1.00
100%
100%
8 The registered office of the entity listed above is Grant Thornton, 95 Bothwell Street, Glasgow, Scotland G2 7JZ
FINANCIAL STATEMENTSAPG_AR18_26.03.19_BACK_PROOF 6Anglo Pacific Group PLC 2018 Annual Report & Accounts 131
G
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O T H E R I N F O R M A T I O N
SHAREHOLDER STATISTICS
(a) Size of Holding (at 22 March 2019)
Category
UK AND CANADA
1 – 1,000
1,001 – 5,000
5,001 – 10,000
10,001 – and over
Number of
Shareholders
%
Number
of Shares
570
589
160
340
34.36%
288,623
35.50%
1,359,814
9.64%
1,192,944
20.49% 178,629,011
1,659
100% 181,470,392
%
0.16%
0.75%
0.66%
98.43%
100%
(b) The percentage of total shares held by or on behalf of the twenty largest shareholders as at 22 March 2019 was 74.61%.
CORPORATE DETAILS
REGISTERED OFFICE
Anglo Pacific Group PLC
1 Savile Row
London W1S 3JR
Registered in England
No. 897608
Telephone: +44 (0) 20 3435 7400
Fax: +44 (0) 20 7629 0370
WEBSITE
anglopacificgroup.com
SHAREHOLDERS
Please contact the respective
registrar if you have any queries
about your shareholding.
EQUINITI REGISTRARS LIMITED
Aspect House
Spencer Road
Lancing
West Sussex BN99 6DA
Telephone: +44 (0)371 384 2030
EQUIT Y TRANSFER & TRUST COMPANY
Suite 400
200 University Avenue
Toronto
Ontario M5H 4H1
Telephone: +1 416 361 0152
STOCKBROKERS
BERENBERG
60 Threadneedle Street
London EC2R 8HP
BMO CAPITAL MARKETS LIMITED
1st Floor
95 Queen Victoria Street
London EC4V 4HG
PEEL HUNT
120 London Way
London EC2Y 5ET
APG_AR18_26.03.19_BACK_PROOF 6Anglo Pacific Group PLC 2018 Annual Report & Accounts
132
FORWARD-LOOKING STATEMENTS
Performance measures
Throughout the Strategic Report, we use a number
of financial measures to assess our performance.
The measures are defined on inside front cover.
Third party information
As a royalty and streaming business, the Group often
has limited, if any, access to non-public scientific and
technical information in respect of the properties
underlying its portfolio of royalties, steams and
investments, or such information is subject to
confidentiality provisions. As such, in preparing this
Annual Report, the Group has relied upon the public
disclosures of the owners and operators of the
properties underlying its portfolio of royalties,
streams and investments, as available at the date of
this Annual Report.
References in this Annual Report to websites are
made as inactive textual references and for
informational purposes only. Information found
at the relevant websites is not incorporated by
reference into this Annual Report. The Group makes
no representation as to the accuracy of any such
information.
Cautionary statement on forward-looking
statements and related information
Certain statements in this Annual Report, other than
statements of historical fact, are forward-looking
statements based on certain assumptions and reflect
the Group’s expectations and views of future events.
Forward-looking statements (which include the
phrase ‘forward-looking information’ within the
meaning of Canadian securities legislation) are
provided for the purposes of assisting readers in
understanding the Group’s financial position and
results of operations as at and for the periods ended
on certain dates, and of presenting information
about management’s current expectations and plans
relating to the future. Readers are cautioned that
such forward-looking statements may not be
appropriate other than for purposes outlined in
this Annual Report. These statements may include,
without limitation, statements regarding the
operations, business, financial condition, expected
financial results, cash flow, requirement for and terms
of additional financing, performance, prospects,
opportunities, priorities, targets, goals, objectives,
strategies, growth and outlook of the Group
including the outlook for the markets and economies
in which the Group operates, costs and timing of
acquiring new royalties and making new
investments, mineral reserve and resources
estimates, estimates of future production,
production costs and revenue, future demand for
and prices of precious and base metals and other
commodities, for the current fiscal year and
subsequent periods.
Forward-looking statements include statements that
are predictive in nature, depend upon or refer to
future events or conditions, or include words such
as ‘expects’, ‘anticipates’, ‘plans’, ‘believes’, ‘estimates’,
‘seeks’, ‘intends’, ‘targets’, ‘projects’, ‘forecasts’, or
negative versions thereof and other similar
expressions, or future or conditional verbs such as
‘may’, ‘will’, ‘should’, ‘would’ and ‘could’. Forward-
looking statements are based upon certain material
factors that were applied in drawing a conclusion or
making a forecast or projection, including
assumptions and analyses made by the Group in light
of its experience and perception of historical trends,
current conditions and expected future
developments, as well as other factors that are
believed to be appropriate in the circumstances. The
material factors and assumptions upon which such
forward-looking statements are based include: the
stability of the global economy; the stability of local
governments and legislative background; the relative
stability of interest rates; the equity and debt markets
continuing to provide access to capital; the
continuing of ongoing operations of the properties
underlying the Group’s portfolio of royalties, streams
and investments by the owners or operators of such
properties in a manner consistent with past practice;
the accuracy of public statements and disclosures
(including feasibility studies, estimates of reserve,
resource, production, grades, mine life and cash cost)
made by the owners or operators of such underlying
properties; the accuracy of the information provided
to the Group by the owners and operators of such
underlying properties; no material adverse change in
the price of the commodities produced from the
properties underlying the Group’s portfolio of
royalties, streams and investments; no material
adverse change in foreign exchange exposure; no
adverse development in respect of any significant
property in which the Group holds a royalty or other
interest, including but not limited to unusual or
unexpected geological formations and natural
disasters; successful completion of new
development projects; planned expansions or
additional projects being within the timelines
anticipated and at anticipated production levels; and
maintenance of mining title.
