the global natural resources royalty company€¦ · portfolio centred on base metals and bulk...

APG AR16 | 30.03.17 | ARTWORK

THE GLOBAL NATURAL RESOURCES ROYALTY COMPANY2016ANNUAL REPORT & ACCOUNTS

Anglo Pacific Group PLC

Group overview

Strategic report

GovernanceFinancial statem

entsOther inform

ation

Welcome to the Anglo Pacific Group Annual Report 2016This interactive PDF allows you to view and easily find the information you’re looking for. By using the control icons at the top of each page and the little blue arrows within the narrative of the report you can search and navigate through the book.

The icons are...Return to main contents page

Print pages or whole sections

Search the document by keyword

Go to the previous page

Go to the next page

Jump to a specific page

Link to APG website

Wherever you are in the book, you can also

click the tabs to take you to each section


Anglo Pacific Group Plc Annual Report & Accounts 2016Group overview

Strategic report


entsOther inform

ation


Anglo Pacific Group Plc Annual Report & Accounts 2016

More �page 10

http://anglopacificgroup.comhttp://anglopacificgroup.com

Contents

01 Group overview02 AngloPacificataglance03 Miningroyaltiesexplained04 Ourportfolio06 Chairman’sstatement

08 Strategic report08 ChiefExecutiveOfficer’s

statement10 Newroyaltyacquisition12 Marketoverview14 Ourbusinessmodel16 Ourstrategy18 Principalrisksanduncertainties24 Keyperformanceindicators25 Businessreview37 Financialreview42 Corporatesocialresponsibility

44 Governance44 Corporategovernancereport45 TheBoard48 NominationCommittee49 AuditCommittee52 RemunerationCommittee53 Directors’remunerationreport67 Directors’report69 StatementofDirectors’

responsibilities

70 Financial statements70 Independentauditor’sreport75 Consolidatedincomestatement76 Consolidatedstatementof

comprehensiveincome77 ConsolidatedandCompany

balancesheets78 Consolidatedstatement

ofchangesinequity79 Companystatementof

changesinequity80 Consolidatedstatementof

cashflowsandCompany statementofcashflows

81 Notestotheconsolidated financialstatements

116 Other information116 Shareholderstatistics116 Corporatedetails117 Forward-lookingstatements

for more information visit �anglopacificgroup.com

Throughout this report a number of financial measures are used to assess the Group’s performance. The measures are defined as follows:

Operating profit/(loss)Operatingprofit/(loss)representstheGroup’sunderlyingoperatingperformancefromitsroyaltyinterests.Operatingprofit/(loss)isroyaltyincome,lessamortisationofroyaltiesandoperatingexpenses,andexcludesimpairments,revaluations andgain/(loss)ondisposals.Operatingprofit/(loss)reconciles to‘operatingprofit/(loss)beforeimpairments,revaluations andgain/(losses)ondisposals’ontheincomestatement.

Adjusted earnings per shareAdjustedearningsrepresentstheGroup’sunderlyingoperatingperformancefromcoreactivities.Adjustedearningsistheprofit/(loss)attributabletoequityholderslessallvaluationmovements,andnon-cashimpairments(whicharenon-cashitemsthatariseprimarilyduetochangesincommodityprices),amortisationcharges,sharebasedpayments,financecosts,anyassociateddeferredtaxandanyprofitorlossonnon-coreassetdisposalsasthesearenotexpectedtobeongoing.Adjustedearningsdividedbytheweightedaveragenumberofsharesinissuegivesadjustedearningspershare.Referto �note 11to thefinancialstatementsforadjustedearnings/(loss)pershare.

Dividend coverDividendcoveriscalculatedasthenumberoftimesadjustedearningspershareexceedsthedividendpershare.Referto�note 12 tothefinancialstatementsfordividendcover.

Free cash flow per shareFreecashflowpershareiscalculatedbydividingnetcashgeneratedfromoperatingactivities,plusproceedsfromthedisposalofnon-coreassets,lessfinancecosts,bytheweightedaveragenumberofsharesinissue.Referto�note 33 tothefinancialstatementsforfreecashflowpershare.

Performance measures


http:/anglopacificgroup.comhttp://anglopacificgroup.com

To develop as the leading international diversified royalty company with a portfolio centred on base metals and bulk materials.Anglo Pacific Group PLC (‘Anglo Pacific’, the ‘Company’ or the ‘Group’) is the only listed company on the London Stock Exchange focused on royalties connected with the mining of natural resources. Our strategy is to build a diversified portfolio of royalties and metal streams, focusing on accelerating income growth through acquiring royalties in cash or near-term cash producing assets.It is an objective of the Company to pay a substantial portion of these royalties and metal streams to shareholders as dividends.

GROUP OVERVIEW

Our aim

More on how we are achieving our strategy �pages 10 and 11

01



Strategic report


entsOther inform

ation

http://anglopacificgroup.com

03.0

1.12

03.0

1.13

03.0

1.14

03.0

1.15

03.0

1.16

03.0

1.17

150

120

90

60

30

0

GROUP OVERVIEW

Anglo Pacific at a glance

Primary listing

London Stock ExchangeSecondary listing

Toronto Stock ExchangeRoyalty income increased in the year

+127% Net assets at December 31, 2016

£210.1mAssets in production by value

Over 86% of our portfolio by value, across 5 commodities is in production

Global royalty assets

11 principal royalty and streaming related assets across 5 continentsProduction potential

Significant, fully funded, organic growth in the current portfolio from Kestrel, Narrabri and Salamanca

Key facts 2016KPIs

Shareholder returns

See more �page 24

Dividend per share (p)

6.00pDividend cover of 1.6x in 2016 provides platform for growth

FTSE 350 Mining Index vs. Anglo Pacific Group 2011-2016(Rebased to 100)

Royalty income (£m)

£19.7m

Adjusted earnings per share (p)

9.76p

Dividend cover (x)

1.6x

Free cash flow per share (p)

7.93p

12 13 14 15 16

1.6

0.4

0.0

0.80.9

12 13 14 15 16

19.7

8.7

3.5

14.715.2

Royalty assets acquired (£m)

Nil

12 13 14 15 16

7.93

2.93

10.36

2.93

7.93

12 13 14 15 16

-1.97

8.398.69

2.47

9.76

12 13 14 15 16

0.0

45.0

16.2

6.36.9

FTSE 350 Mining Index

Anglo Pacific Group

6.007.00

8.45

10.2010.20

12 13 14 15 16

02




A mining royalty is a non-operating interest in a mining 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.

Types of royaltiesTheGroup’sroyaltiesaremostlyrevenueorproduction-basedroyalties.Typically,theseroyaltiesareeitherGrossRevenueroyaltiesorNetSmelterReturnroyalties,eachofwhichcanbedescribedasfollows:

GRR : Gross Revenue royalty AGRRentitlestheroyaltyholdertoafixedportionofthegrossrevenuesgeneratedfromthesalesofmineralproductionfromaproperty.IncalculatingaGRRpayment,deductions,ifany,appliedbythepropertyowner toreducetheroyaltypaymentareusuallyminimal,andGRRsarethereforethesimplestformofroyaltytoaccountforandimplement.

NSR : Net Smelter Return royaltyAnNSRentitlestheroyaltyholdertoafixedportionofthenetrevenuesreceivedfromasmelterorrefineryfromthesalesofmineralproductionfromaproperty,afterthedeductionofcertainoffsiterealisationcosts.Typicalrealisationcostsincludethoserelatedtotransportation,insurance,smeltingandrefining.Thesedeductionsaregenerallyhigherinbasemetalsminesduetothesemi-finishedproduct,suchasconcentrate,oftenbeingproducedattheminesite,whencomparedtopreciousmetalsmines,whichproduceanearly-finishedproductonsite.

Primary versus secondary royaltiesPrimaryroyaltiesareenteredintobetweenaroyaltycompanyandthepropertyownerdirectly,wherethepropertyownergrantsaroyaltytotheroyaltycompanyinreturnforoneormoreup-frontcashpaymentsfromtheroyaltycompany. Incontrast,secondaryroyaltiesareexistingroyaltiesthatareacquiredfromathirdpartywithnopaymentmadetotheowneroftheunderlyingproperty.

Metal streamsAmetalstreamisanagreementthatprovides,inexchangefor anupfrontpayment,therighttopurchasealloraportionofoneormoremetalsproducedfrom amine,atapricedeterminedforthelifeofthestream.

Streams,whilstprovidingsimilaroutcomesforAngloPacific,arenotroyaltiesbecausetheydonotconstituteaninterestinlandandthereisanongoingcashpaymentrequiredtopurchasethephysicalmetal.However,astreamholderisnotordinarilyrequiredtocontributetowardsoperatingorcapitalcosts,norenvironmentalorreclamationliabilities.

Commodity exposureat December 31, 2016

Targeting reduction in coal exposure to less than 50% through diversification

Geographic exposureat December 31, 2016

95.2% of the portfolio is in established natural resources jurisdictions

Stage of productionat December 31, 2016

86.9% of the portfolio is producing royalties

Mining royalties explained Diversified portfolio of royalties

See the Group's portfolio of assets �pages 04 and 05

Coking coal 55.7%

Thermal coal 22.5%

Iron ore 7.0%

Gold 4.9%

Uranium 1.9%

Other 8.0%

Australia 84.4%

Brazil 6.2%

Spain 2.8%

Canada 1.8%

Other 4.8%

Producing 86.9%

Development 1.1%

Early stage 12.0%

03



Strategic report


entsOther inform

ation


GROUP OVERVIEW

Our portfolio 11 principal royalty and streaming related assets over five continents. More than 86% of the portfolio by value is producing and 95% of the portfolio is located in well established mining jurisdictions.

8

Groundhog

10

Ring of Fire

7Salamanca5

EVBC

3

McClean Lake Mill

11

Dugbe 1

4

Maracás Menchen9

Pilbara

6

Four Mile

1

Kestrel

2

Narrabri

Our 11 principal assets are split across three stages. Six are Producing, two are in Development and three are Early-stage

Our principal assets

04




Producing royalties

Royalty Commodity Operator Location Royalty rate Balance sheet and type classification

1 Kestrel Coking coal Rio Tinto Australia 7 – 15% GRR 1 Investment

property

2 Narrabri Thermal & Whitehaven Australia 1% GRR Royalty PCI coal Coal intangible

3 McClean Uranium Denison Mines Inc./ Canada Tolling revenue Loan & royalty Lake Mill AREVA / Cameco financial instrument

4 Maracás Vanadium Largo Brazil 2% NSR Royalty Menchen Resources intangible

5 El Valle- Gold, copper Orvana Spain 2.5 – 3% NSR 2 Royalty

Boinás/Carlés & silver Minerals financial (‘EVBC’) instrument

6 Four Mile Uranium Quasar Australia 1% NSR Royalty Resources intangible

How are our assets performing? More on �pages 25-36

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.

