Royalty Returns (Portfolio Buy)

Round and merry
Source

What goes around, comes around.

Errr - I've never understood what that actually means but (as I've written before) I do think of investing as a giant old fashioned merry-go-round composed of gilt wooden horses moving up and down on spiral poles. As the merry-go-round turns I like to ride the horses up to the top and then jump off, landing on another one on its way up.

Sometimes that means riding the same horse more than once. And if you're going to ride it twice, there should be a good reason...

In this case the reason is royalty - or rather, the plural: royalties. A royalty in this context is a kind of tax on the extraction of raw materials, usually created as part of the process of generating capital to develop a mine.

And the king of royalties on the London market is Anglo Pacific Group (LSE:APF). To quote their website - as a natural resources royalty company Anglo Pacific Group PLC offers investors:

• Exposure to commodity prices.
• Royalty income with no exposure to rising operating costs and low operational risk.
• Low political risk.
• A sustainable dividend.

And to quote Digital Look: The strategy of the Group is to expand its mineral royalty interests in low-cost, long-life  mining assets. The Group achieves this through both direct acquisition and investment in projects at the development and production stage. It is a continuing policy of the Group to pay a substantial proportion of these royalties to shareholders as dividends. The Group strives to focus on projects in areas with low political risk that have defined resources and near-term production.

APF has 'producing' mines in Brazil, Spain and Australia, with 'development' and 'pre-development' mines all around the world. The main commodities are coal, iron ore, gold, uranium and chromite.

Last year was not so good but the dividend was maintained in the expectation of better times to come. The trailing dividend yield is currently 5.5%, however the dividend cover is slim-to-dangerously-low at less than one, meaning that it is digging into its own cash reserves to maintain the dividend. However, the company has cash and receivables equivalent to five years' royalties and no debt.

APF has been around for a while - and, as I say, I've owned it before (and profited from it). So I'm willing to take a gamble on a turnaround. Although commodities are weak at the moment, in the medium term, I can't see any direction but 'up' as populations get richer around the world. And I don't have any other exposure to raw materials other than BP.

I'm jumping back on the merry-go-round!

[Purchase price: £1.8346]


I am not a financial adviser and the information provided does not constitute financial advice. You should always do your own research on top of what you learn here to ensure that it's right for your specific circumstances.