Forward-looking statements are not guarantees of
future performance and involve risks, uncertainties
and assumptions, which could cause actual results to
differ materially from those anticipated, estimated or
intended in the forward-looking statements. Past
performance is no guide to future performance and
persons needing advice should consult an
independent financial adviser. No statement in this
communication is intended to be, nor should it be
construed as, a profit forecast or a profit estimate.
By its nature, this information is subject to inherent
risks and uncertainties that may be general or
specific and which give rise to the possibility that
expectations, forecasts, predictions, projections or
conclusions will not prove to be accurate; that
assumptions may not be correct and that objectives,
strategic goals and priorities will not be achieved.
A variety of material factors, many of which are
beyond the Group’s control, affect the operations,
performance and results of the Group, its businesses
and investments, and could cause actual results to
differ materially from those suggested by any
forward-looking information. Such risks and
uncertainties include, but are not limited to current
global financial conditions, royalty, stream and
investment portfolio and associated risk, adverse
development risk, financial viability and operational
effectiveness of owners and operators of the relevant
properties underlying the Group’s portfolio of
royalties, streams and investments; royalties, steams
and investments subject to other rights, and
contractual terms not being honoured, together with
those risks identified in the ‘Principal Risks and
Uncertainties’ section herein. If any such risks
actually occur, they could materially adversely affect
the Group’s business, financial condition or results of
operations. Readers are cautioned that the list of
factors noted in the section herein entitled ‘Risk’ is
not exhaustive of the factors that may affect the
Group’s forward-looking statements. Readers are
also cautioned to consider these and other factors,
uncertainties and potential events carefully and not
to put undue reliance on forward-looking
statements.
This Annual Report also contains forward-looking
information contained and derived from publicly
available information regarding properties and
mining operations owned by third parties. This
Annual Report contains information and statements
relating to the Kestrel mine that are based on certain
estimates and forecasts that have been provided to
the Group by Kestrel Coal Pty Ltd (“KCPL”), the
accuracy of which KCPL does not warrant and on
which readers may not rely.
The Group’s management relies upon this
forward-looking information in its estimates,
projections, plans and analysis. Although the
forward-looking statements contained in this Annual
Report are based upon what the Group believes are
reasonable assumptions, there can be no assurance
that actual results will be consistent with these
forward-looking statements. The forward-looking
statements made in this Annual Report relate only to
events or information as of the date on which the
statements are made and, except as specifically
required by applicable laws, listing rules and other
regulations, the Group undertakes no obligation to
update or revise publicly any forward-looking
statements, whether as a result of new information,
future events or otherwise, after the date on which
the statements are made or to reflect the occurrence
of unanticipated events.
US Employment Retirement Income
Security Act
Fiduciaries of (i) US employee benefit plans that are
subject to Title I of the US Employment Retirement
Income Security Act of 1974 (ERISA), (ii) individual
retirement accounts, Keogh and other plans that are
subject to Section 4975 of the US Internal Revenue
Code of 1986, as amended (the Internal Revenue
Code), and (iii) entities whose underlying assets are
deemed to be ERISA ‘plan assets’ by reason of
investments made in such entities by such employee
benefit plans, individual retirement accounts, Keogh
and other plans (collectively referred to as Benefit
Plan Investors) should consider whether holding the
Company’s ordinary shares will constitute a violation
of their fiduciary obligations under ERISA or a
prohibited transaction under ERISA or the Internal
Revenue Code. Shareholders should be aware that
the assets of the Company may be or become
treated as ‘plan assets’ that are subject to ERISA
fiduciary requirements and/or the prohibited
transaction rules of ERISA and the Internal Revenue
Code. The Company’s ordinary shares are subject to
transfer restrictions and provisions that are intended
to mitigate the risk of, among other things, the assets
of the Company being deemed to be ‘plan assets’
under ERISA. Shareholders who believe these
provisions may be applicable to them should review
these restrictions which are set forth in the
Company’s Articles of Association and should
consult their own counsel regarding the potential
implications of ERISA, the prohibited transaction
provisions of the Internal Revenue Code or any
similar law in the context of an investment in the
Company and the investment of the Company’s
assets.
APG_AR18_26.03.19_BACK_PROOF 6Anglo Pacific Group PLC 2018 Annual Report & AccountsOTHER INFORMATION Printed in the UK by CPI Colour
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ANGLO PACIFIC GROUP PLC
1 Savile Row, London W1S 3JR United Kingdom
T +44 (0)20 3435 7400
F +44 (0)20 7629 0370
info@anglopacificgroup.com
www.anglopacificgroup.com