Development royalties

7 Salamanca Uranium Berkeley Spain 1% NSR Royalty Energia intangible

8 Groundhog Anthracite Atrum Coal Canada 1% GRR or Royalty US$1.00/t intangible

Early-stage royalties

9 Pilbara Iron ore BHP Billiton Australia 1.5% GRR Royalty intangible

10 Ring of Fire Chromite Cliffs Natural Canada 1% NSR Royalty Resources intangible

11 Dugbe 1 Gold Hummingbird Liberia 2 – 2.5% NSR 3 Royalty Resources financial instrument

05



Strategic report


entsOther inform

ation


GROUP OVERVIEW

Chairman’s statement

12 months ago I reported that 2015 had seen the beginnings of a turnaround in the fortunes of Anglo Pacific. It is therefore extremely gratifying to now report that that turnaround has become a full scale recovery with a further doubling in royalty income from £8.7m to £19.7m and more significant growth anticipated in 2017.

Key results

Royalty income, up from £8.7m in 2015 to £19.7m

£19.7mBasic and diluted earnings per share

15.60p Basic and diluted adjusted earnings per share

9.76pUpward revaluation of Kestrel

£17.9m

2017 should be a year of continued organic growth for Anglo PacificW.M. BlythChairman

06




Ourroyaltyincomebenefitedfromarangeoffactorsin2016.MiningatKestrelreturnedincreasinglytoourroyaltylands,atrendwhichwillcontinuein2017andbeyond.Therewasarecoveryincommoditypricesduring2016,notablyforAngloPacific, incokingcoal.Whiletherewasslippageinspotpricestowardstheendoftheyear,theaveragepriceachievedwasstillsignificantlyaheadof2015,andtheEUreferendumandsubsequentsterlingweaknessalsobenefitedourroyaltyincome,allofwhichiseitherAustralian,CanadianorUSdollardenominated.

Withoperatingexpensesremainingbroadlyunchanged,thisledtoasixfoldincreaseinoperatingprofit,upfrom£2.1min2015to£12.7min2016. Ourresultswere,asusual,impactedby anumberofrevaluationadjustments andnon-cashimpairments,whichthisyearresultedinanetcreditof£10.9m (2015:charge£32.5m).ThemaindriverforthisturnaroundwasanupwardrevaluationofourKestrelroyaltyof£17.9mduetotheimprovementincokingcoalpricestogetherwithafavourableexchangeratemovement. Asaresult,overallprofitbeforetaxwas£28.3mcomparedtoalossof£30.5m in2015.Basicanddilutedearningspersharewere15.60p(2015:losspershare14.06p).Strippingoutthesenon-cashitems,wepresentanadjustedearningsmeasure(referto �note 11totheaccounts)which,webelieve,morecloselyreflectstheperformancewithinmanagement’scontrol.Onthisbasisadjustedearningspersharewere 9.76p(2015:2.47p).

DividendsTwelvemonthsagowerebasedourdividendlevelstoaminimumannualpaymentof6ppershare,whileretainingouroveralltargetofpayingdividends of65%ofadjustedearnings.Onanadjustedbasis,ourdividendcoverfor2016is1.6timesandcurrentprojectionssuggestthatweshouldbereviewingdividendlevelsupwardsduringthecourseof2017.Thoseprojectionsare,

however,heavilydependentoncommoditypricesingeneralandcoalpricesinparticular.Thelatterweresubjecttosignificantfluctuationsduring2016andwewishtohavemuchgreatercertaintyabouthowtheyperformduring2017beforecommittingtoasustainabledividendincrease.

Royalty portfolioOnceagainitisencouragingtonotethatalloftheGroup’sroyaltiesthat wereinproductionin2015remaininproductionandcontinuetogenerateroyaltyincome.Itisequallyencouragingtoseethatallofthoseroyalties,withtheexceptionofElVallewhichremainedflat,increasedtheircontributionsandthatourFourMileroyaltycontributedforthefirsttime.PaymentsfromNarrabriand,inparticular,Kestrelincreasedsignificantly.BothbenefitedfromimprovementsincoalpricingwhileatKestrel,miningwasincreasinglywithinourroyaltylands.Moredetailofourroyaltyperformanceisshownon �pages 25 to 36.

NomajoracquisitionswereconcludedlastyearbutwedidannounceafinancingandstreamingarrangementwithDenisonMinesCorp.earlierinthecurrentyear.Furtherdetailsonthistransactionaregiveninthecasestudyon �pages 10 and 11.

Theimprovedtradingperformancereferredtoabovecoupledwiththeadditionalfirepoweravailabletousthroughheadroomunderourrefinancedrevolvingcreditfacilityandthesteadilyincreasingvalueofourshareportfoliohaveenabledustoextendourinvestmentcriteria. Asshownon �pages 16 and 17, this nowincludespre-productionroyalties,which,webelieve,offertheopportunityofsignificantlyhigherreturns,albeitsomedistanceinthefuture. Ourprincipalobjective,however,will remaintheacquisitionofproducing ornearproductionroyaltyandstreamingassets.

BoardTherewerenochangestotheBoardduring2016.Wehavecollectively,Ibelieve,alltheskillsandexpertisenecessarytodrivetheCompanyforward.Asyouwillhavenoted,however,werecentlyannouncedthatIwillbesteppingdownaschairmanattheconclusionoftheforthcomingAGM andwillbesucceededbyPatrickMeier.

TheCompanyisnowextremelywellpositionedtotakeadvantageoftherenewedconfidencewithintheminingsectorandtheopportunitiesthatwillprovide.Patrick,withhisextensiveexperienceininvestmentbankingingeneralandtheminingsectorinparticular,isperfectlyplacedtolead theCompanythroughthenextstage initsdevelopment.

Our Strategic reportOur2016Strategicreport,from �pages 08 to 43,wasreviewedandapprovedbytheBoardonMarch29,2017.

Outlook2017shouldbeayearofcontinuedorganicgrowthforAngloPacificasproductionatKestrelmovesincreasinglyintoourroyaltylandsandwereceiveourfirstcontributionsfromtheDenisonfinancingarrangement.Much,however,willdependonhowcoalpricesmoveduringtheyear. Inaddition,asconfidencereturnsto theminingsector,freshopportunitiesshouldarise.Wehaveshownourability tobeinnovativeandimaginativein ourapproachtotheDenisonopportunityandbelievethatapproachwillcontinuetobearfruitintheyearahead.

Inconclusion,IshouldliketothankallDirectorsandstafffortheircontinueddiligenceandhardworkduringtheyear.

OnbehalfoftheBoard

W.M. BlythChairman

March29,2017

07



Strategic report


entsOther inform

ation


Market outlookTheoutlookfortheminingsectorhaschangedmarkedlyoverthepastyear,primarilyduetoacombinationofChineseproductionrestrictionsandimprovedmacro-economicconditions.Whereasayearorsoago,peopleexpectedanegativemacroeconomicenvironment,todaythecombination ofsupplyrestrictionsandfastergrowthprospectshasledtoamuchmoreoptimisticoutlookandarapidreboundinequityprices.Thisalsosuggeststhatweareatthebeginningofanothermultiyearcycleandthatweneedtoaccelerateourlevelofactivitiesoverthenextyearortwo,asthisshouldbe arelativelyfavourableperiodtoputcapitaltoworkinthesector.

Withregardstotheroyaltyandstreamingmarkets,thisaboutturnhassignificantimplications.First,someoftheverylargebulkroyaltieswewereworkingonduring2016withthemajorsareunlikelynowtomaterialise.Thereboundincommoditypricesisrapidlyresultinginthedeleveragingoftheirbalancesheetssotheyhavelittleneedforfurtherassistanceandsoonwillbelookingtoexpandagain.Thereisstill alackofcapitalflowingtothesectorandsotheremayberoominthecomingmergersandacquisitionsactivityforroyaltyfinancing.However,moreprospectiveisthemid-tieranddevelopmentarenawheretheexpectedsupplydeficitsasaresultofconsistentunderinvestmentinthesectorshouldspurrenewedinvestmentindevelopingthenextwaveofprojectsforthefuture.Weare,asaresult,alreadyseeinganupliftinactivityandroyaltyfinancingopportunitiesforthoseseekingtoengageinmergersandacquisitions ormovingprojectsforward.

Coal outlookWhilstwecontinuetodiversifytheportfolioawayfromKestrel,coal,and inparticularcokingcoal,continueto beamajorareaofexposureforyourcompany.Whilstwesufferedwithlowercoalpricesin2015,fortunatelyatatimewhenourshareofKestrel'sproductionwasalsolow,therecoveryincoalpricingtogetherwiththegrowthinthatsharecontributedsignificantlytoourgrowthin2016andisexpectedtodothesamethisyear.Inthatcontext,theoutlookforcoalcontinuestobeimportanttous.

Thecoalpricehasseensignificantvolatilityoverthepastyear,drivenlargelybyrestrictionsonChineseproductionintheautumn.Thiswaspartofageneral

trendtoreducepoorqualitycoalproductionandconsumptioninChinatoimproveairquality.TheimpactofthisreductioninsupplyincreasedthepriceofenergyorthermalcoalbyaroundathirdinH2.TheeffectontherarerformofcoalwhichKestrelproduces,namelycokingcoal,wasevenmoreextremeandthespotpricetripled.SubsequentlyovertheChinesewinter,theauthoritiesrelaxedtheirrestrictionsandthepriceofthermalcoaldroppedby20%,withthespotpriceofcokingcoalalmosthalving.Itisworthnotingthatcokingcoalpricesneverthelessremainroughlydouble thelevelofayearago.

Lookingforward,weexpectthedirectionoftraveltoremainunchangedi.e.continuedChinesevolumereductions.ItispossiblethatfurtherrestrictionswillbeimposedduringQ2aftertheChinesewinterwhichinturnwillsendpricesbackup.However,wearemakingmuchmoreconservativeassumptionsinourinternalforecastsandassumepricesaverageslightlylessthancurrentspotlevelsfortheyear.Whatisimportantisthattheenvironmentforcoalhaschanged andpricesareunlikelytoreturnto theirpreviouslowlevels.

Shareholdersshouldnotethatwearewellpositionedincoalwithroyaltiesonmodernminesinsafelocationsandexposuretohighquality,cleanercoals.

