Roughly a year ago, mining stocks like Anglo Pacific Group, or Ecora Resources (LSE:ECOR) as it’s now known, were all the rage. With inflation driving up commodity prices, it was a good time to have resource-extraction businesses in a Stocks and Shares ISA. After all, these firms’ costs are almost entirely fixed, enabling profit margins to go through the roof.
In recent months the cooling of inflation, paired with a slower-than-expected economic bounce back in China, has led to mixed results for raw material prices. And two of Ecora’s flagship products, coking coal (used for steel making) and cobalt (used for electric vehicle (EV) batteries), haven’t had the best of luck.
| Resource | 1-Year Price Change |
|---|---|
| Cobalt | -54.9% |
| Coking Coal | -66.9% |
| Copper | +6.8% |
| Nickel | +2.9% |
| Uranium | +12.7% |
With that in mind, it’s not surprising to see the stock drop by over 30% since September last year. Consequently, the royalty mining business currently offers an impressive dividend yield of 6.8%. But the question is, can the firm maintain this tasty payout moving forward?
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Investigating a high-dividend yield
With the energy sector undergoing a massive transition toward renewables, metals like copper, nickel, uranium, and cobalt will undoubtedly be in high demand in the long run. In fact this is precisely why Ecora’s management team have been busy investing in royalty stakes of mining operations extracting these specific resources.
However, dividends may still be in danger. Despite the group’s efforts, the lion’s share of revenue continues to stem from its Kestral site in Australia. Kestral is a coking coal mine that’s expanded considerably over the years. So much so, operations are beginning to fall outside Ecora’s royalty region.
Consequently, in the next couple of years, income from Kestral will cease. And it will be up to the group’s other mining sites to pick up the slack, which at the moment doesn’t come close to covering Kestral’s contributions.
In other words, today’s high yield could very well be an income trap for my Stocks and Shares ISA.
The bull case
As concerning as the looming loss of coking coal revenue is, management still deserves some credit. The company isn’t idling, and encouraging progress is being made to secure long-term earnings.
Using the excess cash flow generated by Kestral these past couple of years, the firm has added multiple new mining sites to its royalties portfolio. The largest of which is the Voisey’s Bay cobalt mine.
While cobalt prices have fallen sharply over the last 12 months, long-term demand is set to skyrocket as more EVs enter the market. Don’t forget cobalt is a primary ingredient for lithium-ion batteries.
Furthermore, the continued diversification away from coking coal reduces Ecora’s reliance on the strength of the Chinese economy (the biggest steelmaker in the world).
At a P/E ratio of just 3.5, investors appear to be already baking in the loss of Kestral’s income into the share price. At least that’s the impression I’m getting. And with management actively working to diversify and bolster its revenue stream, the high yield may be sustainable in the long run, even if it suffers a cut in the short term.
Therefore, now could be an excellent time to add this business to my Stocks and Shares ISA, I feel.
