Anglo Pacific Group PLC Interim results H1 2019 (8470J)

Share Name	Share Symbol	Market	Type	Share ISIN	Share Description
Anglo Pacific Group Plc	LSE:APF	London	Ordinary Share	GB0006449366	ORD 2P

	Price Change	% Change	Share Price	Bid Price	Offer Price	High Price	Low Price	Open Price	Shares Traded	Last Trade
	0.00	0.00%	157.00	157.60	158.60				0.00	01:00:00

Industry Sector	Turnover	Profit	EPS - Basic	PE Ratio	Market Cap
	0	0		N/A	0

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RNS Number : 8470J

Anglo Pacific Group PLC

22 August 2019

Anglo Pacific Group PLC

Interim results for the six months ended 30 June 2019

Anglo Pacific Group PLC ("Anglo Pacific", the "Company", the "Group") (LSE: APF) (TSX: APY) is pleased to announce interim results for the six months ended 30 June 2019 which are available on both the Group's website at www.anglopacificgroup.com and on SEDAR at www.SEDAR.com.

Results

 
                                 H1 2019           H1 2018 
                                 GBP'000   % Mvt   GBP'000 
------------------------------  --------  ------  -------- 
 Kestrel                          22,692    60%     14,225 
 Maracás Menchen              1,783   (16%)     2,125 
 Narrabri                          2,273    56%      1,456 
 Denison - interest                  975   (10%)     1,079 
 Royalty related dividends         3,420               141 
 Four Mile                           110   116%         51 
------------------------------  --------  ------  -------- 
 Royalty related revenue          31,253    64%     19,077 
------------------------------  --------  ------  -------- 
 EVBC - royalty receipts           1,021    2%       1,003 
 Denison - principal               1,015    37%        741 
------------------------------  --------  ------  -------- 
 Total portfolio contribution     33,289    60%     20,821 
------------------------------  --------  ------  -------- 
 
   --    64% increase in revenue in H1 2019 of GBP31.3m (H1 18: GBP19.1m)

-- 60% increase in portfolio contribution(1) (which includes EVBC and Denison principal) of GBP33.3m (H1 18: GBP20.8m)

-- Record half yearly Kestrel revenue - in line with the owners target to increase volumes in 2019 by 40%

-- Higher than expected revenue from LIORC, representing an annualised yield of 16% on our investment, reflecting the distribution of retained cash and the pellet price premium achieved during H1 19

-- Strong recovery at Narrabri as geotechnical issues are being overcome, with 56% increase in revenue in H1 2019 of GBP2.3m (H1 18: GBP1.5m)

-- Maracás Menchen is on track to deliver on its expansion plans, but revenue has been impacted by a significant decline in the vanadium price from the record levels achieved in 2018

-- 42% increase in adjusted earnings(2) per share to 12.13p (H1 2018: 8.56p) basic earnings per share more than doubled to 16.76p (H1 2018: 7.24p)

-- 78% increase in cash generated from operating activities to GBP26.6m (H1 2018: GBP15.1m) with free cash flow(3) generated in H1 2019 of GBP27.4m - a 53% increase on the GBP17.9m equivalent in H1 18

-- Borrowings repaid in full during the period, with GBP14.5m of cash on hand at 30 June 2019 (YE 2018: net debt of GBP3.1m) and access to US$90m of borrowings

-- 19% increase in net assets to GBP260.1m (YE 2018: GBP218.1m) translating into net assets per share of 144p (YE 2018: 121p)

-- The strong results for the first half should lead to an increase in the full year dividend for 2019 to a minimum of 9p per share, subject to market conditions and the impact of further global volatility during H2 19

Other highlights

-- GBP10m additional investment in LIORC year to date, of which GBP1.0m had been deployed during the six months ended 30 June 2019, bringing our current position to 5.2% at an average price of C$24.50/share

-- Volatility in exchange rates has had a positive impact thus far in Q3 19, and the Group has entered into further forward contracts to protect a portion of expected revenue, which should benefit the Group when translating full year revenue at the end of the year

Julian Treger, Chief Executive Officer, commented:

"We are pleased to report another period of strong organic growth in H1 19, with record revenue from Kestrel as the new owners appear to be on track to deliver their ambitions to increase production in 2019 by 40%.