Denison financing and streaming agreementsThoughthistransactionwasannouncedearlyin2017,wehadbeenworking onitformuchoflastyear.Asthecasestudypresentedon �pages 10 and 11 highlights,itisatransactionwhichshouldprovideastablelong-termstreamofincomewithsomeupside.ShareholdersshouldexpecttoseethepositiveeffectsoftheDenisontransactionstartto comethroughinourresultsfromQ1 ofthisyear.

ReflectingthedifferentstructureoftheDenisontransaction,whereincomewillbederivedinpartfromtherepaymentofdebt,wearenowintroducinganewKPIintheformofcashgenerationwhichwebelievewillbeamoreaccuratemeasureofprogressgoingforwardthanearnings.

Weexpecttoexecuteonfurthertransactionsintheyearahead,thoughthestructureoftheDenisontransactionwasaoneoffandfuturedealsshouldbemoreintheformoftraditionalroyaltiesandstreams.

STRATEGIC REPORT

Chief Executive Officer’s statement

I am pleased to report that royalty income grew strongly in 2016 and is expected to do so again this year. The result was strong growth in profits, dividend cover and net asset value.J.A. TregerChiefExecutiveOfficer

08 Anglo Pacific Group Plc Annual Report & Accounts 2016


New strategyAlthoughourmainfocuswillcontinuetobeonimmediatelyrevenueproducingroyalties,weannouncedearlyintheyearthatwewerebroadeningourinvestmentmandate toincludedevelopmentroyalties. Thesecouldtakeuptoadecadetobringintodevelopment,shouldgeneratehigherreturns,giventhedevelopmentrisk,andhavethepotentialtoincrease invaluesignificantlyinthecomingyears.Thesizeoftheseinvestments isunlikelytoexceedUS$20mandtheintentionistofundthemprimarily fromretainedearnings.

DividendTherecoveryinourearningshassignificantlyimprovedourdividendcoveranditispleasingthatthisexceeded1.6xlastyear.Withfurtherimprovementexpectedthisyear,thereshouldbescopefordividendincreasesonaprudentandprogressivebasis.However,thelevelsofourearningsareinturndrivenbythepriceofcokingcoalandthishasbeenextremelyvolatileoflate.Barringatransformationallargetransactionwhichfundamentallyaltersthisrelationship,yourBoardthereforeintendstoawaittheoutcomeofthefirsthalfoftheyearbeforeconsideringanyalterationstodividendlevels.Anynewlevelofdividendsannouncedneedstobeanewbasefromwhichwecancomfortablygrowintheyearsahead.

TaxationAssistedinpartbythedisposalofourIsuaroyalty,announcedwiththeyearendresults,wehavecreatedsignificanttaxlosses.Theseshouldreduceourtaxchargeinthecomingyear,morethanwehadpreviouslyindicatedtothemarket.Wealsohavesignificantcapitallosses,someofwhichwereusedtoshieldagainstourequityprofitsinthecurrentperiod,andwhichhopefully willbeutilisedduringthiscycle.

CurrenciesTheweakeningofsterlingasaresult oftheEUreferendumhashadtheeffectofincreasingourincomeandprofits. Inordertomaintainthisbenefit,wehaveinstitutedarollinghedgingprogramoverpartofourincome,hedgingagainstthemaincurrenciesinwhichourincomeisdenominated.Asatyearend,thisprogramhadgenerated£0.7mofadditionalincome.

Central costsCentralcostscontinuedtobewellcontrolled.OneofthevirtuesoftheAngloPacificmodelisthatoverheadsdonotincreaseinlinewithincome,providingadditionaloperatingleverage.Thisprovedtobethecasein2016whereincomeslightlymorethandoubledbutoperatingprofitsrosealmostsixfold.

Financial resourcesWearepleasedtohaverepaidsignificantamountsofourborrowingslastyearandtookadvantageoftheDenisonopportunitytorenewourborrowingfacilitiesandextendthem. IfwehadnotinvestedinDenison,wewouldhavebeendebtfreebytheendofQ12017.Withourmuchhigherincomelevels,weexpectthenewdebtassumedforDenisontoberepaidinshortorderleavingournewfacilityavailablefornewacquisitions.This,togetherwithourequityportfolioandincome,providesconsiderablefirepowerfornewdeals.Weintendto beprudentwithregardstodebtlevels,withtheintentionofnotexceeding2xfreecashflowandgenerallyoperatingwellbelowthislevel.

Net assets and share priceTheincreaseinnetassetvaluepershareto124pafterthepaymentof6pofdividendsduringtheyearisgoodnewsforallshareholders.Thesharepricehasrecoveredalongwiththesectorandprovidesuswithabettercurrencytomoveforward.However,itcontinuestotradeatadiscounttowhatweconsidertobethetruenetassetvalue,andgivesnocreditforthoseassetsinourportfoliowhichwebelievehaveincreasedinvalueconsiderablysinceweacquiredthemandwhichisnotreflectedonthebalancesheet.

Oursharescontinuetoprovideamuchhigherdividendyieldthanourglobalpeersandwehopethattheprocessofreratingwillcontinueduringtheyear. Weweregratifiedthatapproximately20newinstitutionalinvestorsjoinedtheregisterwiththeDenisontransaction andwewelcomethesenewshareholdersonboard.

Board developmentsIwouldliketotaketheopportunitytopaytributetothechairmanshipofMikeBlythoverthepastfewyears.HehasmadeasignificantdifferencetothewaytheCompanyisrunandgoverned,instigatingaseriesofdisciplinesandcontrolswhichreflectbestpractice,andwhichshouldstandusingoodsteadfortheyearsahead.Wearefortunatethathehasdecidedtoretainhispresence ontheBoard.

IlookforwardtoworkingcloselywithPatrickMeierintheyearsaheadtotaketheCompanytoanewlevel.

OutlookInsummarywehavemovedforwardsignificantlyoverthepast12monthsandarenowinthefortunatepositionofhavingtheresourcestotakeadvantageofbeingintheearlystagesoftheupcycle.Weexpectthisprogresstocontinueduring2017,bothfromorganicgrowthandnewacquisitions.

J.A. TregerChiefExecutiveOfficer

March29,2017

Group overview

Strategic report


entsOther inform

ation09Anglo Pacific Group Plc Annual Report & Accounts 2016


On February 13, 2017, the Group announced the completion of the C$43.5m financing and streaming agreements with the TSX-listed Denison Mines Corp. (‘Denison’).

Transaction highlights

· Anglo Pacific Group entered into a financing agreement related to the toll revenues generated from Denison’s 22.5% ownership of McClean Lake Mill under a toll milling agreement for treatment of uranium from Cigar Lake ore.

· Total cash consideration of C$43.5 million (~£26.4 million) was structured as a:

· C$40.8 million 13-year loan at an interest rate of 10%

· C$2.7 million subsequent stream to take advantage of the upside from a potential Cigar Lake Phase II mine life extension

· Payment in respect of toll milling revenues was backdated to July 1, 2016.

· The McClean Lake Mill, operated by AREVA Resources Canada Inc, receives all of the output from the Tier 1 Cigar Lake uranium mine, operated by Cameco Corporation.

· According to the Cigar Lake Qualified Persons report1, the mine is the world’s highest grade uranium mine with an average ore grade above 18%, and has current published Proven Mineral Reserves and Probable Mineral Reserves of 221.6 Mlbs U3O8 making the deposit one of the largest in the world.

· Full production of 18.0 Mlbs per annum is expected by Cameco in 2017 and a remaining mine life of the deposit based on current Mineral Reserves of approximately 12 years.

1. Cigar Lake Operation Northern Saskatchewan, Canada. Cameco National Instrument 43-101 technical report (dated March 29, 2016)

Ore treatment

Commodity exposure Pre acquisition

Coking coal 55.7%

Thermal coal 22.5%

Iron ore 7.0%

Gold 4.9%

Uranium 1.9%

Other 8.0%

Commodity exposure Post acquisition

Coking coal 49.4%

Thermal coal 19.9%

Iron ore 6.2%

Gold 4.4%

Uranium 13.0%

Other 7.1%

Tolling revenues

22.5% of tolling revenues

Tolling revenues1

Loan (C$40.8m) + Stream (C$2.7m)

Cigar Lake Mine

Denison

McClean Lake Mill

Stable production profile with upside potential

Transaction summary

1. Cigar Lake Operation Northern Saskatchewan, Canada. Cameco National Instrument 43-101 technical report (dated March 29, 2016); forecast toll milling revenue adjusted for inflation at midpoint of Bank of Canada inflation target of 1-3%

1. Phase 1 in the eastern area of the project with a 12 year mine life, is the focus of the current mine plan and includes 223.7 kt of Proven Reserves and 375.7 Mt of Probable Reserves

2. Mineral Resources are exclusive of Mineral Reserves

STRATEGIC REPORT

McClean Lake Mill financing and streaming agreements

1. Representing interest, mandatory prepayments or stream revenue

Toll Milling Revenues attributable to Denison 1 (US$m)

Toll Milling Revenues attributable to Denison 1, 2 (mlb U3O8 )

Further diversification of Group’s portfolio of assets

17 18 19 20 21 22 23 24 25 26 27

5.8 5.9 6

.1 6.2 6.3 6.4 6

.6

6.4

4.0 4.1

3.9

17 18 19 20 21 22 23 24 25 26 27

18.1

18.2

18.2

18.2

18.2

18.2

18.2

18.2

18.2

18.2

16.8



Diversification of geographic exposure

Geographic exposure Pre acquisition

Australia 84.4%

Brazil 6.2%

Spain 2.8%

Canada 1.8%

Other 4.8%

Geographic exposure Post acquisition

Australia 74.9%

Brazil 5.5%

Spain 2.5%

Canada 12.8%

Other 4.3%

CA

NA

DA

MCCLEAN LAKE

McArthur RiverWollaston Lake

La Ronge

Stony RapidsFond-du-Lac

S A S K A T C H E W A N

Key Lake

Cluff Lake Midwest

Rabbit Lake

A T H A B A S C A B A S I N

CIGAR LAKE

Black Lake

Achieving our strategy The completion of the McClean Lake Mill financing and streaming agreements demonstrates the Group’s progress towards its aim of developing as the leading international diversified royalty company with a portfolio centred on income production based metals and bulk materials royalties and streams.

