APF.L Regulatory News (APF)

23 August 2018

Anglo Pacific Group PLC

Interim results for the six months ended 30 June 2018

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 2018 which are available on both the Group's website at www.anglopacificgroup.com and on SEDAR at www.SEDAR.com.

Results

· Revenue in H1 2018 of £19.1m, a 12% increase from £17.0m in H1 2017

· Including EVBC and Denison principal, total income generated from the portfolio of £20.8m, a 20% increase compared to £17.3m in H1 2017

· Record royalty income of £2.1m from Maracás Menchen, already in excess of the £2.0m earned for FY 2017

· 15% increase in adjusted earnings per share to 8.56p from 7.44p in H1 2017; basic earnings per share increasing to 7.24p from a loss of 1.46p in H1 2017 (refer note 6)

· Cash generated from operating activities of £14.6m (H1 2017: £16.8m) with free cash flow generated in H1 2018 of £17.9m (H1 2017: £18.9 - which included £1.8m in relation to back dated income from the Denison financing arrangement)

· Net cash of £5.2m at June 30, 2018 (YE 2017: £8.1m) - after investing £13.9m and dividends of £7.2m

· Net assets of £217.1m (YE 2017: £218.9m) translating into net assets per share of 120p (YE 2017: 121p)

· Acquisition of a 0.5% NSR over the Canariaco project in Peru owned by Candente Copper Corp for £0.8m

Other highlights

· Purchase of Kestrel by EMR and Adaro completed on 1 August 2018, with the new operator targeting doubling of production in the near-term

· £37.0m (US$50.0m) acquisition of a 4.25% shareholding in Labrador Iron Ore Royalty Corporation ("LIORC"), as announced on 16 August 2018, providing exposure to the 7% GRR Labrador Iron Ore royalty

Julian Treger, Chief Executive Officer, commented:

"Anglo Pacific has enjoyed a very successful start to 2018 with our overall income continuing to grow (+20% in H1 2018) principally due to higher commodity prices. We have invested US$51.0m in growth opportunities which complement and diversify our existing portfolio. In the short-term the sale of Kestrel suggests that volumes could double in the coming years as the new owners look to maximise their return.

We have entered the second half of 2018 in a very strong position, with significant liquidity available to us, and we continue to actively pursue and appraise other royalty opportunities to add to the two acquisitions we have completed so far this year."

Analyst presentation

There will be an analyst presentation via conference call at 9:30am (BST) on 23 August 2018. The presentation will be hosted by Julian Treger (CEO), Kevin Flynn (CFO).

Dial in details for the call are as follows:

Participant Access Code: 58239674#

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

https://event.on24.com/wcc/r/1822941-1/09C9AB86360CCC28F7127539DEDBCE06

For further information:

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 financial measures are used to assess the Group's performance. The measures are defined as follows:

Total portfolio income

Total portfolio income represents the Group's total income flows from its royalty related assets. The Group's income flows are derived from royalty receipts (including EVBC), interest and principal repayments under royalty financing agreements and dividends from the Group's equity investment in Labrador Iron Ore Royalty Corporation.

Operating profit/(loss)

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

Adjusted earnings 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 receipts from royalty financial instruments less all valuation movements, non-cash impairments and amortisation charges (which are non-cash adjustments that arise primarily due to changes in commodity prices), finance costs, any associated deferred tax and any profit or loss on non-core asset disposals as these are not expected to be ongoing.

Valuation and other non-cash movements such as these are not considered by management in assessing the level of profit and cash generation available for distribution to shareholders. As such, an adjusted earnings measure is used which reflects the underlying contribution from the Group's royalties during the year.

The introduction of IFRS 9 at the beginning of the year has impacted on the way in which the EVBC royalty is presented in the Income Statement. Despite the income being a prescribed percentage of revenue, the various equity conversion rights associated with the initial investment resulted in the asset being considered a financial asset. Previously, the royalty was accounted for as an IAS 32 available for sale equity financial asset, whereby the royalty income was recognised included within revenue. Upon adoption of IFRS 9, the royalty income is accounted for as repayment of the balance sheet carrying value and only the revaluation of the future cash flows is recognised in the income. Given this change, the Group has altered its definition of adjusted earnings to include the portion of the valuation movement which is attributable to the royalty income in the period, with non-cash revaluation movements continuing to be excluded. This achieves consistency with the previous years, when EVBC receipts were included as royalty revenue, and reflects the way in which management monitor performance and report revenue internally.

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 a reconciliation of adjusted earnings to the profit/(loss) attributable to equity holders and adjusted earnings per share.

Free cash flow and free cash flow per share

The structure of a number of the Group's royalty financing arrangements, such as the Denison transaction completed in February 2017, result in a significant amount of cash flow being reported as principal repayments, which are not included in the income statement. As the Group also considers dividend cover based on the free cash flow generated by its assets, management have determined that free cash flow per share is a key performance indicator.

Free cash flow is the net cash generated from operating activities, plus proceeds from the disposal of non-core assets, less finance costs.

Free cash flow divided by the weighted average number of shares in issue gives free cash flow per share. Refer to note 20 to the financial statements for a reconciliation of free cash flow to net cash generated from operating activities and free cash flow per share.

Dividend cover

As it is a continuing policy of the Company to pay a significant portion of its royalties to shareholders as dividends, the directors consider the affordability of the dividend, conveyed by dividend cover, to be a useful additional measure of the Group's performance. Dividend cover is calculated as the number of times adjusted earnings per share exceeds the dividend per share. Refer to note 7 to the financial statements for dividend cover.