Although Kestrel accounted for the majority of our revenue in H1 19, we were also pleased to see the revenue from our most recent acquisition, LIORC, outperform our expectations. The GBP3.2m received in H1 19 alone represented an underlying yield of 16% on an annualised basis. We have increased our investment in LIORC by a further GBP10m in the year to date, taking advantage of the recent decline in global equities in identifying an attractive entry point based on the current yield and our confidence in the iron ore pellet premium in the near-term.

We continued to generate significant free cashflow during the period, which allowed us to repay our borrowings in full. The cash on-hand at the end of the period, when added to our available facilities, provides US$100m of liquidity to us, which is even more important in the context of short-term volatility in the capital markets.

Given the strength of our results in the first half of the year, we would expect to increase the full year dividend from 8p per share to a minimum of 9p per share, depending on market conditions and outlook in H2 19."

(1) 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 plus royalties received or receivable from royalty financial instruments carried at fair value through profit or loss ('FVTPL') and principal repayments received under the Denison financing agreement.

(2) Adjusted earnings/(loss) represents the Group's underlying operating performance from core activities. Adjusted earnings/(loss) is the profit/(loss) attributable to equity holders less all valuation movements, non-cash impairments and amortisation charges (which are non-cash IFRS 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.

(3) Free cash flow is 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.

Analyst presentation

There will be an analyst presentation via conference call at 9:00am (BST) on 22 August 2019. The presentation will be hosted by Julian Treger (CEO), Kevin Flynn (CFO) and Juan Alvarez (Head of Investments)

Dial in details for the call are as follows:

 
 Location you are dialling in from                    Number you should dial 
 United Kingdom (toll free)                           0800 358 9473 
                                                     --------------------------------- 
 United Kingdom (Local)                               +44 (0) 333 300 0804 
                                                     --------------------------------- 
 All other locations please refer to the link below: 
  http://events.arkadin.com/ev/docs/NE_W2_TOLL_Events_International_Access_List.pdf

Participant Access Code: 94145360#

The webcast cast presentation can be followed at the following URL:

https://event.on24.com/wcc/r/2069034/65CCE0FDA627A003DD5A28F0EB7D3636

For further information:

 
 Anglo Pacific Group PLC 
  Julian Treger - Chief Executive Officer 
  Kevin Flynn - Chief Financial Officer and 
  Company Secretary                                                +44 (0) 20 3435 7400 
 Website:                                                     www.anglopacificgroup.com 
 Berenberg                                                         +44 (0) 20 3207 7800 
 Matthew Armitt / Detlir Elezi 
 
 BMO Capital Markets Limited                                       +44 (0) 20 7664 8020 
 Jeffrey Couch / Tom Rider 
 
 Peel Hunt LLP                                                     +44 (0) 20 7418 8900 
 Ross Allister / James Bavister 
 
 Capital Market Communications Limited (Camarco)                   +44 (0) 20 3757 4997 
 Gordon Poole/ Owen Roberts / James Crothers

Notes to editors:

About Anglo Pacific

Anglo Pacific Group PLC is a global natural resources royalty company. The Company's strategy is to develop a leading international diversified royalty and streaming company with a portfolio centred on base metals and bulk materials, focusing on accelerating income growth through acquiring royalties on projects that are currently cash flow generating or are expected to be within the next 24 months, as well as investment in earlier stage royalties. It is a continuing policy of the Company to pay a substantial portion of these royalties to shareholders as dividends.

Alternative Performance Measures

Throughout this report a number of alternative financial measures are used by the Board to assess the Group's performance, particularly when determining dividends levels. These measures are defined as follows:

Portfolio contribution

Portfolio contribution represents the funds received or receivable from the Group's underlying royalty related assets. Portfolio contribution is royalty related revenue (refer to note 2) plus royalties received or receivable from royalty financial instruments carried at fair value through profit or loss ('FVTPL') and principal repayments received under the Denison financing agreement (refer to note 12).

Operating profit

Operating profit represents the Group's underlying operating performance from its royalty interests. Operating profit is royalty related revenue, less amortisation of royalties and operating expenses, and excludes impairments, revaluations and gains/(losses) on disposals. Operating profit reconciles to 'operating profit before impairments, revaluations and gains/(losses) on disposals' on the income statement.