The financing and streaming agreements clearly satisfy the Group’s stated investment criteria: Established natural resources jurisdictions

· Established North American mining jurisdiction

Long-life, high-quality & low-cost asset

· 12 year reserve based mine life

· Underlying mine is the highest grade uranium operation globally, well positioned on the global uranium cost curve

Near-term producing assets

· The McClean Lake Mill is a producing asset with immediate cashflow generation and full production expected in 2017

Production & exploration upside potential

· Production upside potential from Cigar Lake Phase II mine life extension or mill capacity expansion

Strong operational management team

· Mine & mill operators amongst the world’s largest publicly traded uranium companies

Diversification of royalty portfolio

· Further diversified asset base, commodity exposure and geography

· Growing exposure to non-carbon energy

In addition to satisfying the Group’s investment criteria, the completion of the financing and streaming agreements was supported by a strong financial rationale:

· Immediately accretive to adjusted EPS and dividend cover

· Income backdated to July 1, 2016

· Toll milling revenue expected to provide stable cashflow base to Anglo Pacific’s broader royalty portfolio

· Reduced commodity price risk given toll milling fees are inflation- linked and based on units of production

This transaction ticks all the boxes for Anglo Pacific and moves forward our growth and diversification in a material wayJ.A. TregerChiefExecutiveOfficer

Existing or proposed uranium mining developments

City or settlement

©Denison/Areva

MCCLEAN LAKE MILL

Established natural resources jurisdiction

Group overview

Strategic report


entsOther inform



STRATEGIC REPORT

Market overview 2016 saw a marked recovery in market sentiment. The mining sector outperformed global markets following five straight years of underperformance as commodity prices recovered, balance sheets were recalibrated, and corporates trended toward increased cash flows and shareholder returns.

Commodity prices as at 31 Dec for each calendar year

Thermal coal (US$/t)

12 13 14 15 16 17

140

120

100

80

60

40

Coking coal (US$/t)

12 13 14 15 16 17

350

300

250

200

150

100

50



Thepositiveperformancehascontinuedintothefirstquarterof2017andthatmomentumisanticipatedtobemaintainedfortheremainderoftheyear.Despitethisimprovingsentiment,themarketremainscautiouswithregardtoasecondyearofoutperformanceinlightofslowingChinesegrowth,globalpoliticalinstabilityanduncertaintyoftheimpactofPresidentTrump’seconomicpolicies.

Throughout2016,equityvaluesofminersgloballyreboundedinamannerreminiscentoftherecoveriesseenin2009.Broadly,commentatorsareoftheviewthatthemulti-yearcommoditynadirshavepassedandthesectorasawholemaybeatthebeginningofanothercycle.CommoditypriceswerepushedhigherinpartduetonewfiscalsupportinChina,reversingthedeflationaryconditionsseenforthepasttwoyears.Additionally,improvedeconomicperformanceintheUS,EuropeandJapansupportedcommoditypriceandequityrecoveries.

Thetopperformingcommodityintheyearwascoal,withcokingcoalandthermalcoalpricesup146%and102%respectively.RestrictionsinChinesedomesticcoalsupplyandstrongsteeldemandsawhardcokingcoalpricesnearlyquadrupleto$310/tfromJanuarytoNovemberwiththermalcoalpricesdoublingto$110/t.Withtherestrictionsrelaxedinthesecondhalfoftheyearthepriceshavenoweasedoffsomewhattoaround$150/t.

Industrialmetalsalsoperformedwell assupplymetsustaineddemandand aperceivedlackofinvestmentduring thedownturnmeantthatsupplydeficitsarewidelyanticipated.Copperprices ranfromOctoberrisingto$2.50/lb byyearend,anannualgainof17%,assupplysideconcernsandstrongerglobaldemandpositivelyimpactedprices.Othertopperformingcommoditiesincludedzinc(+86%),palladium(+52%)andlead(+44%).

Goldpricesralliedforthefirstninemonthsoftheyear,reachinghighsof$1,375perounce,butpricessoftened to$1,150perouncebyyearenddueto astrongerUSdollarandtheFederalReservedecisiontoraiseinterestrates inDecember.

Thetoughoperatingenvironmentfacedin2014-15hasledtocontinuedfocus oncostoptimisation,capitaldiscipline,balancesheetstrengtheninganddebtreduction.Companiesfocusedonprojectswithhigherreturnsoncapitalwithgreateroptionalityandflexibilityacrossassetportfoliosandimproved costcurvepositions.Dividendpolicies wererevisedbythemajorsin2016andseveralcompaniesdecidedtosuspendpayments,certainlyasignalofthelowpointinthecycle.Athemeacrossthesectorwastolinkdividendpoliciesdirectlytoearningsandcashflowwithinreviseddividendpolicies.

PositivesectorsentimentandrisingcommoditypricesledtoanincreaseinM&Avolumesin2016despitetheoverallvalueofdealsfallingcomparedtothepreviousyear.Thediversifiedmajors whotypicallydriveacquisitionsarestillfocusedonportfoliorealignmentandbalancesheetstrengtheningratherthanacquisitionsforfuturegrowth,withdivestmentsstillfeaturingin2016.Juniorandintermediateproducershoweverdidlooktoconsolidatemarketshareinthelast12months,takingadvantageofassetandcorporatetransactionswhichmaynothavebeenavailableunderdifferentoperatingenvironments.

ThemosttargetedcommoditycontinuedtobegoldandthemostactivegeographywasCanada.Capitalraisingsawaslightresurgencein2016;globalfundsraisedincreased9%year-on-yearto$249billion.ExcludingChina,corporatebondissuancefell,asdidoveralllending.Convertiblebondissuanceremainedrelativelyflat andIPOactivitywasnegligible.However,equityissuancevolumeandvaluesaw

anincreaseon2015levels.Theupturnincommoditypriceenvironmentsacrosstheboardprovidedinvestorswithgreaterconfidence.Notwithstandingthis,fundingfromequitymarketsremainssignificantlybelowpre-crashlevelsandthereforeroyaltyandalternativefinancingremainsanattractiveandcomplementarysourceofcapitalforminingcompanies.

Lookingto2017,thesentimenttowardstheminingsectorappearsmorepositivethanithasbeenforseveralyears.CommentatorsbroadlyexpecttoseeanuptickinM&A,asmajorssignalapotentialendtotheirfocusondivestments,and anincreaseininitialpublicofferings ascommoditypriceshavefirmed.Itisexpectedthatthemajorswilllooktomaintainefficientbalancesheetsand willenjoyenhancedcashflowshavingextensivelyreducedcapex.Theymaylooktospendonorganicandinorganicdevelopmentandexplorationprojectsandthismayincreasinglybedonebywayofjointventure.Thereturnofasectorwidefocusonreserveandresourceexpansionmaybeofahigherprioritynow,andthereturnofgrowthtothesectorin2017mayrequirecompanies tolookforadditionalcapitaltofundprojects.Asequityanddebtfinancingreturntofavour,companiesmaylooktobalancethesesourceswithalternativefinancingsuchasroyaltiesandstreams inordertoensurethelong-termsuccessofprojectsandcreatethecapacitytoreturnvaluetoshareholders.

Gold (US$/oz)

12 13 14 15 16 17

2,000

1,800

1,600

1,400

1,200

1,000

Uranium (US$/lbs)

12 13 14 15 16 17

60

50

40

30

20

10

Vanadium (US$/lbs)

12 13 14 15 16 17

7

6

5

4

3

2

Group overview

Strategic report


entsOther inform



STRATEGIC REPORT

Our business model

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 mine lives. 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.

Revenue-basedroyaltieslimittheGroup’sdirectexposuretooperatingorcapitalcostinflationoftheunderlyingmineoperations,asthereisnoongoingrequirementfortheGrouptocontributetocapital,exploration,environmentalorotheroperatingcostsatminesites.

TheGroupisseekingtobuildadiversifiedportfolioofroyaltiesacrossavarietyofdifferentcommoditiesandgeographiclocations.Investinginroyaltiesacrossawidespectrumofcommoditiesandjurisdictionsreducesthedependencyonanyoneasset orlocationandanycorrespondingcyclicality. Afullydiversifiedportfoliocanhelptoreducethelevelofincomevolatility,stabilisingcashflowswhichcontributetowardsinvestmentanddividendpayments.

Royaltyholdersgenerallybenefitfromimprovementsmadetothescaleofaminingoperation.Explorationsuccess,orlowercut-offgradesasaresultofrisingcommodityprices,canservetoincreaseeconomicreservesandresources.Increasedreserveswillextendamine’slife,orfacilitateanexpansionoftheexistingoperations.Anysubsequentincreasesinproductionwillgenerallyresultinhigherroyaltypayments,withouttherequirementfortheroyaltyholdertocontributetothecostofexpandingoroptimisingtheoperation.

Royaltiesandstreamsprovideexposuretounderlyingcommodityprices.TheGroupexpectstobenefitfromarisingcommoditypriceenvironment,withtheupsidefeedingthroughtoincreasedroyaltyreceipts.

Creating value for our shareholders

Lower risk through top-line, revenue participation in mining companies

Exposure to increases in mineral reserves and production

Exposure to commodity price upside

Lower volatility through commodity and geographic diversification

G

EN

ER

AT

IN

G

LO

NG

-T

ER

M

CA

SH

R

ET

UR

NS



Creating value for our counterpartiesW E S E R V E A S A P A R T N E R T O T H E M I N E O P E R A T O R

Royalties and streams reduce the upfront capital 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.

Comparedtotheissuanceofnewequity,royaltiesandstreamsdonotdependontheprevailingstateofthecapitalmarketsbut arerathertheresultofbilateralnegotiations.Theissuanceofnewequitycanalsoserve todiluteexistingshareholders,particularlyduringperiodsofdepressedshareprices.Furthermore,asroyaltiesandstreamsareassetspecific,thereductionintheupside forexistingshareholderscanbelimitedto acertainmineorproduct.

Royaltiesandstreamsdonottypically levyinterest,nordotheytypicallyrequireprincipalrepaymentsorhaveamaturitydate.Moreimportantly,unlikeconventionaldebtarrangementswhereinterestpaymentstendtostartimmediatelyorarecapitaliseduntilcashpaymentscanbemadefrom aproject’scashflow,mostroyaltiesarepayableonlyoncetheprojectcomesintoproductionandisgeneratingsales.Inaddition,manyformsofdebt,suchasprojectfinance,includerestrictivecovenantsandmayrequirecommoditypricehedgesto beputinplace.Thesearenotonlytypicallycostlyintermsoffees,butcanalsolimittheminer’sexposuretoupsideinthepricesoftheircorecommodities.

Thevalueofaroyaltyisrealisedoverthedurationoftheminelife.Oftenroyaltyownersmayhaveaneedtofreeupcashinordertorecyclecapital.ThereisalimitedsecondarymarketforroyaltiesandAngloPacificcanbeasourceofvaluableliquidity forprivateroyaltyholders.