BUSINESS REVIEW

Highlights

The first half of 2018 has seen significant further growth for Anglo Pacific. Total income from our portfolio increased by 20% to £20.8m compared to the same period last year. This has resulted in strong cash generation which in turn has enabled us to complete two acquisitions for total consideration of US$51.0m (£37.8m), including the recently announced interest in the Labrador Iron Ore Royalty Corporation ("LIORC").

Underlying performance 

Our success over the past 18 months has been underpinned by the strong performance of the prices of the commodities from which our revenue is derived. Our commodity exposure is not currently being impacted by the recent global trade wars playing out between the US and developing economies.

Both thermal coal and vanadium, two of our most recent additions, are currently at five-year highs. Coking coal prices have remained higher than the long-term consensus price point of US$150/t. The outlook for the remainder of the year remains positive and is expected to enable us to report further growth in revenue for 2018 as a whole.

We are seeing a shift in demand towards high quality, low polluting premium products. This has been particularly evident in coal prices of late. The more developed economies in Asia are increasingly turning towards higher quality, lower polluting coal, mainly from Australia, as they see this as a quicker remedy to pollution and internal CSR issues. Although out of favour in Western economies, thermal coal should continue to play an important, if not key, role in the energy needs of developing countries, particularly in Asia. In the medium-term, the coal price seems to be well supported from increased demand in Asia.

We see this shift to premium as a feature of the industry which is likely to endure. This is one of the key reasons why we were attracted to the LIORC, as its underlying operation produces pellets with low alumina, silica and phosphorous content.

We are also starting to see a clamp down on operations with sub-standard environmental records and CSR practices, particularly in China. Vanadium has benefitted from this as it is often a by-product in iron ore operations, a number of which have been shut in China due to CSR concerns. Vanadium is also benefitting from higher demand due to the Chinese authorities increasing the rebar standard in steel for use in construction, again due to CSR and environmental pressures. Vanadium is also likely to benefit from its alternative use in large energy storage solutions. We remain very positive on the outlook for higher vanadium prices, which have already contributed to our H1 2018 income.

In addition to favourable pricing, the other significant event of note in the period was the change of ownership of Kestrel, which completed at the beginning of August when a joint venture comprising EMR Capital (a prominent Australian based private equity resource manager) and Adaro (one of the largest global coal producers) acquired the mine from Rio Tinto. We were very pleased to see the announcement by Adaro at the end of May 2018 in which they signalled their intent to double production at Kestrel over the next two to three years. We are very encouraged about this development given that this period coincides with mining being within our private royalty land as this would lead to a material increase in our royalty income.

The combination of higher prices and the potential for significant volume growth at Kestrel should result in further organic growth for Anglo Pacific for the remainder of 2018 and beyond.

Diversification and transformation

The growth in revenue in the first half has led to further strong cash generation which we have deployed to enhance our future income. We have, as of today, invested US$51.0m (£37.8m) in royalty-based acquisitions so far this year, in both income producing investments and those which could provide significant future growth.

Our largest investment was the 4.25% stake we acquired in LIORC for US$50.0m (£37.0m) and represents a significant step in our aim to diversify our exposure to coal whilst increasing our footprint in North America from 13% to 26% by asset value.

LIORC is structured as a passive flow-through entity for its 7% Gross Revenue Royalty ("GRR"), its entitlement to a C$0.10 per tonne commission on all iron ore products sold, and 15.1% equity position in the Iron Ore Company of Canada ("IOC"). LIORC has a policy of paying quarterly cash dividends to the maximum extent possible subject to the maintenance of appropriate levels of working capital. LIORC declared dividend payments of C$169.6 million in 2017 and is currently trading at a historical 2017 dividend yield of ~11%.

This is aligned with our strategy of investing in high quality products, well-established jurisdictions, long mine life and Tier-1 operators, such as Rio Tinto. This operation has a long track record of production, a 25 year mine life and has the potential for significant mine life extensions.

Based on current LIORC broker consensus dividend forecasts and Anglo Pacific's 4.25% LIORC shareholding we expect to receive ~C$4.7 - C$5.7m of royalty related revenue in 2019, with the investment in H1 2018 contributing £0.1m of income as the vast majority of the stake was acquired in Q3 2018. The acquisition also significantly reduces our exposure to coking coal from 46% to 42% (based on asset carrying values at 30 June 2018) and reduces our exposure to Australia from 70% to 64% whilst increasing our exposure to North America from 18% to 26% (also based on asset carrying values at 30 June 2018).

Our second acquisition was the US$1.0m (£0.8m) acquisition of a 0.5% NSR royalty over the Canariaco project in Peru owned by Candente Copper Corp. This acquisition falls into our secondary strategy of investing modest amounts into development opportunities which have the potential to offer higher returns in the long-term. This is a copper royalty and is in line with our objective to invest in commodities closely aligned to the growth in the electric vehicle story.

We are very pleased to have executed two acquisitions to date this year and are actively working on other opportunities which would complement and diversify our now enlarged portfolio of 14 principal royalties.

Financing

Importantly, the investments we have made so far this year were financed entirely from the Group's balance sheet, without the need to raise equity. This is a good example of how we intend to use the strong cash flow from Kestrel, along with our bank facilities, to invest in long-life assets whilst also reducing our exposure to coal. To date we have drawn £17.3m on our US$40.0m (£24.0m) facility to finance these acquisitions, but we expect this amount to be repaid in full by the end of the year.