Adjusted earnings and adjusted earnings per share

Adjusted earnings represents the Group's underlying operating performance from core activities. Adjusted earnings is the profit attributable to equity holders plus royalties received from financial 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 6 to the financial statements for adjusted earnings 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 7 of the financial statements for dividend cover.

Free cash flow and free cash flow per share

The structure of a number of the Group's royalty financing arrangement, 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 by reference to both adjusted earnings per share and 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, 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 19 to the financial statements for free cash flow per share.

BUSINESS REVIEW

The last few weeks have seen increased concern about the progress of the global economy with falling yields and a flight to safety. Against this background, we are pleased to report a material increase in our half year results and this should, subject to market conditions in H2 19, increase our full year dividend for 2019 to a minimum of 9p per share from 8p per share in 2018.

Portfolio contribution was up 60% leading to a doubling in earnings per share, adjusted earnings per share increased by 42%, net assets increased by 19% and free cashflow increased by 53% to GBP27.4m which, in turn, allowed us to repay our borrowings and give the Company access to US$100m of liquidity to finance our growth ambitions.

The outlook for the remainder of the year, certainly for volumes, looks encouraging. Kestrel has been a noticeable performer in the period. We highlighted the owners stated ambitions to increase production by 40% in 2019 and are pleased to report that the numbers from the half year suggest that this is achievable. Narrabri has also performed well in the first half, and it looks like Whitehaven Coal has resolved some of the geotechnical issues which it has been encountering over the past number of years. Largo has stated that its expansion programme at Maracás Menchen should be completed during the current quarter whilst Orvana continue to target high grade ore to increase efficiencies.

Whilst our results for the full year should benefit from volume growth, the outlook for commodity pricing appears less certain. High quality coking coal and iron ore pellet prices performed well in the first half but have declined recently. Thermal coal and vanadium both continue to trade above the levels when we acquired the Narrabri and Maracaás Menchen royalties respectively.

Current ongoing trade tensions between the US and China, regulatory pressures, scarcity of conventional capital and lack of investment by the majors present opportunities for Anglo Pacific and we have seen an increase in deal flow as a result. We continue to invest in developing our capacity to process transactions and we exact high requirements of new investments. Whilst it has been frustrating not to deploy more capital in H1 19, we have examined many and are progressing a number of transactions and we are hopeful this will bear fruit in H2. In the mean-time, we took the opportunity of the recent global equity sell off to top up our position in LIORC as we continue to believe in the strong fundamentals of the iron ore pellet market and the position which Labrador Iron Ore commands in this market at present.

The capital scarcity for mining combined with the recent squeeze on prices due to trade war fears provides confidence for deal flow in the second half of the year. Downward pressure on commodity prices should create an attractive entry point for deploying capital.

Our adjusted earnings per share growth in the first half, combined with the yield implied by our recent LIORC acquisition, bodes well for the 2019 final dividend, although this will ultimately depend on commodity prices and currency in the second half of the year. We will await developments of how ongoing global volatility and market conditions, but at this stage our intention is to increase the total dividend for the year to a minimum of 9p per share (2018: 8p per share).

We remain well positioned to grow our business and have US$100m of liquidity which can be invested quickly and opportunistically should we need to. We have a good track record of identifying accretive transactions which should underpin our business in the longer term. But we have more to do and are very focused on using the significant cashflows we expect from Kestrel to grow and diversify our sources of revenue.

Portfolio review

The portfolio continued to perform well during the first half of 2019. Record production was achieved at Kestrel, Narrabri saw its strongest six-month total since H2 2017 and income from LIORC in H1 19 implied a running yield of 16.25%. The only drawback was in relation to the vanadium price which impacted our income from Maracás Menchen, despite production volumes being in line with expectations. EVBC benefitted from a strengthening of the gold price resulting in another consistent contribution in the period, whilst income from the Denison financing arrangement was in line with our expectations. The performance in the first half suggests that the portfolio is on track to deliver the growth we anticipated at the beginning of the year, as discussed in more detail below.

