Buying shares of UK businesses when they’re dirt-cheap is a proven strategy to generate significant wealth over the long term. But finding these opportunities is often easier said than done.
Fortunately, that task is less complicated at the moment since fears surrounding rising inflation have got the stock market in a bit of a huff. And that’s how I spotted Anglo Pacific Group (LSE:APF). Let’s explore what this business does and why I’m keen to buy more shares, even with as little as £100.
A royalty company for a renewables world
I’ve explored this UK share before. But as a quick reminder, Anglo Pacific is a mining royalty company. It provides the necessary funds for other mining businesses like BHP and Rio Tinto to develop an extraction site once all the initial exploration surveys are completed. In exchange, it receives a percentage of the materials extracted from the ground throughout the lifetime of the mine.
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Inflation is bad for most businesses, but it’s actually quite beneficial for mining groups. Why? Because mining is a largely fixed cost operation. So, when inflationary pressure pushes commodity prices up, profit margins begin expanding. And just looking at the company’s latest results, the effects are evident.
Total income from its royalty portfolio throughout 2021 grew by a staggering 80% reaching £85.6m. That’s even higher than 2019 levels when the pandemic wasn’t disrupting operations.
£48m of this income originated from its Kestrel coking coal mine in Australia. That obviously poses as a single asset risk, as well as a commodity that the world is slowly phasing out. But thanks to portfolio diversification over the years, this proportion of income has been steadily falling.
What’s more, it’s being replaced with new renewables-facing commodities, including copper, vanadium, and more recently, cobalt. This latter metal was responsible for £16.5m of royalty income alone last year and is a critical ingredient in electric vehicle batteries.
Is this UK share too cheap?
Despite generating record-breaking royalty income, the share price of this UK business doesn’t seem to reflect that performance. It’s true that over the last 12 months, the stock has climbed by a respectable 10%. But it’s still trading well below pre-pandemic levels, even though from an operational standpoint, the group is in a much stronger position. Yet there might be a reason why the stock is trading at a discount.
A lot of the growth seen throughout 2021 was primarily thanks to rising metal prices from surging demand in the automotive and renewable energy industries. But with other mining businesses trying to capitalise on the opportunity, the market might become saturated in the future.
Suppose that were to happen? In that case, metal prices would fall, taking out Anglo Pacific’s profits in the process with little recourse for management available. Needless to say, that would not be good news for its UK shares.
Personally, I think this is a risk worth taking. Vanadium and cobalt are pretty hard to come by, which gives Anglo Pacific a bit more protection from potential oversupply. Plus, with many countries aiming to go green within the next decade, I don’t see demand for these materials disappearing any time soon.
Therefore, to me, this looks like a fantastic buying opportunity for my portfolio.
