By James Regan
SYDNEY, Nov 13 (Reuters) - A slump in mineral prices that's
making it tough for miners to borrow is providing more
opportunities for companies such as Anglo Pacific Group Ltd
APF.L , whose business is exchanging cash for production
royalties on commodities out of favour with lenders.
Banks are becoming increasingly wary of lending to fund
exploration and development work as profit margins shrink or
outright disappear. This is driving miners to find other avenues
to raise cash.
"At the end of the day we are a shadow lender to a
distressed sector," said Julian Treger chief executive of Anglo
Pacific.
Given a lack of access to traditional sources of funding,
many companies are exploring alternatives, according to a report
prepared by Deloitte.
These include getting cash for royalties, guarantees to
purchase output, equipment financing and high-yield debt, it
said.
Royalty contracts can also hold appeal for some mining
companies looking to avoid debt after years of financing new
projects through traditional lenders.
Anglo Pacific extends cash to companies looking to develop
mines. Once the mines are running a portion of the proceeds flow
back to Anglo Pacific.
"We are talking with people to give them up to $1 billion,
but we would do that with co-investors," Treger told Reuters.
While it is the only company of its kind trading on the
London Stock Exchange, an army of royalty companies operate in
North America.
One of the biggest, Toronto-based Silver Wheaton SLW.TO ,
holds rights to purchase silver at a very low fixed cost from 18
operating mines in North and South America and Europe. Last
week, Glencore Plc GLEN.L agreed to sell future silver output
from a mine in Peru to it for $900 million in cash.
Others include Franco-Nevada Corp FNV.TO , Royal Gold Inc
RGLD.O and Osisko Gold Royalties Ltd OR.TO
Anglo Pacific already holds royalty contracts with Rio Tinto
RIO.AX RIO.L and BHP Billiton BHP.AX BLT.L in coal and
iron ore and with other companies in gold, uranium, copper and
vanadium.
Earlier this year it completed its biggest royalty
acquisition to date with Australia's Whitehaven Coal Ltd
WHC.AX for $65 million on a mine forecast to yield 7.7 million
tonnes of coal annually.
"Every time they (Whitehaven) sell a dollar of coal, they
give us a penny," Treger said.
Overall royalty income in the first half exceeded what the
company received for the whole of 2014 despite sagging
commodities prices, and Treger is expecting a strong leap in
full-year income for 2015.
"The only thing we know about the commodity sector is that
there are cycles and people are unable to predict pricing. It's
an educated leap of faith and I am happy to do that."
Anglo Pacific faces risks other than pricing.
It received royalty income of only 1.7 million pounds in
2014 from Rio Tinto's Kestrel coal mine in Australia, compared
to 9.9 million pounds in 2013.
The significant drop was due to production being conducted
largely outside Anglo Pacific's private royalty land.
However, this year Rio Tinto has indicated it should mine on
50-55 percent of land eligible for Anglo Pacific royalties,
rising to more than 90 percent in 2017, according to Treger.
Royalties from the Kestrel mine vary, but can reach as high
as 15 percent, he said.
($1 = 0.6595 pounds)
(Editing by Ed Davies)