Kestrel

Sales volumes increased by 50% in H1 19, although the prior year did contain a longwall changeout. This is significant as the owners of the mine announced their target to increase volumes in 2019 by 40% from the levels achieved in 2018, to 6.5Mt. The numbers reported in the first half of the year would suggest that achieving this run rate is possible. Anglo Pacific undertook a site visit to the mine in February 2019 and we remain very encouraged by the operational performance at the mine since the current owners took over in August 2018, with significant volume growth expected for 2019 and beyond.

Demand for high quality coking coal remains strong in the Asian markets. Some supply issues from Australia kept the seaborne market tight in H1 19. The slowdown in the Chinese economy, impacted by trade tension with the US, has triggered an infrastructure stimulus, increasing the demand for steel. This should support pricing in the short-term, although consensus pricing does suggest a tapering of this policy impacting pricing in the medium term.

LIORC

The Group acquired its indirect exposure to the Labrador Iron Ore royalty during H2 2018. Anglo Pacific receives dividend income from LIORC which is based primarily on its underlying exposure to the Labrador Iron Ore mine. Similar to a conventional royalty, income from this asset varies with the commodity price as the investment company is effectively a pass-through vehicle.

Income from LIORC in H1 19 was well in advance of that anticipated at the time of the acquisition, and now represents the Group's second largest source of revenue. The results were buoyed by a significant supply tightening in the iron ore market at a time when China commenced an infrastructure led economic stimulus.

This has had a significant impact on pricing, especially at the premium end of the market where there is a current scarcity of availability on the seaborne market. This has resulted in benchmark iron ore pricing exceeding $100/t in Q2 2019, the first time it has reached this level in five years. As noted above, increased Chinese demand through infrastructure stimulus policies has coincided with this period of supply disruption, resulting in elevated pricing for producing operations such as Labrador Iron Ore.

It is questionable as to whether a supply side reaction can occur in 2019, given the lead time to bring production online, however, the longer pricing remains at these levels the more likely it is that there will be a response. However, the most likely trigger for a softening in price will be the recommencement of operations in Brazil which is likely to take place in the near-term.

We have been selectively adding to our position as and when the pricing level comes within our anticipated return range, and have added a further GBP10m thus far in 2019, of which GBP1.0m had been deployed during the six months ended 30 June 2019.

Narrabri

We were very pleased to see a strong recovery in production at Narrabri during the first half, following well documented disruptions over the past number of years as Whitehaven Coal successfully navigated its way through localised faults in certain longwall panels.

ROM production in H1 19 was 3.6Mt compared to 2.4Mt in H1 18, a 50% increase. Royalties were paid based on sales of 3.0Mt versus 1.9Mt in the corresponding period in 2018. There was a higher than normal level of stock on hand at the end of June 2019 at just over 1Mt, so there could be additional royalty revenue to come in Q3 19.

Whitehaven announced that the longwall successfully mined through the fault area in Q2 19 without issue and quickly resumed normal production levels. Without production disruptions, total production reached 6.4Mt in Whitehaven's FY 19 (twelve months to end of June 2019), which beat their previous guidance of 5.6-6.0Mt.

Production of 6.4Mt is well below what we believe the operator can achieve given its infrastructure and the mine is permitted up to 11Mtpa.

Pricing achieved at Narrabri softened somewhat during H1 19. Whitehaven reported that the global Coal Newcastle Index thermal coal price in Q2 19 was $80/t compared with an average of $100/t over the past twelve months.

Thermal coal pricing has enjoyed a strong run since the end of 2017, with high demand from China and India coinciding with some supply disruptions in Australia elevating pricing towards $90-100/t. This prompted action from China, who began to focus on Australian imports either by restrictions or by increasing port inspections. At the same time, China has lifted some capacity restrictions on its domestic coal industry, allowing domestic volume increases to combat the higher import cost of Australian seaborne coal.

The longer-term demand outlook remains mixed for thermal coal. Indonesia and Russia continue to represent new sources of supply to compete against the traditional supply of Australian coal, although importantly, the latter should still represent a higher quality than the former. India is increasing its domestic production with a view to becoming less reliant on Australian prices. The slowdown in the Chinese economy might result in less power demand than previously expected.