We have commenced the process of refinancing and upsizing our existing bank facility which will provide greater flexibility for financing further royalty acquisitions. We hope to complete this in Q3 2018.

Dividend

As previously communicated to the market, we will review the overall dividend level for 2018 in Q1 2019 once our full year revenue has been confirmed, along with the outlook for 2019. In the meantime, the interim quarterly payment of 1.625p per share remains unchanged and the next payment will be the Q2 2018 dividend which will be paid on 15 November 2018.

Outlook

We are very pleased with our performance to date in 2018. We have seen income from our royalty portfolio continue to grow, translating into strong free cash flow which has been reinvested in two acquisitions. With documentation of a new larger borrowing facility well advanced we will soon have even greater financial flexibility to fund further growth. We look forward to the remainder of 2018 with cautious confidence given the outlook for commodity prices, particularly for premium products. This should lead to us reporting another year of growth in 2018 with the potential for significant production increase at Kestrel in the coming years.

Portfolio review

H1 2018 has been strong operationally for our royalties, albeit with some variability. Maracás Menchen has no doubt been a clear highlight whilst Narrabri volumes have continued to be impacted by geotechnical issues which are expected to persist through the next two longwall panels. Kestrel had a strong Q2 2018 to make up for a slightly disappointing Q1, but the real highlight is to come when the new owners commence their plans to double production. EVBC, which has had its challenges over the past few years had an excellent operational result in H1 2018 and they are currently investing in expansion. Four Mile has continued to disappoint and it very much looks like this dispute will need to be resolved through litigation.

Kestrel

The underlying performance at Kestrel was encouraging in the first half of 2018, with revenue some 12.9% higher than in the same period in 2017. Production was impacted in Q1 2018 by a longer than usual longwall changeout, but volumes more than doubled in the second quarter. The outlook from Kestrel for the remainder of the year looks encouraging with the guidance from Rio Tinto suggesting that volumes in H2 2018 will be higher than those in H2 2017.

The most noteworthy event in the period was the sale of Rio Tinto's 80% interest in Kestrel to a joint venture between EMR and Adaro, which completed at the start of August, for US$2.25bn - some 50% higher than most analysts were expecting.

Although Rio Tinto has done a very good job in operating the mine, we see this change of ownership as a very positive event for Anglo Pacific as it is likely that the new owners will be motivated to significantly increase production. They have signalled this intent to the market in an announcement in May, when Adaro indicated that they will be looking to double production in the next two to three years. Clearly this would have a significant impact on the Group's revenues given that virtually all production from Kestrel in this time period is within the Group's private royalty land.

We have had several meetings with the new owners and look forward to working with them in a collaborative manner going forward. In the meantime, we have the same contractual rights which we had previously.

Maracás Menchen

Although Kestrel continues to represent a significant portion of our income, arguably Maracás Menchen was the standout performer in the first six months of 2018.

Largo had a very good operational performance in H1 2018, producing 4,672 tonnes of vanadium pentoxide, an increase of 10% compared to H1 2017. The first quarter saw a lower overall level of production due to premature wearing of the cooler refractory. Upon mending, volumes returned to their previous high levels and the second quarter was particularly encouraging as they increased the recovery rate to 79.2% from 72.6% in the corresponding quarter in 2017. Largo also took advantage of the truckers strike in Brazil in May to conduct repair and maintenance work at the plant, although they still anticipate a seven-day shutdown in Q4 2018 to conduct maintenance works at the kiln. Production volumes in Q2 2018 of 2,458 tonnes were 12.5% higher than Q2 2017, and they achieved a new daily average production record in June at 29.4 tonnes per day.

The outlook for the remainder of the year continues to be positive. Production volumes have stabilised, and Largo is now targeting an increase in its monthly production from 800 tonnes to 1,000 tonnes. Work has already commenced on the enhancements required to process this, and they are hoping to see this completed by June 2019, when they expect the production increases to commence.

Although pricing is still relatively opaque, the risk to pricing does seem to be on the upside at present. This is mainly due to limited supply side reaction, increased rebar standards in China and the increased demand for vanadium for use in battery storage in the future.

Narrabri

Volumes were down ~30% in the first half of 2018 as Whitehaven continue to mine through the previously announced volcanic intrusion, which is expected to last through the next two longwall panels.

Although the rate of mining has slowed somewhat due to these temporary technical issues described above, this has been somewhat offset by the continued strength in the thermal coal price, which was on average 18% higher in the first half of 2018. Whitehaven continue to see strong demand for their premium high-quality low polluting coal, especially in the Asian region. This has also been reflected in the forward consensus price deck, with the long-term price showing an increase of 14% since the beginning of the year, and most commentators consider the near-term fundamentals for thermal coal to remain positive.

Whitehaven revised down their FY 2019 (July 2018 - June 2019) guidance to between 6.5-6.8Mt from 7.7Mt previously and 5.6-6.0Mt in FY 2020, the latter being the last occasion when they expect to have to navigate around the fault, which will see an additional longwall changeover as they do so.

Four Mile

We remain frustrated by the level of deductions being applied to our royalty income by the operator, Quasar Resources. We hope to make some progress in resolving this dispute in the second half of the year and have fully engaged experts to assist us in preparation for litigation.

EVBC

Orvana announced that gold production increased by 11% during Q2 2018 to the highest level achieved since 2014. Despite the production increases, Orvana did reduce their FY 18 guidance for gold production from a mid-point of 68,500oz to a mid-point of 58,500oz.