An alternative form of financing to conventional equity, which can be an expensive form of finance

Source of liquidity for holders of existing royalties

Flexible financing structures to suit the mine operator, often structured as non-debt instruments, therefore do not impact on credit ratings

SE

CO

ND

AR

Y

RO

YA

LT

IE

S

PR

IM

AR

Y

RO

YA

LT

IE

S

Group overview

Strategic report


entsOther inform



AimTo develop as the leading international diversified royalty company with a portfolio centred on income producing base metals and bulk materials royalties and streams.

During 2016, the Group continued to progress towards achieving its strategy and is pleased to have completed the Denison financing and streaming agreements in February 2017. The Group is currently evaluating a number of royalty and streaming opportunities against our disciplined investment criteria.

STRATEGIC REPORT

Our strategy

StrategyAchieving our aim through the acquisition of both primary and secondary royalties, together with metal streams.

New strategyAlthough income producing royalties remain our key focus, we will now selectively deploy modest amounts of capital on royalties which have the potential to offer superior returns albeit with some development risk.



GoalExecuting the strategy will result in additional cash producing royalties, a substantial proportion of whose cash flows will be paid to shareholders as dividends.

CriteriaAchieving our strategy through acquisitions which satisfy these criteria

Established natural resources jurisdictions

Long-life assets

High-quality and low- cost assets


Production and exploration upside potential

Strong operational management teams


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. As at December 31, 2016, 95.2% of the Group’s existing assets were based in such jurisdictions.

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. Three of the royalties in the Group’s existing portfolio are over mines that have reserves of 20 years or more.

High-quality and low-cost assets

The Group is also 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.


The Group is seeking to grow its royalty income beyond the existing organic growth profile of its current royalty portfolio by investing in producing or near-term producing assets.

Production and exploration upside potential

The Group seeks to acquire royalties 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.

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.


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 base metals and bulk materials. The Group may also selectively pursue royalties in energy commodities, such as uranium and oil and gas, as well as other commodities, such as platinum group metals and precious stones.

See our latest acquisition �pages 10 and 11

Group overview

Strategic report


entsOther inform



BackgroundTheBoard,inconjunctionwiththeAuditCommittee,reviewedtheGroup’spreviousriskdisclosuressincethepublicationofthe2015AnnualReportandAccounts.Althoughriskis anareawhichisfrequentlyconsideredbytheBoard,thelatestreviewwasperformedagainstthebackdropofamuch-improvedoutlook forcommoditiesinparticularandthesector ingeneral.Assuch,theriskswhichhavethepotentialtomateriallyaffecttheGroup’sprospectsnowarelikelytohaveadifferentweightingtothoseconsidered12months ago.Inaddition,animprovedoutlookforthesector,whilstpositivefortheGroup’sfinancialprospects,couldresultinlessdemandforroyaltyfinancingwhichwouldhaveamaterialimpactontheGroup’sabilitytoexecuteitsstrategy.ThetablebelowpresentstheoutcomeoftheBoard’sassessmentofprincipalrisks.

Risk appetite and viabilityTheCompanyisonceagainvoluntarilycomplyingwithprovisionC2.2ofthe2014CombinedCode,whichrequiresastatement onviabilitytobemadeinthisreport,includingthedeterminationandconsiderationofstresstested‘severebutplausible’scenarios. Thisanalysiswasperformedforathree-yearperiod,consistentwiththeGroup’smedium-termplanninghorizonandthetermofitsborrowingfacility.

Theviabilitystatement,andunderlyingsupportingpapers,isintendedtointertwine riskdisclosureandgoingconcernintoamoremeaningfuldiscussionaboutthefinancialimpactofprincipalrisks.Riskcanneverbe fullyeliminated,butcanbemitigatedtoalevelwhichtheDirectorsarepreparedtoacceptasnecessarytoexecutetheGroup’sstrategy.

AlthoughtheultimatesuccessofAngloPacificwilldependonitsabilitytocontinuetoaddvalueenhancingroyaltiesandstreamstoitsportfolio,thefocusoftheviabilitystatementisontheexistingbusinessoftheGroupandtheability ofthecurrentroyaltyportfoliotogeneratesufficientcashtomeettheGroup’soutgoings,includingthedividend.Underour‘severebutplausible’case,thisresultsintheGroupdrawingdownfurtheronitsborrowingfacilitiesasincomereduces.TheDirectors’riskappetite isthereforecappedwithreferencetoanacceptableandsupportablelevelofborrowingsrelativetotheGroup’sincomeprofileoverthenextthreeyearsona‘severebutplausible’basis.

STRATEGIC REPORT

Principal risks and uncertainties

2016 updateCategory2016 ranking

2015 ranking

Risk

Concentration risk associated with Kestrel

That the Group fails to identify and acquire new royalty and streaming opportunities

TheKestrelroyaltyiskeytotheGroup’ssuccessanduntilsuchtimethatsufficientacquisitionsaremadetomateriallyreducethedependenceonthisasset. AnyprolongedgeologicalissuesoraninabilitytoproduceatKestrelwouldresult inasignificantlossofincometotheGroup.Inaddition,riskrelatingtogovernmentroyaltyrates,changeofownershiportheeconomicviabilityoftheminecouldmateriallyimpactontheGroup’sprospects.TheGrouphaslimitedmeanstoalterorenhancethetermsoforaddanyfurtherlevelofprotectiontotheroyaltytomitigatetheriskassociatedwithKestrel.TheBoard,however,takesassurancesfromtheassetbeinglocatedinAustralia,governedbyAustralianlaw,operatedbyaworldclassminerandsufficientlylowonthecostcurve,whichcombinedshouldreducetheriskassociatedwithKestrel.

DealflowiscrucialforAngloPacificduetothedepletingnatureoftheGroup’sassetsoverthelong-termandlimitedresidualvalue.Althoughtherecentstrongperformanceofcommoditypriceshastakensomepressureofflargerminingcompanies,thereremainsalargesectionofthemarketwhichwebelieveisstillexperiencingcapitalconstraints.Assuch,opportunitiestoacquireaccretiveroyaltiesshouldstillcontinuetoexist.Furthermore,theGroupwillnowpursuetwoinvestmentstrategies:coreincomegeneratingroyaltiesanddevelopmentroyalties.ThelatterhasnotbeenthefocusfortheGroupwhilstwehaverebuiltourincome,butwenowintendtodeploymodestsumsintopre-productionassetswithaviewtohigherreturns.

Strategic

Strategic

1

4

ConclusionTheoutcomeoftheBoard’sriskassessmentresultedintherevisionstotheprincipalrisksdetailedinthetablebelow.

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.

2

Dependence on operators

TheGrouphasalwaysbeenreliantonthemineoperatorsfordeterminingthecorrectroyaltypayable,providinginformationandproductionguidanceandacknowledgingtheGroup’srightsasaroyaltyholder.Counterpartyriskisrelevantthroughoutthecyclealthoughfordifferentreasons.Towardsthebottomofthecycletheriskofnon-paymentoroperatorsurvivalishigher.AttheotherendofthecyclethereisagreaterchanceofM&Aactivityandchangeofcontrol,whichcouldleadtoaninferioroperatortakingcontrolofprojectsoranewoperatortakingadifferentinterpretationoftherequirementsundertheroyaltyagreement.

Operational 23

NEW RISK



2016 updateCategory2016 ranking

2015 ranking

Risk

That the Group fails to meet its obligations under its secured borrowing facility and is unable to refinance

Theabilitytorefinanceisnolongerasurgentasitwas12monthsagofollowing therefinancingoftheGroup’sborrowingfacilityuntil2021.Theriskassociatedwithfinancialcovenantshasabatedsomewhatwiththerecoveryincommodityprices inthepastsixmonthsandtheresultingimpactontheGroup’scashbalances.Shouldleveragebedeployedinameaningfulfashioninconjunctionwithanacquisitionthenthisriskmightheightenonceagain.

Operational 38

That the current portfolio will not generate sufficient cash

That the Group cannot finance royalty and streaming opportunities

Development royalties fail to reach production

That the reputation of coal will deteriorate and impact on its appeal as an investment proposition

CommoditypricesrecoveredstronglyinH216whichhasimprovedtheGroup’sfinancialprospectsconsiderably.ThisisstillaprincipalriskfortheGroup,althoughthedirectimpactbetweenabsolutelevelsofincomeanddebthassubsidedsomewhatwiththerecoveryincoalpriceandincreasedvolumesatKestrel.EvenifthepriceoftheGroup’stwoprincipalcommoditiesfellby50%,theGroupisforecastingfullcompliancewithitsfinancialcovenantsovertheviabilitystatementlookoutperiod,althoughitwouldhaveahigherrefinancingrisk.

Withthreefundraisesbehindit,theGrouphasdemonstrateditsabilitytosuccessfullyfinanceroyaltyacquisitions.Equitymarketsare,bytheirnature,volatileandtherecanbenocertaintythattheGroupwillbeabletosuccessfullyraiseequityinthefuture.Equitywillmostlikelyberequiredaspartofanylargetransformationaldeal,withtheGroupmostlikelytobeabletouseitsbalancesheettofundsmallertransactions.

TheGroupwillnowconsiderroyaltiesonoperationswhicharenotinproductionbuthavethepotentialtogenerateconsiderablyhigherreturns.Withhigherreturnscomesahigherriskprofileandthereisariskthatthoseinvestmentsdonotcomeintoproductionandgenerateareturnoninvestment.Althoughthisriskcannotbemitigatedinitsentirety,managementhaveexercisedconsiderabledisciplineoverthepastfewyearsinapplyingtheGroup’sinvestmentcriteriaasoutlinedasitscorestrategy.TheGroupwillensureanypre-productionroyaltiessatisfyourpre-definedinvestmentcriteriaandwehaveawealthofexpertise,bothatBoardandmanagementlevel,toidentifythoseopportunitieswhichhaveagreaterlikelihoodofbecomingsuccessfulinvestments.

Thiswasanewriskaddedtotheregisterin2015posttheParisclimateaccordwhenthesentimenttowardfossilfuelextractionandconsumption,includingcoal,deterioratedsuddenly.Althoughthepriceofcoalhasrecovered,andtherehasbeenrecentM&Ainthesector,itisstillnotclearthatmarketsentimenthasfullyreversed.ForAngloPacificspecifically,weareawarethatsomeEuropeanbankswillnolongerprovidefinancetotheGroupuntilwehavefurtherdiversifiedawayfromcoal(althoughnon-coalco-investmentscouldstillbepossible).Thisissuewasnotreallyencountered,norprovidedanyobstacle,intherecentequityraise.TheDirectors aresupportiveofcleanerenergy,andnotethattheGroup’sroyaltiescoverminesproducinghigherqualityandlowerpollutingcoal.