The above factors are expected to result in downward pressure on thermal coal prices. This is reflected in consensus prices, which now anticipate prices to be down 16% in H2 19 and 9% in 2020. The growth in volume from Narrabri should shelter Anglo Pacific from the full impact of weaker pricing should this materialise.

Maracás Menchen

Operationally, Maracas continued to perform very well in H1 19, with sales of 4.6kt, in line with the corresponding period in 2018. Largo achieved a record month of production in June 2019, with 926 tonnes of vanadium pentoxide produced.

The outlook for the remainder of the year looks positive. Largo had previously announced its intention to implement an expansion plan in 2019 to increase output at the plant. The numbers achieved in June suggest that the ramp up, expected to be completed in Q3 2019, is on track and this should result in increased sales volumes in H2 19.

Vanadium pricing has experienced a very volatile last 18 months. Pricing levels achieved during H2 18 reflected record highs for vanadium, which was driven by Chinese supply coming offline at the same time as the Chinese authorities increased the rebar standard for steel production - both price catalysts for higher vanadium prices.

Prices began to soften at the beginning of 2019, as China rolled back somewhat on previously announced regulation changes in response to its economic slowdown and subsequent infrastructure stimulus. As such, heavy industry was once again supported and some regulatory changes in relation to rebar standards were deferred. This resulted in destocking and the vanadium price dropped accordingly.

The volatility seen in the vanadium price of late makes pricing predictions very difficult, but it appears that there was not a supply side reaction to the price rises in H2 18. As such, the market should remain tight and therefore create a new floor price around current spot levels. Even at these lower levels the price remains well in advance of the assumptions we made when we acquired the royalty in June 2014 and we have already had a 60% payback on acquisition cost.

EVBC

The production increases achieved during 2018 slowed somewhat during Q2 19, but overall gold recoveries were up 17% in the period. Orvana has announced that it is on track to achieve its FY 19 (twelve months ending 30 September 2019) guidance, which for EVBC represents 65koz (mid-point).

Orvana continues to explore options to optimise efficiency, targeting higher grade oxide areas around the existing mine.

The results from Orvana also benefitted from a resurgent gold price in 2019. Gold prices at the beginning of the year were just over $1,280 oz and has now rallied to $1,500 oz, driven by global economic uncertainty, lowering of central bank interest rates and a general flight to safety. The outlook for the remainder of the year remains positive given the significant market volatility which looks set to remain.

McClean Lake

Throughput at the mill was higher in H1 19 compared to the same period in 2018 which drove a 7% increase in revenue. The underlying income is from a toll over the throughput at the mill and as a result is not sensitive to the underlying uranium price and should, as a result, always produce a steady and consistent stream of cashflow.

Four Mile

We continue to pursue our rights in relation to the ongoing royalty dispute with the operator and have now commenced court proceedings.

Salamanca

Berkeley Energia continues to wait for the approvals it needs in order to bring its Salamanca project into production. Due to the ongoing nature of the delays, the company has decided to relocate to Spain, and is now actively searching for a Spanish managing director to engage with the local stakeholders in at attempt to resolve the current impasse. In the meantime, the project is construction ready as soon as it receives its permits.

Uranium pricing had been impacted during H1 19 by uncertainty regarding a petition to protect uranium mining in the US by imposing tariffs and restrictions on imports on the grounds of national security under Section 232. This uncertainty resulted in an overhang on the uranium price in H1 19 as restocking decisions were postponed until the President's decision was published.

Although the US President has since stated that he did not agree with this position, he has nonetheless called for a fuller enquiry into the national security considerations over the entire supply chain within the nuclear industry. This announcement has been welcomed by the industry and domestic consumers within the US.

Spot uranium has remained soft even since the Section 232 announcement, and key projects (McArthur River, Key Lake) remain offline. It remains to be seen whether a uranium price move would be met by subsequent, and prompt, supply reaction.

Other royalties

There are no material updates in relation to the Group's other development and early stage royalties.

Finance review

The first half of 2019 saw continued growth from the Group's portfolio of royalties. Commodity prices underpinning the main revenue generating royalties were at levels higher than anticipated at the beginning of the year, noticeably for coking coal and iron-ore and in particular at the premium end of these markets. Trade tensions between the US and China continue to cast uncertainty over the market, but for the moment this has not materially impacted on the commodities which drive the Group's revenues.