In addition to higher levels of production, the plans to improve efficiency are now really starting to come through, with grade increasing by 43% in Q2 2018 compared to Q2 2017. Orvana also announced that it intends to recommence mining in a section of the Carles mine in the next few months. This investment could result in some upside to the mine life at the operation for what has always been a very consistent royalty for the Group.

McClean Lake

Cash flow from our Denison financing arrangement, which receives the McClean Lake toll revenue, was consistent in the first half of 2018 and averaged ~C$0.5m per month, in line with that received in H1 2017. This financing arrangement was entered into at the end of February 2017, so H1 2018 is not comparable to H1 2017.

Although the uranium price has experienced some volatility in the recent past, our income from this investment is unaffected as it is a $/lbs toll on ore processed through the McClean Lake Mill and should, all things being equal, be relatively consistent month on month.

Indo Mines

As previously announced, Anglo Pacific received US$2.5m in H1 2018 in final settlement of its outstanding debenture with Indo Mines. Anglo Pacific entered into a US$4m 8% secured debenture in 2009. Given the challenges which the project encountered, Anglo Pacific commenced discussions with the majority shareholder of Indo Mines in 2017 which ultimately culminated in a takeover, including the Group's outstanding debenture. As a result, the Group received US$4.9m over the life of the debenture and represents a highly satisfactory exit considering the many challenges which the project has faced.

Salamanca

Progress continues at Berkeley Energia's Salamanca uranium project in Spain. With construction finance now fully in place, and capex savings being identified, the only barriers to production are now in the final permitting stages. This will be the Group's next income producing royalty from within our portfolio and we remain significant equity holders along with our royalty position.

Finance review

The first half of 2018 has seen continued growth in the Group's income and profitability. Profit after tax swung from a loss of £2.5m in H1 2017 to a profit of £13.0m in H1 2018. This resulted in free cash flow of £17.9m and adjusted earnings of 8.56p per share.

This outcome is largely due to the continued strength of the prices of the commodities from which the Group's revenue is derived. The outlook for commodity prices has also improved, with the forward price curve for both thermal and coking coal considerably higher than at the beginning of the year. This has had a positive impact on the balance sheet, with the Kestrel valuation remaining largely unchanged, despite the quantum of royalty income received. The Group has also invested US$51.0m (£37.8m) in acquisitions and is in the process of increasing our bank facility, leaving us well placed to finance further acquisitions in the second half of the year and beyond.

Adjusted earnings

Adjusted earnings were £15.4m in the first half of 2018, compared to £12.9m in the comparable period in 2017. This translates into adjusted earnings per share of 8.56p for the half year, resulting in dividend cover of 2.6x (refer to notes 6 and 7).

The introduction of IFRS 9 at the beginning of the year has impacted the way in which EVBC royalty receipts are presented in the Income Statement. Despite the income being a prescribed percentage of revenue, the various equity conversion rights associated with the initial investment resulted in the asset being considered a financial asset. Previously, the royalty was accounted for as an IAS 32 available-for-sale equity financial asset, whereby the royalty income was recognised and included within revenue. Upon transition to IFRS 9, the royalty income is accounted for as repayment of the balance sheet carrying value and only the revaluation of the future cash flows is recognised in the Income Statement.

Given this change, we decided to revise our definition of adjusted earnings to include the portion of the valuation movement which is attributable to the royalty income in the period, with non-cash revaluation movements continuing to be excluded. This achieves consistency with the previous years, when EVBC receipts were included as royalty revenue, and reflects the way in which management monitor performance and report income internally.

Revenue

Overall, income increased by 20% in the first half of 2018. Kestrel continues to represent a significant portion of our revenue, although its portion of overall revenue has fallen to ~68% given the contribution from Denison and Maracás Menchen during the first half.

Ø Kestrel

Royalty income from Kestrel increased by 12.9% in the period. This was largely a function of a 9.5% increase in the average price achieved in the period. The higher price also resulted in a higher weighted average royalty rate of 11% in H1 2018. Although overall volumes from Kestrel were broadly flat, there was considerably more production within the Group's private royalty land in H1 2018 (96%) compared to H1 2017 (88%). At the higher prices noted above, this also resulted in a significant increase in revenue. The guidance from Rio Tinto suggests that this trend is expected to continue in the second half of 2018. These gains were offset somewhat by translating this revenue back into pounds at less favourable rates (H1 2018: 1.7837; H1 2017: 1.6497).

Ø Maracás Menchen

Income from Maracás Menchen increased by 171% to £2.1m in the period compared to H1 2017. Income in the first half of 2018 is already in excess of that earned in 2017 as a whole. This was mainly driven by a significant increase in the price of vanadium pentoxide (average price of US$15.44/lbs in H1 2018 vs US$4.97/lbs in H1 2017), along with a ~9% increase in sales volumes. Largo's operating costs are currently US$4.97/lbs, which generate significant margins at the current spot price, which is in excess of US$18/lbs.

Ø Narrabri

Income from Narrabri fell by 22.6% in H1 2018, reflecting lower volumes due to the persistent geotechnical issues being experienced in part of the deposit. It is expected that this issue, which is localised to a specific section of each longwall panel, will continue through the next few panels. This is resulting in slower mining at present, although the ~30% fall in volumes was partly made up for by the 18% increase in average price achieved, reflecting the recent strength in thermal coal prices to a five-year high on the back of a shift in demand to more premium product.