Operational

Strategic

Strategic

Strategic

1

55

6

4

7 6

NEW RISK

Group overview

Strategic report


entsOther inform



STRATEGIC REPORT

Principal risks and uncertaintiescontinued

Risk Possible cause Mitigation Management comment

That the Group fails to meets its obligations under its secured borrowing facility and is unable to refinance

TheGroup’sborrowingsaresecuredandsubjecttocertainfinancialcovenants,thefailingofwhichcouldimpactontheabilityoftheGrouptocontinuetorunitsbusinessindependently.TherecentincreasesincoalpricesenabledtheGrouptodeleverageand,withdividendcovernowre-established,theGroup’sleverageratiosshouldbemuchlesssensitivetovolatilityincommodityprices.

• Breach of financial covenant associated with a reduction in royalty income or unexpected liabilities (via commodity price declines or production disruption) could result in the banks enforcing security

Detailedcashflowforecastsprovidetimelywarningofanyupcomingtighteningofheadroomunderfinancialcovenants.TheGrouphasdiscretionoveritscostbaseandhassomefurtherliquidityinitsequityportfoliowhichcouldbemonetisedtoreduceborrowings.

That the current portfolio will not generate sufficient cash

TheGroupexpectsthecurrentportfoliotogenerateacertainlevelofincome,largelydrivenbyincreasedminingatKestrelwithintheGroup’slandandcontinuedproductionupsideatNarrabri.

• Further falls in commodity prices

• Unexpected production issues at Kestrel and/or Narrabri

• Reduction in Queensland royalty rate

• Foreign exchange risk (discussed separately on �page 23)

TheGrouphaslittleability toinfluencethequantumofroyaltiesitreceivespostacquisitionasitcannotreadilyandcheaplyhedgeitscommodityexposure,norcanitinfluencetheroyaltyrate.DetailedcashflowprojectionsarepreparedwhichincludedownsidescenariostounderstandthesensitivityofpriceandquantityassumptionsfortheGroup’smaterialassets.

TheGroupisexposedtocommoditypricevolatility,althoughunlikemineoperatorsitscostbaseisflexibleandfullywithinitscontrol.

Dependence on operators

TheGroupdependsonmineoperatorstocorrectlycalculateroyaltiespayable, topaytheroyaltypromptlywhendue,toprovideinformationandguidance ontheoperatorandtoco-operatewithanyauditrightsandrequirements.Inmoreextremecircumstances,theabilityfortheoperationtoremaineconomicallyviableisofupmostimportancetotheGroup’sfinancialprospects.

• Disputes over the quantum of royalty payable

• Non-payment of royalty

• Adhering to existing obligation under royalty contract in the case of a change of control

ThebestwaytheGroupcanmitigateagainstoperatorrelianceistocontinuediversifyingitssourcesofincomeandreducingitsrelianceonanyoneoperator.TheGrouphasauditrightsatseveralofitsroyaltieswhichaffordsittheopportunitytochallengeandverifyroyaltycalculations.

Forthoseroyaltieswithoutauditrights,underlyingroyaltyinformationandforecastsareoftenprovidedonavoluntarybasisbytheoperator.Assuch,change ofcontrolattheGroup’smaterialassetscouldinterferewiththesystemsandcommunicationestablishedovertheyearswiththeexistingoperators.

TheGroupcannotcontrolorcorrectasevereproductionoutageatKestrelwhichcouldimpactmateriallyoncovenantcompliance.

OP

ERAT

ION

AL

Principal risks




Concentration risk associated with Kestrel

• Kestrel accounted for over 65% of the Group’s royalty income in 2016 and is likely to be the main source of revenue growth in 2017

• Any significant mining issues could result in considerable production disruption, impacting on the Group’s expected cash flow

• The royalty rate applicable to Kestrel is determined by the Queensland government and so any material downward revision to rates would directly impact on the Group

• Change of control could result in disruption to royalty payments or processes

• A material reduction in the coking coal price would impact on the level of income the Group expects to receive from the royalty

TheGrouphasagoodworkingrelationshipwiththeoperator,RioTinto,andhasreceivedroyaltiesfromtheoperatorconsistentlysince1992.TheGroupisalsoprovidedwithproductionforecastsforthenextfourquarterswhichassistsitincashflowpreparation,budgetinganalysisandguidingthemarket.ThemapwhichRioTintopublishedatthebeginningof2016showedforthefirsttimetheareacoveredbyprivateroyalty.Thisprovidedconsiderableassuranceregardingthedirectionofmining,confirmingourexpectationthatover90%ofproductionwouldbewithinourroyaltylandbytheendof2017.ThemapreferredtoabovewaspublishedaspartofalicenceextensionatKestreltoobtainpermittingbeyondthecurrentlyapprovedmineplan.AlthoughthiswillnotimpactontheGroupasthisareaisoutsideourroyaltyarea,itclearlydemonstratestheeconomicviabilityoftheoperation.TheGroupcouldbeimpactedifRioTintoweretodisposeofthemineastheGroupwouldneedtodeveloparelationshipwithanewcounterpartywhichcouldresultinsometransitioningissues.

That the Group fails to identify and acquire new royalty and streaming opportunities

Inordertoexecuteitsstrategy,theGroupneeds toacquirefurtherroyalties.Thesuccessofthisstrategywilldependonthefuturedemandforroyaltyfinancingaspartofthefinancingmix inthesector.

• The recent recovery in commodity prices has shifted sentiment in the sector and eased the financial pressure on operators, making identifying royalty opportunities more difficult

• Pricing competitiveness of royalties versus conventional sources of finance, particularly when the outlook for the sector is improving

• Appetite of counterparties to relinquish operating margin in favour of restrictive debt or dilutive equity

Generally,demandforroyaltyfinancingisgreaterwhentheunderlyingmarketconditionsarechallenging.Thepastsixmonthshaveseenconsiderablerecoveryinthesectorwhichhasresultedinawindfallforthosewithproducingassets,whichmeansthereislikelytobereducedpressureforroyaltyfinancing.Foroperatorsnotyetinproduction,thedynamichasnotchangedsignificantlyandthereremainshighcompetitionforcapital,whichshouldprovideopportunitiesfortheGrouptoaddtoitsroyaltyportfolio.TheGroupalsolookstoacquireexistingroyalties,andtheseopportunitiesexistthroughoutthecycle.

Therecanbenoguaranteethatroyaltieswillalwaysbeindemandthroughoutminingcycles.However,theGrouphasanextensivenetworkofadvisorsandcontactsglobally,inadditiontoitsownmarketinginitiatives,whichprovidesaregularsourceofdealflowtoappraiseatanyonetime.

Ultimately,thereislittle thattheGroupcandotomitigatethedominantimpactofKestrelontheGroup’sprospectsotherthandiversifyingthisthroughmaterialandtransformationalroyaltyacquisitions,whichisverymuchthefocusofmanagement.

STR

ATEG

IC

Group overview

Strategic report


entsOther inform



STRATEGIC REPORT

Principal risks and uncertaintiescontinued


That the Group cannot finance royalty and streaming opportunities

Therecanbenocertainty thattheGroupwillhavereadyaccesstocapitaltofinanceroyaltyopportunities.

• Sudden adverse change in equity market conditions

• 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

TheGroupdemonstratedthatroyaltyopportunitieswhichmeetitsstrictinvestmentcriteria,suchastheNarrabriandDenisontransactions,arecapableofbeingfinanced.Managementregularlymeetsbothexistingandpotentialinvestorsandlistenstoanyconcernsorfeedbackwithaviewtofutureacquisitions.TheGroupremainsinclosedialoguewithseveralinstitutionswhoareinterestedinco-investinginappropriateopportunities.Thisshouldsignificantlyde-riskfinancingriskforlargertransactions.Therecentrefinancinghasreducedsoledependenceononebankwhichshouldprovidegreaterfinancingcapability.

Therecanbenoguaranteemarketconditionswillalwaysbeoptimalforraisingfinance.

That the reputation of coal will deteriorate and impact on its appeal as an investment proposition

Thecoalindustryhasattractedconsiderablecriticisminrecentyearsasenvironmentallobbyistscontinuetoexertpressureontheinvestmentcommunitynottosupportextractiveindustries.AlthoughAngloPacificisnotacoaloperator, itcontinuestobeconsideredakintoanindirectinvestmentincoal.

• Climate change lobbyists continue to target the natural resource sector and coal producers in particular

Australiancoal,onwhichtheGroup’sKestrelandNarrabriroyaltiesarebased,isgenerallyregardedaslowinashandlowinsulphurandmuchcleaner innature.AngloPacificbelievesthat thecoalindustryisbeginningtopromotecleaner,moresustainablecoalwhichclearlyhasaplaceinfuturepowersolutions.

TheGroup’sstrategyistobuildadiversifiedroyaltyportfoliowhichshouldnaturallyreducetheGroup’sexposuretocoalgoingforward.TheDirectorscontinuetobelieveinthefutureofcoalasbothapowersourceandrawmaterial,especiallylesspollutingcoalfromminessuchasKestrelandNarrabri.

Development royalties fail to reach production

Developmentroyalties, bytheirnature,areexposed togreaterriskthanincomeproducingroyalties.Conversely,theyofferthepotentialforhigherreturns.

• Unproven reserves/resources

• Geological/technical issues

• Overspend/insolvency

• Inexperienced management

TheGrouponlyintendstoallocateamodestamount ofcapital,mainlyretainedincome,tothisassetclass. Assuch,anyfailurewilllargelybeimmaterial.TheCompanyhasanexperiencedmanagementteamwithin-housegeologicalandfinanceexperiencetohelpidentifythoseopportunitieswhichrepresentthegreatestchanceofsuccess.

SimilartoproductionriskwiththeGroup’sexistingroyalties,riskarounddevelopmentroyaltiescannotbefullymitigated,althoughitsimpactislikely tobelessdetrimentalduetothemodestamountslikely tobeinvested.

STR

ATEG

IC

Principal riskscontinued




Liquidity risk

ThattheGroupcannotmeetallofitsobligationsasthey falldue.

Credit risk

ThatthereisariskofdefaultbythoseowingtheGroupmoneyorthoseinstitutionsholdingtheGroup’scashreserves.

Foreign exchange risk

Thatforeignexchangemovementsadversely impactontheGroup’scashflowprojections.