Significantly for Anglo Pacific, the ambitious volume growth targets set by the Kestrel owners for 2019 have eventuated in the first half, with royalties being paid on sales volumes which were 50% higher than the equivalent period in 2018.

The continued resilience of coking coal prices, along with higher annual production assumptions, has resulted in a further increase in the value of our Kestrel royalty of GBP14m pre-tax. This, along with other valuation and currency adjustments has resulted in a GBP42m increase in net assets to GBP260m, implying an IFRS net asset value per share of 144p, a 19% increase from year end 2018.

The cash generated during the period enabled the Group to repay its borrowings in full and ended the period with cash of GBP14.5m. Added to the potential US$90m of borrowings under the Group's facility provides the Group with liquidity of over US$100m to finance growth opportunities.

Adjusted earnings

Overall, earnings per share were 16.76p in the period (16.70p diluted), more than double the 7.24p reported in H1 18 (diluted: 7.23p). The growth in portfolio contribution has led to a 42% increase in our adjusted earnings per share to 12.13p compared to 8.56p in H1 18.

Although an impressive outturn for the period, the underlying performance is even higher as H1 18 benefitted from a tax shield in relation to losses forward which were utilised in full by the end of 2018.

 
                                                                 H1 2019           H1 2018           H1 2017 
 Royalty related revenue                                          31,253            19,077            17,043 
 EVBC income (included in valuation of financial instruments)      1,021             1,003                 - 
 Operating expenses - excluding share-based payments             (2,741)           (2,452)           (2,512) 
 Finance costs                                                     (430)             (354)              (14) 
 Finance income                                                       14                71                 6 
 Other (losses)/income                                               822                 -                 - 
 Tax                                                             (8,032)           (1,964)           (1,622) 
 Adjusted earnings                                                21,907   42.4%    15,381   19.2%    12,901 
==============================================================  ========  ======  ========  ======  ======== 
 
 Weighted average number of shares ('000)                        180,544           180,006           173,370 
 Adjusted earnings per share                                      12.13p   41.7%     8.56p   15.1%     7.44p 
--------------------------------------------------------------  --------  ------  --------  ------  --------

Although less significant than commodity pricing, the other variable impacting on results is foreign exchange, which looks set to remain volatile in the near-term given the combination of a no deal Brexit looking like a distinct possibility, the continued weakness of the Australian economy and an environment of ever lower interest rates in developed economies.

In the first half, the pound (GBP) was, on average, stronger against the Australian dollar (AUD) - the main source of the Group's revenues, which would result in a headline translation loss. However, the commodities which our Australian dollars are received from are priced based on the US dollar (USD). The AUD:USD rate decreased from 0.77 in H1 18 to 0.71 in H1 19, which offset the adverse movement in the GBP:AUD. This impact is even more profound at Kestrel where the royalty rate is ratcheted to the AUD price, so when the AUD:USD moves lower we receive a higher weighted average royalty rate.

Simply translating the results at a constant foreign exchange rate in the period would imply lower income of GBP0.4m, but the number is likely to be significantly better given the weakness of the AUD to the USD in the period impacting favourably on the quantum of Australian dollars received, as explained above. The Group does hedge forward a certain proportion of its Australian dollar revenues in order to manage some of the risk associated with currency fluctuations, and has increased its positions following the recent weakening of the pound.

Revenue

Total portfolio contribution for the period was GBP33.3m, representing a 60% increase on the same period in 2018. Kestrel has once again provided the majority of this increase, with a record half yearly contribution of GBP22.7m - a 60% increase on H1 18. There were other highlights - LIORC paying substantial special dividends, Narrabri volume recovery and another solid performance from EVBC. However, the decrease in the vanadium price during the period resulted in lower revenue from Maracas despite similar volumes.