Ø Denison

Income from Denison has been consistent, with the variance being attributable to the financing arrangement being in place for the entire six months in 2018 whereas the transaction was only completed at the end of February 2017. On average, monthly revenue was ~C$0.5m, which is in line with that received in H1 2017. The Denison financing arrangement is structured as a 10% secured loan, and as such the cash received represents both interest and loan repayment. It is only the interest component which is included in our income statement and adjusted earnings.

Ø Four Mile

The Group received £51k of royalty income in H1 2018. This remains far below the levels which we consider should be payable in accordance with the royalty contract. We are pursuing our rights in relation to this difference of opinion, and hope to progress the matter in H2 2018.

Ø EVBC

Income from EVBC increased by 23.1% in the first half of the year as gold production was considerably higher. EVBC have invested in growth and efficiency over the past 24 months or so, which has resulted in higher grade ore being processed at the plant along with the recent announcement of the recommencement of mining in a targeted area of the Carles mine.

Ø LIORC

Our entitlement to the Q2 2018 LIORC dividend based on the shares we had accumulated to 30 June 2018 was £0.1m and was received in July. This is included within revenue as the vehicle which we have invested in is effectively a single asset pass through vehicle to the operations of the Iron Ore Company of Canada. Management consider this acquisition to be akin to a part ownership of the underlying royalty. The shares are not held for trading.

Currency

The results for the first half of 2018 were impacted by the strengthening of the pound, certainly compared to the same period in 2017. Most of the Group's revenue is still received in Australian dollars. The GBP:AUD rate was, on average, 1.7837 in H1 2018 compared to 1.6497 in the same period in 2017. Applying the 2017 average rate to the Group's Australian revenue would have resulted in an additional £1.2m of total income. The Group does enter into forward foreign exchange contracts in order to mitigate against the volatility of underlying exchange rates.

The strength of the pound at 30 June 2018 was before the recent impasse in relation to Brexit, which has seen the pound fall by ~ 6% against most dollar currencies. There is a view that the pound could now remain weak, especially as the March 2019 deadline approaches without progress. Although this would likely have adverse consequences for the UK economy generally, the weakness of the pound would benefit the Group's revenue.

Other items

Elsewhere, overheads remained relatively flat in the first six months of the year. The increase in finance income is due to holding higher cash balances in Australian dollars during H1 2018, although there will be significantly less finance income in H2 2018 as our cash has been used to finance the LIORC investment.

Finance costs have increased in the period, although the vast majority of this increase is due to foreign exchange being included here. This showed a gain of £385k in H1 2017 compared to a loss of £136k in H1 2018. Otherwise, the costs in 2018 mainly relate to the amortisation of the arrangement fees associated with the refinance in February 2017.

Tax

The relatively low current tax rate of 8.7% (when assessed on adjusted earnings) is due to the utilisation of the remaining trading losses which the Group accumulated over the past number of years. These losses have now been used in full and, as such, the tax provision for H2 2018 is likely to be significantly higher.

All of the above has resulted in adjusted earnings of £15.4m for H1 2018, which is 19% higher than H1 2017. This translates to adjusted earnings per share of 8.56p compared to 7.44p in H1 2017.

Profit after tax

The higher commodity prices seen over the past twelve months, in addition to the increases seen in the consensus forward price estimates, has resulted in favourable valuation movements and fewer impairment charges in the Income Statement.

Included within valuation movements in H1 2017 was a fair value charge of £3.9m, mainly in relation to the Dugbe 1 royalty, whereas this was a surplus of £0.8m in the current year. The larger item is the fair value of the Kestrel royalty. The impact of a higher consensus price input at H1 2018 has led to a gain of £1.8m compared to a loss of £11.1m in H1 2017. There is a corresponding entry in deferred tax for these valuation movements.

Other gains include the £1.7m profit on the sale of the Indo Mines debenture as part of the takeover by the majority shareholder in Q2 2018.

This has resulted in the overall profit after tax switching from a loss of £2.5m in H1 2017 to a profit of £13.0m in H2 2018.

Balance Sheet

Overall, net assets remain largely unchanged from the start of the year at £217.1m equating to 120p per share. Ordinarily, the higher the level of production the higher the level of depletion would be expected on the balance sheet, particularly for Kestrel. However, this was not the case at June 2018, for the reasons discussed below.

Fig 1: Net Asset Reconciliation

http://www.rns-pdf.londonstockexchange.com/rns/6248Y_1-2018-8-22.pdf

 Kestrel valuation

Given that depletion and price movements have largely netted out, the £1.4m decrease in the value of the asset was actually due to translating it at a less favourable rate at June 30, 2018 compared to the end of 2017.

Despite earning £14.2m from Kestrel in H1 2018, the asset only decreased in value by £1.4m (pre-deferred tax credit of £0.4m, net impact on the balance sheet of £1.0m). This was largely because the forward consensus commodity price deck, a key input for the Kestrel valuation, has been gradually increasing month on month throughout H1 2018, indicating that the high prices experienced over the past 24 months are based on more sustainable factors than previously thought i.e. Chinese environmental policy.

The forward price deck has shown consistent increases month on month so far in 2018. The price expectation for 2019 is now 34% higher than was anticipated at this stage last year, and 17% higher than at the beginning of the year. As a result, despite significant income and depletion at Kestrel, the valuation has held largely unchanged from the beginning of the year. As noted above, the new owners intend to double production levels in the next two to three years. This would have a material impact on the valuation of the royalty due to the acceleration of the cash flow above and beyond the current expectations. This is not included in the current valuation.