Interest rate risk

ThatanincreaseininterestratescouldadverselyimpactontheGroup’sprospects.

• Unexpected financial claim

• Insufficient access to cash

• Royalty payment default

• Bank collapse

• Cash flow risk associated with dollar derived income and costs (including dividend) largely payable in pounds

• Translation risk of having a presentational currency in GBP but assets denominated in A$

• Financing risk when raising equity in GBP to fund dollar denominated acquisitions

• The Group is exposed to the US and UK LIBOR rate as part of its bank facility

TheGrouppreparesregularcashflowprojectionswhichhighlightallanticipatedandprobableexpensesincludingroutineoverheads,taxandanycapitalcommitments.TheGrouphassufficientheadroomunderitsexistingRCFandpotentialaccesstothecapitalmarketstoprovideadditionalliquidity.

TheGroupoperatescontrolledtreasurypolicieswhichspreadstheconcentrationoftheGroup’scashbalancesamongstseparatefinancialinstitutionswithsufficientlyhighcreditratings.

TheBoardapproveda currencyhedgingpolicy duringtheyearwhichlookstoprotectasignificantamount oftheGroup’snext12monthexpectedroyaltyincome.Underthepolicy,theGroupcanhedgeupto70%ofthenextquarter’sincome,60%ofthesecondquarterfollowed by30%and25%thereafter.

TheGrouphasarelatively lowlevelofborrowingsand, assuch,interestrateriskisnotconsideredmaterialwhenassessingtheGroup’slonger-termprospects.

TheDirectorshavecarefullyconsideredthisriskinmakingapositivestatementaboutgoingconcernandviability.

Theriskofcounterpartydefaultisassessedwhenenteringintonewroyaltyagreements.TheDirectorsareconfidentthattheKestrelandNarrabriroyalties,whichrepresentthemajorityoftheGroup’sreceivables,areatrelativelylowriskofdefaultduetothenatureoftheoperatorsinvolved.

TheGroupwillalwaysbeexposedtoforeignexchangeriskonfutureacquisitions buthassoughttocommenceacashflowhedgingprogrammeforitscurrentincomeproducingassets.

Interestratescurrentlyremainathistoricallylowlevels.TherecanbenoguaranteethatthiswillcontinueintheshorttomediumtermwhichcouldimpactonthecostoftheGroup’scapitalwhenacquiringfutureroyalties.

Other pricing risk

TheGroup’sresultsaredeterminedbyotherpricinginputswhichcouldresult inunrealisedlossesateachreportingdate.

• The Group has a portfolio of certain publicly quoted equity investments which are marked to market 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

TheGroup’sequityportfoliohaslargelybeendivested,meaninganyfutureimpairmentshouldbemuchlessmaterialtotheGroup.TheGroupusesindependentthirdpartyconsensusprices ateachreportingdateinassessingforimpairment.

TheGroupisexposedtocommoditypricesandasignificantdecreaseincommoditypricesislikelytoresultinfurtherimpairmentcharges.ThereislittletheDirectorscandotomitigateagainstthisriskoncearoyaltyhasbeenacquired.

FIN

AN

CIA

L

Group overview

Strategic report


entsOther inform



STRATEGIC REPORT

Measuring our progressKey performance indicators

Adjusted earnings per share (p)

9.76p

Royalty income (£m)

£19.7m

Dividend cover (x)

1.6x

Free cash flow per share (p)

7.93p

Adjustedearningspersharereflectstheprofitwhichmanagement iscapableofinfluencing.Itdisregardsanyvaluationmovements,whichreflectshort-termcommoditypricefluctuations,impairments,amortisationandshare-basedpaymentexpenses.

ItalsoadjustsforanyprofitsorlosseswhicharerealisedfromthesaleofequityinstrumentswithintheminingandexplorationinterestsasthesearedeterminedbasedonmarketforcesoutsidethecontroloftheDirectors.Adjustedearningsdividedbytheweightedaveragenumberofsharesinissuegivesadjustedearningspershare(referto �note 11forfurtherdetails).

RoyaltyincomereflectstherevenuefromtheGroup’sunderlyingroyaltyandstreamingassetsonanaccrualsbasis(referto �note 4 forfurtherdetails).

ItisapolicyoftheGrouptopayasignificantportionofitsroyaltyincomeasdividends.Justasimportantasmaintainingthedividend ismaintainingthequalityofthedividend.Dividendcoveriscalculatedasthenumberoftimesadjustedearningspershareexceedsthedividendpershare(referto �note 12 forfurtherdetails).

Inanyperiodwherethereisanadjustedloss,thedividendcover willbereportedasnil.

ThestructureofanumberoftheGroup’sroyaltyfinancingarrangements,suchastheDenisontransactioncompletedinFebruary2017,resultinasignificantamountofcashflowbeingreportedasprincipalrepayments,whicharenotincludedintheincomestatement.AstheGroupconsidersdividendcoverbased onthefreecashflowgeneratedbyitsassets,managementhavedeterminedthatfreecashflowpershareisakeyperformanceindicator,goingforward.

Freecashflowpershareiscalculatedbydividingnetcashgeneratedfromoperatingactivities,plusproceedsfromthedisposalofnon-coreassets,lessfinancecosts,bytheweightedaveragenumberofshares inissue(referto �note 33 forfurtherdetails).

12 13 14 15 16

1.6

0.4

0.0

0.80.9

Royalty assets acquired (£m)

NilTheGroup’sstrategyistoacquirecashornear-cashproducingroyaltieswhichwillbeaccretiveandinturnenabledividendgrowth.ThechartoppositeshowshowmuchtheGroupinvestedinroyaltyacquisitionsineachperiod.

12 13 14 15 16

7.93

2.93

10.36

2.93

7.93

12 13 14 15 16

-1.97

8.398.69

2.47

9.76

12 13 14 15 16

0.0

45.0

16.2

6.36.9

19.7

8.7

3.5

14.715.2

£m

p

x

p

£m

12 13 14 15 16



STRATEGIC REPORT

Business review

Record levels of sales volumes at Kestrel, Narrabri and Maracás in 2016

Producing royalties �page 26

Our 11 principal assets are split across three stages. Six are Producing, two are in Development and three are Early-stage

Development royalties �page 32

Early-stage royalties �page 34

Group overview

Strategic report


entsOther inform



STRATEGIC REPORT

Business review

Producing royalties

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 )

K E S T R E L N O R T H( h i s t o r i c m i n e )

AREA BEING MINED AS OF

Q4 2016

Area already mined

Kestrel mine plan, showing direction of mining compared to private land boundary

Rockhampton

Townsville

Cairns

KESTRELAU

ST

RA

LI

A

Brisbane

The significant growth in royalty income in 2016 was due primarily to increased Kestrel production within the Group’s private royalty land and the weakening of the pound.

KestrelStage Producing

Commodity Coking coal

Operator Rio Tinto

Location Australia

Royalty rate and type 7 – 15% GRR

Balance sheet Investment classification property

What we own KestrelisanundergroundcoalminelocatedintheBowenBasin,Queensland,Australia.ItisoperatedbyRioTintoLimited(‘RioTinto’).TheGroupowns 50%ofcertainsub-stratumlandswhich,underQueenslandlaw,entitleittocoalroyaltyreceiptsfromtheKestrelmine.

TheroyaltyratetowhichtheGroup ispresentlyentitledisprescribedby theQueenslandMineralResourcesRegulations.Theseregulationscurrently



stipulatethatthebasisofcalculation isathree-tieredfixedpercentageoftheinvoicedvalueofthecoalasfollows:

Average price per tonne for period Rate

Up to and including A$100 7%

Over A$100 and up to and including A$150 First A$100 7% Balance 12.5%

More than A$150 First A$100 7% Next A$50 12.5% Balance 15%

PerformanceTheGroupreceivedroyaltyincome of£13.1mfromKestrelduring2016,comparedto£3.6min2015.Thesignificantincreaseinroyaltyincome in2016wasdueprimarilytoincreasedKestrelproductionwithintheGroup’sprivateroyaltylandandtheweakening ofthepoundduring2016.

InaccordancewithAngloPacific’s Kestrelinformationrights,theGroupestimatesthat80-90%ofminingatKestrelwillbewithinourroyaltylands

during2017(2016:67%),increasing toover90%fromtheendof2017for aperiodof~8-9years.

InadditiontothepercentageofproductionwithintheGroup’sprivatelandincreasingin2016,theGroup wasencouragedbyRioTinto’sfourthquarterproductionannouncementonJanuary17,2017whichreportedoverallproductionfromKestrelof4.9mtfor 2016comparedto4.1mtin2015.

ValuationTheKestrelroyaltywasindependentlyvaluedatA$200.3m(£116.9m)andaccountsfor46%oftheGroup’stotalassetsasatDecember31,2016(2015:A$167.7m;£82.6m;42%).Theincrease inthevaluationofKestrelresultedinagainof£17.9m(2015:loss£27.2m)ontheincomestatement,togetherwithaforeigncurrencytranslationgainof£16.3m (2015:loss£7.2m).Thevalueofthelandiscalculatedbyreferencetothediscountedexpectedroyaltyincomefromminingactivity,asdescribedin�note 14.

TheindependentvaluationhasbeenundertakenbyaCompetentPerson inaccordancewiththeValminCode(AusIMM,2005),whichprovidesguidelinesforthepreparationofindependentexpertvaluationreports.TheGroupmonitorstheaccuracyof thisvaluationbycomparingtheactualcashreceivedtothatforecasted.

Astheassethasanominalcostbase, thecarryingvaluevirtuallyrepresentsthevaluationsurplus.TheGrouprecognisesadeferredtaxprovisionagainstthevaluationsurplusand,assuch,thenetvalueonthebalance sheetis£82.4m(2015:£58.3m).

Theincreaseinfairvalueislargelydue totherecoveryincokingcoalconsensusprices,combinedwiththetranslationbenefitfollowingtheweakeningofthepoundduringH216.