 
 H1 income analysis                 2019              2018      2017      2016 
                                 GBP'000   % Mvt   GBP'000   GBP'000   GBP'000 
------------------------------  --------  ------  --------  --------  -------- 
 Kestrel                          22,692    60%     14,225    12,604     1,406 
 Maracas                           1,783   (16%)     2,125       785       701 
 Narrabri                          2,273    56%      1,456     1,880     1,607 
 EVBC (1)                              -                 -       815       529 
 Denison - interest                  975   (10%)     1,079       959         - 
 Royalty related dividends         3,420               141         -         - 
 Four Mile                           110   116%         51         -       256 
 Royalty relate revenue           31,253    64%     19,077    17,043     4,499 
==============================  ========  ======  ========  ========  ======== 
 EVBC - royalty receipts           1,021    2%       1,003         -         - 
 Denison - principal               1,015    37%        741       296         - 
 Total portfolio contribution     33,289    60%     20,821    17,339     4,499 
==============================  ========  ======  ========  ========  ======== 
 1 EVBC income as previously reported under IAS 32

Ø Kestrel

H1 19 represented a record half yearly result from Kestrel. The increase is in line with the owners stated ambition to increase production volumes at the mine by 40% in 2019. This has, by and large, begun to come through in the first half of the year, with overall sales volumes showing an increase of 50% on the comparative period. Over 95% of sales were from within the Group's private royalty land.

The average price achieved at Kestrel increased by 5% in the period as the benefit of a weaker Australian dollar resulted in the weighted average royalty rate increasing by 20bps to 11.22%.

Ø LIORC

Income from LIORC was the second highest source of income for the Group in H1 19. The income is received by way of regular and special dividends received from the pass-through vehicle. The special dividends were higher in the period than expected (Q1 19: C$0.80, Q2 19: C$0.65) and together with the normal dividend level of C$0.25 led to total dividends in the period of C$1.95 (our average investment price is C$24). The level of special dividends benefitted from the distribution of previously withheld cash in the company along with higher iron ore pellet prices throughout H1 19. The C$1.95 per share received during H1 19 represents an effective annualised running yield of 16%.

Ø Narrabri

Income from Narrabri recovered during the period, resulting in a 56% increase in revenue to GBP2.3m. The recovery in income was largely volume driven, with total sales of 3.0 Mt in H1 19 compared to 1.9Mt in H1 18. We also noted that Whitehaven had on hand double the stock levels at the end of June 2019 compared to the previous year, suggesting there should be some benefit to come through in Q3 19. Pricing was down 8% in the period due to a softening of thermal coal prices in Q2 19.

Ø Maracás Menchen

The underlying performance at Maracas was in line with H1 18, with sales of 4,600 tonnes in the period, and the operator has stated that its ramp up initiatives are well under way and scheduled to complete in Q3 19. The reason for the 16% decrease in revenue is the well documented decrease in the vanadium price in H1 19. The vanadium price began to increase significantly at the end of 2017 and the average price for H1 18 was $14/lb compared to $12/lb in H1 19 and has trended down to $7/lb in Q3 19.

Ø EVBC

Revenue from EVBC was in line with that of H1 18, representing another consistent outturn for the Group which has already had 360%+ payback on its investment. Production numbers were encouraging in H1 19 at 32koz of gold compared to 27koz in H1 18. They remain focused on targeting high grade ore around the mine in order to maintain efficiencies, and the results for the remainder of the year should benefit from the recent increases in gold price which look set to sustain in the short-term.

Ø McClean Lake

Revenue from McClean Lake should, ordinarily, be consistent in each reporting period, and in the range of C$0.5-0.6m per month. Average monthly revenue in H1 19 was C$560k, a 10% increase on the monthly average in H1 18.

Ø Four Mile

The Four Mile dispute is ongoing, and Anglo Pacific has now commenced court proceedings

Other items

Overheads for the period showed a slight increase of 8.5% on H1 18 as Anglo Pacific continues to invest in growth. The increase largely relates to higher staffing levels as we deal with a higher volume of investment opportunities, along with increased travel costs associated with business development opportunities.

Finance costs were higher in the period as we had borrowings drawn on our facility associated with the LIORC acquisition during H1 19.

Tax for the period was higher than H1 18 as the prior year benefitted from full tax shelter in Australia based on available losses. These were exhausted in full at the end of H1 18. As there were no losses to shelter tax in H1 19, corporation tax was higher as a result.