Other non-current assets

The £13.9m increase in royalty financial instruments is largely attributable to the LIORC acquisition. Although the Group has now invested £37.0m (US$50.0m), at the end of June it had only acquired £14.3m.

The £1.7m reduction in the Group's intangible portfolio reflects the systematic amortisation of those royalties which are in production, along with some currency movements. This number does not include the significant valuation upside which we believe is inherent in the Narrabri and Maracás Menchen royalties, with both thermal coal and vanadium pentoxide prices at five-year highs.

The reduction in other receivables reflects the portion of the Denison cash flows which are treated as repayment of principal.

Other items

Cash and borrowings will be discussed in more detail below. Elsewhere, trade receivables represent accrued royalty revenue at the quarter end, and was received in full in July 2018. The limited movement in the deferred tax liability largely reflects the Kestrel valuation decrease.

The increase in trade and other payables reflects the provision of the second tranche of the Maracás Menchen deferred consideration of US$1.5m. This is now considered probable given that Largo have announced that they are targeting monthly throughput of 1,000 tonnes.

Cash and borrowings

Cash generation was strong once again in the first six months of 2018. Free cash flow generated of £17.9m is a slight reduction on the £18.9m generated in the first six months of 2017, although H1 2017 benefitted from the £1.7m of Denison receipts which related to H2 2016.

Fig 2: Cashflow Waterfall H1 2018

http://www.rns-pdf.londonstockexchange.com/rns/6248Y_1-2018-8-22.pdf 

In terms of capital allocation, the Group invested almost twice as much cash (£13.9m) in acquisitions compared to dividend payments (£7.2m). This investment number excludes the £0.8m Canariaco copper royalty which was financed using Anglo Pacific shares.

The Group had net cash of £5.2m at 30 June 2018. We had drawn £6.0m on our borrowing facility at 30 June 2018 in order to fund further LIORC additions at the beginning of July. The acquisition was completed in mid-August, at which stage we had drawn down a total of £17.3m (~US$22.0m).

2018 has been a transformational year for Anglo Pacific in some respects. We have made US$51.0m (£37.8m) in acquisitions without having to undertake an equity raise. LIORC is immediately accretive, and we would expect to be able to repay our borrowings in full by the end of the year.

Given the strong performance of the underlying portfolio, the sustained higher commodity prices (particularly for premium quality products) and the potential for meaningful volume growth at Kestrel, we have decided to refinance our borrowing facility in order to provide us with greater financial flexibility for further growth opportunities.

With a soon to be refinanced facility, strong cash generation and disciplined cost control, we believe that we have significant liquidity available to us to finance future acquisitions without necessarily having to come to the equity market. This is important as it significantly strengthens our position in royalty negotiations and allows us to be opportunistic should royalty opportunities arise at short notice.

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 2017 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 2017 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 2017 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

22 August 2018

Condensed Consolidated Financial Statements

CONDENSED CONSOLIDATED INCOME STATEMENT (UNAUDITED)

FOR THE SIX MONTHS ENDED 30 JUNE 2018

* The Group has revised its definition of revenue to include all royalty related revenue arising in the course of the Group's ordinary activities. As a result, the presentation of the comparative income statement has been restated to show an additional £959,000 of income in revenue, which was previously included in finance income. Refer to notes 2 and 3.

CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (UNAUDITED)

FOR THE SIX MONTHS ENDED 30 JUNE 2018

CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED)

AS AT 30 JUNE 2018

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (UNAUDITED) FOR THE SIX MONTHS ENDED 30 JUNE 2017

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (UNAUDITED) FOR THE SIX MONTHS ENDED 31 DECEMBER 2017

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (UNAUDITED) FOR THE SIX MONTHS ENDED 30 JUNE 2018

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)

FOR THE SIX MONTHS ENDED 30 JUNE 2018

* The Group has revised its definition of revenue to include all royalty related revenue arising in the course of the Group's ordinary activities. As a result, the presentation of the comparative statement of cash flows has been restated to show an additional £959,000 of net cash generated from operating activities, which was previously included in cash flows from investing activities. Refer to notes 2 and 3.  

NOTES TO THE ACCOUNTS

1. Basis of preparation

These condensed consolidated interim financial statements of Anglo Pacific Group PLC are for the six months ended 30 June 2018. They have been prepared in accordance with IAS 34 'Interim Financial Reporting', as adopted by the European Union. They do not include all of the information required for full annual financial statements, and should be read in conjunction with the consolidated financial statements of the Group for the year ended 31 December 2017.

This condensed consolidated financial information does not comprise statutory accounts within the meaning of Section 434 of the Companies Act 2006. Statutory accounts for the year ended 31 December 2017 were approved on 27 March 2018. Those accounts, which contained an unqualified audit report under Section 495 of the Companies Act 2006 and which did not make any statements under Section 498 of the Companies Act 2006, have been delivered to the Registrar of Companies in accordance with Section 441 of the Companies Act 2006.

1.2 Going concern

The financial position of the Group and its cash flows are set out on pages 17 to 21. As at 30 June 2018, the Group had cash and cash equivalents of £11.2m and £6.0m (US$7.9m) in gross borrowings (note 13) following the partial draw down on its revolving credit facility (31 December 2017: nil) with access to a further £18.0m (US$32.1m) in undrawn funds under the same facility.