The Group received royalty income of £13.1m from Kestrel during 2016, compared to £3.6m in 2015

12 13 14 15 16

13.1

3.6

1.7

9.911.0

Coal royalty income (£m)

12 13 14 15 16

116.9

82.6

117.1131.4

171.0

Coal royalty valuation (£m)

Group overview

Strategic report


entsOther inform



STRATEGIC REPORT

Business reviewcontinued

The Narrabri mine has scope to materially increase production over the short and medium term

In 2016 Whitehaven have announced its intention to extend the Narrabri North longwall panels into the Narrabri South area in the near term

Brisbane

SydneyCanberra

Newcastle

NARRABRI

AU

ST

RA

LI

A

Narrabri North longwalls

Area already mined

NARRABRI SOUTH

POTENTIAL EXPANSION

AREA

NarrabriStage Producing

Commodity Thermal & PCI coal

Operator Whitehaven Coal

Location Australia

Royalty rate and type 1% GRR

Balance sheet Royalty classification intangible

What we ownInMarch2015,theGroupacquiredaroyaltyinterestintheNarrabricoalproject,alowcostthermalcoalandpulverisedcoalinjection(‘PCI’)coalminelocatedinNewSouthWales,Australia,operatedbyASX-listedWhitehavenCoalLimited(‘Whitehaven’).TheNarrabriroyaltyentitlestheGrouptoroyaltypaymentsequalto1%ofgrossrevenueonallcoalproducedfromwithintheareacoveredbytheNarrabriroyalty.TheNarrabriroyaltyincludestheNarrabrimine,andtheNarrabriSouthproject.

TheNarrabriminehasscopetomateriallyincreaseproductionovertheshortandmediumterm.WhitehavenestimatesNarrabritohaveareservebasedminelifeof25years,andthepotentialtoextendproductionthereafterwiththedevelopmentofNarrabriSouth.

PerformanceTheGroupreceivedroyaltyincome of£4.2mduring2016fromNarrabricomparedto£3.2mthepreviousyear.

Althoughthethermalcoalpricehad amixedyear,productionatNarrabricontinueditsimpressiverampup.IntheirFY2016(toJune30,2016),WhitehavenannouncedthatNarrabriproduced 6.8mtrun-of-mine(‘ROM’),thetopend oftheirguidance.Theyachieved7.3mt ofproduct,aheadoftheirpreviousguidanceof7.0-7.2mt.Oneoftheirkeystatedprioritiesatthetimewastoget the400mwidelongwallpanelatNarrabrioperationalduringFY17.

Intheir2016annualreport,Whitehavenissuedguidanceof8.0-8.3mtROMforNarrabri,asignificantincreaseonthe6.8mtachievedinFY2016.OnJanuary9,2017WhitehavenannouncedarevisiontotheirguidanceforFY17to7.5-7.8mt.Thiswasduetoadversegeotechnicalconditionsatcertainareaswithinthelongwallpanel.Despitethis,andaperiodofwetweather,theyremainontracktoachievetheirFY17saleableproductionguidance.TheGroupreceivesitsroyaltybasedonsalesandnotproduction.

Whitehavenremainsontracktobring inthe400mwidelongwallpanelinthefirsthalfof2017,andthesurfaceinfrastructureandelectricalupgradeswerecompletedonschedule.

OnFebruary5,2016,WhitehavenannounceditintendstoextendtheNarrabriNorthlongwallpanelsintheNarrabriSoutharea,andthatwork tointegrateNarrabriSouthintoexistingoperationsatNarrabriNorthhadcommenced.DrillingtoconvertNarrabriSouthMineralResourcestoMineralReservesisscheduledtooccur duringWhitehaven’sfiscalyearending June30,2017.

ValuationTheNarrabriroyaltyisclassifiedasaroyaltyintangibleassetonthebalancesheet.Assuch,thisassetiscarriedatcostlessamortisationandimpairmentsanddoesnotbenefitfromanyvaluationupliftresultingfromthepositivedevelopmentsintheyear,asdescribedabove.Itscarryingvaluedoes,however,reflect theimpactoftranslationfromAustraliandollarstopoundswhich,attheyear-end,resultedinafavourableuplift.Royaltyintangibleassetsareamortisedwhencommercialproductioncommences, onastraight-linebasisovertheexpectedlifeofthemine.

15 16

4.2

3.2

Narrabri royalty income (£m)



B R A Z I LSalvador

Petrolina

Vitória deConquista

MARACÁS PROJECT

The project is located 250km south-west of the city of Salvador, the capital of Bahia State, Brazil

The Group received royalty income of £0.8m in 2016, an increase from the £0.6m it received in 2015

Maracás MenchenStage Producing

Commodity Vanadium

Operator Largo Resources

Location Brazil

Royalty rate and type 2% NSR


What we ownTheGrouphasa2%NSRroyaltyonallmineralproductssoldfromtheareaoftheMaracásMenchenprojecttowhichtheroyaltyinterestrelates.Theprojectislocated250kmsouth-westofthecityofSalvador,thecapitalofBahiaState,Brazilandis99.97%ownedandoperatedbyTSXlistedLargoResourcesLimited(‘Largo’).

PerformanceTheGroupreceivedroyaltyincomeof£0.8min2016,anincreasefromthe£0.6mitreceivedin2015,whichwasthefirstyearofroyaltyrevenue.ProductionrampupwasslowerthanenvisagedatthetimetheGroupacquiredtheroyalty,notassistedbythepronounceddecreaseinthevanadiumpriceduring2015 whichpersistedintothefirsthalfof2016andwhichwillhaveimpactedontheoperator’scashflowprofile.

Despitetheweakvanadiumprice,andfollowingaseriesoffinancingsannouncedbyLargo,productionbegantoincreasesignificantlyfromH215onwards. Largoannouncedproductionof600t ofVanadiuminJuly2015,increasingto730tinApril2016,achievingarunrate of~800tthereafterwitharecordmonth of828tinDecember2016.

ThissteadyrampupinproductioncoincidedwitharecoveryinthevanadiumpriceinH216whichincreasedfrom$2.38/lbatthestartof2016toreach$5.02/lbatDecember31,2016,andtheGroup’sroyaltyincomebegantoincreasetowardstheendof2016accordingly.

Underthetermsoftheroyaltysaleagreement,theGroupisrequiredtopay afurtherUS$1.5monceproductionreachesanannualisedrateoveraquarterof9,500t.GiventheproductionachievedinH216byLargo,theDirectorsconsideritprobablethatthisproductionmilestonewillbeachievedpossiblyinthenext18 to24monthsandassuchtheGroup hasrecognisedbothanassetandcorrespondingliabilityforthisadditionalpayment,assetoutin �note 26tothefinancialstatements.AfurtherpaymentofUS$1.5mwouldbepayableifproductionreachesanannualisedrateoveraquarterof12,000t.Basedonthecurrentguidancehowever,theDirectorsdonotconsiderthisprobableandas suchnoliabilityhasbeenrecognised.

ValuationTheMaracásMenchenroyaltyis classifiedasaroyaltyintangibleasset onthebalancesheet.Assuch,thisassetiscarriedatcostlessamortisationandimpairments.Royaltyintangibleassetsareamortisedwhencommercialproductioncommences,onastraight-linebasisovertheexpectedlifeof themine.

15 16

0.8

0.6

Maracás royalty income (£m)

Group overview

Strategic report


entsOther inform



STRATEGIC REPORT


El Valle-Boinás/Carlés (‘EVBC’)Stage Producing

Commodity Gold, copper & silver

Operator Orvana Minerals

Location Spain

Royalty rate and type 2.5 – 3% NSR

Balance sheet Royalty financial classification instrument

What we ownTheGrouphasa2.5%lifeofmineNSRroyaltyontheEVBCgold,copperandsilvermineownedbyTSX-listedOrvanaMineralsCorp(‘Orvana’).EVBCislocated intheRioNarceaGoldBeltofnorthernSpainandwaspreviouslyminedfrom1997to2006byRioNarceaGoldMines.Theroyaltyrateincreasesto3%whenthegoldpriceisoverUS$1,100perounce.

PerformanceTheGroupreceivedroyaltyincome of£1.2mfromEVBCduringthepastyear.Thiscomparesto£1.2mreceivedin 2015.EVBChasbeenoneoftheGroup’smostconsistentroyaltiesoverthepastfewyears.

OrvanaacknowledgedthatEVBCproducedadisappointingfinancialresultinQ42016(theirQ1FY17).Thisresultedinoverallproductionforthecalendaryear2016beingsome20%lowerthan in2015.

Orvanaaredeterminetoextractoperationalefficienciesatthemine bytargetinghighergradeoxidezonesalongwithtargetingarampupfromtherecommencedCarlésoperation.Theyalsointendtorevisitthemineplantotransitionawayfromzoneswithpoorgroundconditionswhichimpactedonproductionin2016.

Thestrategyseemstobesucceeding, asEVBCreachednameplatecapacity of2,000tperdayinDecember2016.

ValuationTheEVBCroyaltyisclassifiedasanavailable-for-saleequityfinancialassetwithinroyaltyfinancialinstrumentsonthebalancesheet.Assuch,theassetiscarriedatfairvaluebyreferenceto thediscountedexpectedfuturecashflowsoverthelifeofthemine.

Bilbao

Santander

León

Gijón

Aviles

SP

AI

N

EL VALLE�BOINÁS/CARLÉS

Madrid

12 13 14 15 16

1.21.2

1.7

4.0

1.6

EVBC royalty income (£m)



Bilbao

Santander

León

Gijón

Aviles

SP

AI

N

EL VALLE�BOINÁS/CARLÉS

Madrid

Adelaide

Port Augusta

FOUR MILE

AU

S

TR

AL

IA

Four MileStage Producing

Commodity Uranium

Operator Quasar Resources

Location Australia

Royalty rate and type 1% NSR


What we ownTheGrouphasa1%lifeofmineNSRroyaltyontheFourMileuraniummineinSouthAustralia.FourMileisoperated byQuasarResourcesPtyLtd(‘Quasar’).

PerformanceTotalroyaltyincomewas£0.3mwithmaidenroyaltyreceiptsof£0.1mfromFourMileinFebruary2016,following thecommencementofsalesbyQuasar.AlthoughroyaltiestodatehavenotbeentotheleveltheGroupwasexpecting, duetolowersalesvolumesandhigherdeductions–whichtheGrouparecurrentlydisputing–thekeybenefitofthisroyaltyshouldaccruewhenQuasarentersintosupplycontractswhichachievehigherpricinglevels.

ValuationTheFourMileroyaltyisclassifiedasaroyaltyintangibleassetonthebalancesheet.Assuch,thisassetiscarriedat costlessamortisationandimpairments.Royaltyintangibleassetsareamortisedwhencommercialproductioncommences,onastraight-linebasis overtheexpectedlifeofthemine.

Four Mile is operated by Quasar Resources Pty Ltd (‘Quasar’)

The key benefit of this royalty should accrue when Quasar enters into longer-term supply contracts which achieve higher pricing levels

Group overview

Strategic report


entsOther inform



Madrid

Cáceres

Zamora

SALAMANCA

SP

AI

NSTRATEGIC REPORT


Development royalties

the global natural resources royalty company€¦ · portfolio centred on base metals and bulk...

Documents