Profit after tax

Profit after tax in the period benefitted from a GBP14.0m valuation gain associated with Kestrel, net of deferred tax of GBP3.3m. This is discussed in the balance sheet section below. The results also include foreign exchange gains in the period of GBP0.9m compared to GBP0.1m loss in H1 18. H1 18 also included a GBP1.8m gain in relation to the termination of the Indo Mines debenture.

Balance Sheet

Net assets increased by GBP42m in the first six months of the year to GBP260m. In addition to retained earnings described above, this was largely attributable to an increase in the Kestrel valuation, as discussed below, along with a significant increase in the value of the Group's LIORC investment.

Figure 1 - Net assets reconciliation

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Kestrel valuation

The increase in Kestrel valuation of 13% is impressive considering the significantly increased level of income earned in H1 19 and associated depletion. The main reasons for the increase in the value of the royalty are higher annual production assumptions, together with increases to the underlying coal pricing assumptions which in turn increase the weighted average royalty rate. In addition, recessionary concerns in Australia and associated interest rates cuts, have reduced the risk free rate of return leading to a reduction in the discount rate applied to the valuation.

LIORC

The Group's LIORC acquisition is included within Royalty Financial Instruments as it effectively represents a part ownership of a royalty although acquired indirectly through an equity position in the pass-through vehicle. Given that the pass-through vehicle is a listed entity with an observable market price, the investment is remeasured at each reporting period to the share price at the reporting date. Due to the ongoing supply shortage of premium pellet products due to restrictions in Brazil production, the share price of LIORC increased noticeably in the period. The total cost of our investment was GBP39.4m compared to a valuation of GBP59.5m at 30 June 2019.

Net Assets

Net assets at the end of the year were GBP260m which represents 144p per share. Given that the intangible assets are amortised rather than re-valued, the balance sheet value does not reflect any increase in value post acquisition for intangible assets, either as a result of resource expansion, price assumptions or the shortening of the time gap to production. For this reason, balance sheet value per share does not equal a discounted future cash flow per share.

Cash and borrowings

The Group generated free cash flow of GBP27.4m in the first half, significantly higher than the GBP17.9m equivalent in H1 18 as outlined in the waterfall chart below:

Figure 2 -Cash Flow Sources & Usage

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The cash generated was used to repay all outstanding borrowings (GBP8.3m), make small acquisitions (GBP1m) and pay dividends totalling (GBP8.6m). After other items of (GBP0.2m), this left a residual cash balance of GBP9.3m which, when added to the opening cash of GBP5.2m, resulted in closing cash of GBP14.5m at the end of June.

The Group has an undrawn US$60m revolving credit facility which can be upsized to US$90m depending on the characteristics of the acquisition being made. The facility has a remaining maturity of just over two years and the Group has the right to request a one-year extension, which we are currently reviewing.

Principal risks and uncertainties

The Group is exposed to a variety of risks and uncertainties which may have a financial, operational or reputational impact on the Group. The principal risks and uncertainties facing the Group at the year-end were set out in detail in the strategic report section of the 2018 Annual Report and Accounts and have not changed significantly since. The principal risks relate to the following:

   --      Commodity prices 
   --      Political and regulatory 
   --      Production

The Group is exposed to changes in the economic environment, as with any other business. Details of any key risks and uncertainties specific to the period are covered in the Investment Review and Finance Review sections.

The 2018 Annual Report and Accounts is available on the Group's website www.anglopacificgroup.com

Responsibility statement

The Directors confirm that to the best of their knowledge:

-- the condensed set of financial statements has been prepared in accordance with IAS 34 'Interim Financial Reporting';

-- the interim management report includes a fair review of the information required by DTR 4.2.7R (indication of important events during the first six months and description of principal risks and uncertainties for the remaining six months of the year); and

-- the interim management report includes a true and fair review of the information required by DTR 4.2.8R (disclosure of related parties' transactions and changes therein).

The Directors are listed in the Annual Report of 31 December 2018 and a list of the current Directors is maintained on the Anglo Pacific website: www.anglopacificgroup.com. The maintenance and integrity of this website is the responsibility of the Directors.

On behalf of the Board

J.A. Treger

Chief Executive Officer

21 August 2019