After making enquiries and reviewing the Group's forecasts and projections, the Directors have a reasonable expectation that the Group has adequate resources to continue to operate within the level of its current facilities for the foreseeable future. The Group therefore continues to adopt the going concern basis in preparing its consolidated financial statements.

1.3 Alternative Performance Measurers

When assessing and discussing the Group's reported financial performance, financial position and cash flows, management makes reference to Alternative Performance Measures (APMs) of historical or future financial performance, financial position or cash flows that are not defined or specified under IFRS. APMs should be considered in addition to, and not as a substitute for or as superior to, measures of financial performance, financial position or cash flows reported in accordance with IFRS. Further information on APMs is provided on page 3 and 4 of these condensed consolidated interim financial statements.

1.4 Changes in accounting policies

The accounting policies applied in these condensed interim financial statements are consistent with those of the Group's consolidated financial statements for the year ended 31 December 2017, as described in those annual financial statements, except for changes arising from the adoption of the following significant new accounting pronouncements which became effective in the current reporting period:

IFRS 9 'Financial Instruments'

The Group has adopted IFRS 9 'Financial Instruments' with effect from 1 January 2018. Information on the implementation of IFRS 9 is included in the Group's consolidated financial statements for the year ended 31 December 2017 - Note 3.1.2 Changes in accounting policies and disclosures. The Group has elected not to restate the comparatives for the adoption of IFRS 9.

The overall impact on net assets from the transition to IFRS 9 was a reduction in opening net assets of £50,000 to £218,887,000 due to the recognition of expected credit losses. The adoption of IFRS 9 will have impacts on the following throughout the current financial year:

Impairment: The standard introduces an 'expected credit loss' model for the assessment of impairment of financial assets held at amortised cost. The Group's primary asset held at amortised cost is the interest-bearing loan to Denison Mines (note 12) and the expected credit losses at 1 January 2018 and 30 June 2018 were £50,000 and £77,000 respectively.

Classification and measurement: The measurement and accounting treatment of the Group's financial assets is materially unchanged on application of the new standard with the exception of mining and exploration interests previously categorised as available-for-sale and royalty financial instruments previously categorised as available-for-sale equity financial assets.

Mining and exploration interests are now held at fair value through other comprehensive income, with the effect that the gains and losses on disposal and impairment losses are no longer recycled from reserves to the income statement for this category of asset. There is no impact to the net assets of the Group at 1 January 2018. In the six months ended 30 June 2018 mining and exploration interests were disposed with historical gains of £397K transferred to retained earnings rather than the income statement, following the adoption of IFRS9 (note 11).

Royalty financial instruments (with the exception of Labrador Iron Ore - see "Changes to revenue presentation" below) are now held at fair value through profit or loss, meaning they are held at fair value on the balance sheet, with fair value movements taken through the income statement rather than reserves. Historical gains of £477k (net of deferred tax) recognised in the investment revaluation reserve as of 1 January 2018 have been reclassified to retained earnings on adoption of IFRS9 (note 9).

Royalty income from these assets is no longer recognised as revenue in the income statement and instead reduces the fair value of the asset. There is no impact to the net assets of the Group at 1 January 2018. In the six months ended 30 June 2018 royalties from the Group's EVBC royalty of £1,003k were deducted from the investment carrying value (rather than being recognised as royalty income) and a non-cash revaluation gain of £324k was instead recognised in the income statement, following the adoption of IFRS9.

IFRS 15 'Revenue from Contracts with Customers'

The Group adopted IFRS15 with effect from 1 January 2018 with no change arising to the Group`s revenue recognition.

The Group's royalty income is derived from three sources: assets accounted for as investment property (Kestrel) under IAS 40, assets at fair value (EVBC) accounted for under IFRS 9 and assets accounted for as intangibles (Narrabri, Maracás Menchen and Four Mile) under IAS 38.

The royalty income derived from investment properties continues to be accounted for in accordance with IAS 40, while the royalty income derived from assets at fair value is accounted for under IFRS 9 as described above. The royalty income derived from assets classified as intangibles are accounted for in accordance with IFRS 15 with revenue recognition unchanged from the previous revenue standard IAS 18.

Change to revenue presentation

For the period ended 30 June 2018 the Group has revised its definition of revenue and included income received from royalty related financial assets in order to provide greater consistency in the classification of the royalty income arising in the course of the Group's ordinary activities.

Income recognised from the Denison non-current other receivable was previously reported as interest within finance income. In addition, the income earned on the Jogjakarta royalty financial instrument was previously reported as effective interest income on royalty financial instruments within other gains and losses. The Group has included £1,002K (six months ended 30 June 2017: £842K) of Denison interest and £77K (six months ended 30 June 2017: £117K) of Jogjakarta effective interest within "royalty related revenue" for the period ended 30 June 2018 and the comparative has been restated to be on a consistent basis (note 2).

Dividend income is received from the Group`s investment in Labrador Iron Ore Corporation, which was acquired during the six months ended 30 June 2018, whose sole underlying asset is a royalty income stream. This equity financial instrument was designated at inception as fair value through other comprehensive income with dividends accordingly recognised in the income statement. This income is considered royalty-related and therefore part of the Group`s ordinary activities. As such the £141K of dividend income receivable from Labrador Iron Ore for the period to 30 June 2018 was presented in revenue (note 2).

