British mining royalty company Anglo Pacific has gained exposure to Australian thermal coal with the announcement that it has bought a royalty interest in the Narrabri coal project – a major thermal coal and PCI coal mine in NSW operated by Whitehaven Coal Ltd.
According to The Sydney Morning Herald, the mining investor has paid $US65 million for the royalty interest in Narrabri and is entitled to royalty payments equal to 1% of gross revenue on all coal produced from the Narrabri royalty area.
Anglo Pacific said the acquisition was consistent with its strategy to acquire royalties on mining assets that are competitively positioned on the cost curve, cash or near-term cash producing and located in established mining jurisdictions.
Production at the Narrabri mine in 2014 stood at about 5.5 million tonnes, including 850, 000 tonnes of PCI coal. According to Whitehaven estimates, the mine is expected to produce more than 6.5 million tonnes in the 2015 financial year.
Anglo Pacific Chief Executive Julian Treger said the royalty would have yielded more than $US5 million in 2014, and could yield around $8 million per year once the Narrabri mine is fully ramped up.
“We are not calling the bottom of the coal price because that is a difficult timing to be accurate on, but I think there is more risk to the upside than the downside for thermal coal,” he said.
“We think Whitehaven is a great operator and they should do well in this environment, whereas a lot of their peers will have higher mining costs going forward because of the age of their mines.”
According to him, the royalty model was a de-risked way to get exposure to the mining sector and commodity prices.
“The virtue of the royalty model is that you take a piece of the top line and you don’t get exposed to operational issues,” he said.
“Higher costs and capex blowouts don’t affect you, you really are interested in ensuring the mine continues to operate, and as long as it operates you get some income.”
Anglo Pacific holds 21 mining royalties around the world, including Rio Tinto‘s Kestrel coking coal mine in Queensland, the Four Mile Uranium mine in South Australia and some undeveloped iron ore assets in the Pilbara, which are owned by BHP Billiton.