VALUE INVESTING
Anglo Pacific: Mining For Value

By Stephen Bland (TMFPyad)
November 28, 2003

I've held Anglo Pacific (LSE: APF) for about six months to date, my buying price being a little under 36p per share. Anglo was a PYAD share when I bought, though I had a minor reservation over the earnings per share (EPS) forecast, which was set to fall for the year to 31 December 2003 against the 4.1p declared for the previous year. It was also quite a small cap of about £31m at the time and for these reasons I did not take a large stake in the company, just a little dabble.

Another reason for the side bet approach was that I was fully invested elsewhere in two other shares that I did not wish to realise at the time. However, even assuming that I was not so invested, I doubt I would have bet a seriously large amount on Anglo, but I may have stuck a couple of quid more in it than in fact I did.

Since I bought, the company published in September its interim accounts for the six months to 30 June 2003. Very unusually for any quoted share, Anglo did not at the time reveal the amount of the interim dividend, stating the details would be given in November. In the last few days, the company has confirmed the payment will be 1.3p per share, a decent increase of 18% on the previous year's interim of 1.1p. Taking the final for the year to 31 December 2002 of 0.65p means the rolling annual total is 1.95p, making a historical yield on the current 48p offer price of about 4.1%. The yield on my buying price is a healthy 5.5%.

As at 30 June 2003, the company had net cash of about £2.5m and a recent report for the third quarter to 30 September 2003 shows it still had net cash of about £1.6m at that date. This leg of PYAD remains.

My calculations show that fully diluted net tangible assets per share as at 30 June 2003 were around 53p, still comfortably above the share price and substantially ahead of the figure at 31 December 2002, so this leg of PYAD remains too. The principle asset and income generator is the coal royalty derived from Australian mining interests and this is calculated by an outside agency based on some net present value of cashflows method.

EPS will almost certainly be down for the year to 31 December 2003; the reason stated by the company is that coal production at its mines in Queensland was largely from areas controlled by the state government and not the privately owned areas in which Anglo has its stake. However, directorspeak in both the interim accounts and the third quarter indicates that production is now swinging back to the private areas from which Anglo derives its royalties, which will step up income in future. We'll see. I would of course have preferred there to be rising EPS for 2003 but there is something else here that in this case is equally important in my opinion.

Ideally a PYAD or general deep value share should have rising EPS as the outer but in Anglo's case, rising book value, or assets per share, is just as much of an outer in my opinion, much like a property company or investment trust. I say this because the company has more in common with the property or investment business than with a normal trading concern, because what it does is invest in mining royalties and shares, not actually dig the stuff out itself. And so far, it has delivered quite nicely on rising asset value.

To the extent that any sector interests me at all, mining always has done but it is marginal. Generally, with few exceptions, I have little interest in sectors or what the company does at all. A value share is a value share as long as it smells right and I have little need to delve too deeply into what it is about. I know nothing about coal for example and don't really want to. It would not help me decide on Anglo's qualities as a value share, the numbers do that for me.

So where am I with Anglo? Not a bad profit to date and with a continuing decent and, importantly, rising yield, increasing the return, satisfied is where I am right now. With the sharp upward revaluation of the main coal royalty assets, up about 30% as at 30 June 2003 against 31 December 2002, the shares at 48p still trade at a price to tangible book value ratio of 0.9 despite the price rise since I bought in. Note that as with most small caps, there is an unwelcome chunky spread of around 2p between the bid and offered prices.

With this discount to book, the good yield and continuing net cash situation, my assessment of the value in this share says that it has not been sufficiently outed for me to sell, despite the price to earnings ratio on the depressed EPS likely for 2003 not being particularly low, something around 15 at a guess. But as I say, I see Anglo as being more asset than earnings driven, with the yield as an added safety feature and useful addition to the total return.

I'm staying in for the time being. As with all plays though, I will keep a constant monitoring eye on the door marked exit. Once enough value has gone, I'm outta there, leaving something -- the riskier bit -- for my old mate, the next guy.