Standards and amendments that are issued but not yet applied by the Group

The Group has not yet applied the following standards and limited amendment to standards:

· IFRS 16: 'Leases' - effective from January 1, 2019, subject to European Union endorsement;

· IFRIC interpretation 22: 'Foreign currency transactions and advance consideration' - effective January 1, 2018, subject to European Union endorsement; and

· IFRIC interpretation 23: 'Uncertainty over income tax treatments' - effective January 1, 2019, subject to European Union endorsement.

IFRS 16: 'Leases' was published on January 2016 and will be effective for the Group from 1 January 2019, replacing IAS 17 'Leases'. The principal impact of IFRS 16 will be to change the accounting treatment by lessees of leases currently classified as operating leases. Lease agreement will give rise to the recognition by the lessee of an asset, representing the right to use the leased item, and a related liability for future lease payments. Lease costs will be recognised in the income statement in the form of depreciation of the right-of-use asset over the lease term, and finance charges representing the unwinding of the discount on the lease liability.

As the Group's operating leases relate primarily to office space and office equipment, the adoption of IFRS 16 is not expected to result in a material increase in lease liabilities or a corresponding increase in property, plant, and equipment right-of-use assets.

IFRIC 23: 'Uncertainty over Income Tax Treatments', comes into force on 1 January 2019 and the pronouncement has not yet been endorsed by the EU. IFRIC 23 changes the method of calculating provisions for uncertain tax positions with an entity being required to consider whether it is probable that the relevant authority will accept the tax treatment that it uses or plans to use in its income tax filing. If the entity concludes that it is not probable that a particular tax treatment will be accepted, a provision needs to be made on a probabilistic basis (for issues for which there are a wide range of possible outcomes) or for the most likely amount (if there is a binary outcome). The Group currently recognises provisions based on the most likely amount of the liability, if any, for each separate uncertain tax position.

The Group has considered the future implications of IFRIC 23 and whether it would be likely to change the assessment of whether or not a provision would be required for the uncertain tax position described in the deferred tax note 14. As it is considered probable that the tax treatment is accepted by the relevant authorities, no material impact is expected from the adoption of IFRIC 23; however, the position will continue to be monitored during the remainder of 2018.

Management do not anticipate that the application of IFRIC 22: 'Foreign currency transactions and advance consideration' will have a material impact on the Group's consolidated financial statements.

2 Royalty related revenue

Interest from royalty related financial assets for the six months ended 30 June 2018 of £1.1m (30 June 2017: £1.0m) relates to interest earned (2018: £1.0m; 2017: £0.8m) on the Group's 13 year amortising loan of C$40.8m with an interest rate of 10 per cent per annum, to Denison Mines Inc ("Denison"), which is classified as non-current other receivables (note 12) and the effective interest earned (2018: £0.1m; 2017: £0.1m) on the Group's Jogjakarta royalty financial instrument prior to its disposal in April 2018.

As described in note 1.4, the Group has revised its definition of revenue to include all income received from royalty related financial instruments. As a result, the presentation of the comparatives in the table above has been restated to show an additional £959,000 of income in revenue, which was previously included in finance income. See note 3.

3 Finance income

As described in note 1.4, the Group has revised its definition of revenue to include all income received from royalty related financial instruments. As a result, the presentation of the comparatives in the table above has been restated to reallocated £959,000 of interest income from the Group's interest-bearing receivable from Denison Mines Inc (refer to note 12) from finance income to royalty related revenue.

4 Finance costs

5 Other gains/(losses)

6 Earnings/(Loss) per share

Earnings per ordinary share is calculated on the Group's profit after tax of £13.0m for the six months ended 30 June 2018 (30 June 2017: loss £2.5m) and the weighted average number of shares in issue during the period of 180,005,712 (2017: 173,370,074).

The weighted average number of shares in issue excludes the issue of shares under the Group's Joint Share Ownership Plan, as the Employee Benefit Trust has waived its right to receive dividends on the 925,933 ordinary 2p shares it holds as at 30 June 2018 (30 June 2017: 925,933).

As the Group was loss making in 2017, the Group's employee share option schemes are considered anti-dilutive because including them in the diluted number of shares outstanding would decrease the loss per share. Consequently, basic and diluted loss per share is the same for the six months ended 30 June 2017.

Adjusted earnings represents the Group's underlying operating performance from core activities. Adjusted earnings is the profit attributable to equity holders plus receipts from royalty financial instruments less all valuation movements, non-cash impairments and amortisation charges (which are non-cash adjustments that arise primarily due to changes in commodity prices), finance costs, any associated deferred tax and any profit or loss on non-core asset disposals as these are not expected to be ongoing.

Valuation and other non-cash movements such as these are not considered by management in assessing the level of profit and cash generation available for distribution to shareholders. As such, an adjusted earnings measure is used which reflects the underlying contribution from the Group's royalties during the year.

The introduction of IFRS 9 at the beginning of the year has impacted on the way in which the EVBC royalty is presented in the Income Statement. Despite the income being a prescribed percentage of revenue, the various equity conversion rights associated with the initial investment resulted in the asset being considered a financial asset. Previously, the royalty was accounted for as an IAS 32 available for sale equity financial asset, whereby the royalty income was recognised included within revenue. Upon adoption of IFRS 9, the royalty income is accounted for as repayment of the balance sheet carrying value and only the revaluation of the future cash flows is recognised in the income. Given this change, the Group has altered its definition of adjusted earnings to include the portion of the valuation movement which is attributable to the royalty income in the period, with non-cash revaluation movements continuing to be excluded. This achieves consistency with the previous years, when EVBC receipts were included as royalty revenue, and reflects the way in which management monitor performance and report revenue internally.