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Baker Steel Resources Trust: THE INVESTMENT CASE
INVESTMENT OVERVIEW

Baker Steel Resources eyeing valuation uplifts in four significant investments

The mineral resources investor thinks the macroeconomic environment is favourable to the mining sector. It has four investments that over the next 18 months or so could see it repeat the success it had with its investment in the Prognoz silver project in Russia.
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Flushed with the success of its investment in the Prognoz silver mine, Baker Steel Resources Trust Limited (LON:BSRT) is hoping to repeat the trick.

The mineral resources-focused trust’s largest investment, Polar Acquisition Limited (PAL), agreed in February to sell Polar Silver Resources, which owns 50% of the Prognoz silver mine in Russia, for US$72mln worth of Polymetal International PLC (LON:POLY) shares.

READ Baker Steel Resources Trust boosts NAV with US$72 mln sale of Prognoz silver mine

“We made three times our money on Prognoz over a period when the silver price halved,” Trevor Steel, the chief investment officer and co-founder of Baker Steel, told Proactive Investors.

“10% is retained in terms of a revenue royalty on Prognoz so … that sets us up in terms of having more liquidity in the portfolio to pursue new ideas if we wish,” he added.

Having said that, he thinks Polymetal shares, which now form 30% of the trust’s portfolio, are attractively priced right now.

“They offer a good yield of 5% or 6%; they’ve got organic growth plus they’ve got good exposure into the hopefully higher silver and gold prices,” Steel said.

Chief investment officer highlights four investments that have revaluation potential

Lest any shareholders think the trust is ready to rest on its laurels, Steel’s message is that it has four stocks that it thinks could provide significant uplifts to the trust’s net asset value (NAV) between now and 2019.

“Futura, if you like, is the next cab off the rank,” Steel said.

Futura has two advanced coking coal developments in the Bowen Basin in Australia.

The forecast low capital costs to bring the projects into production together with excellent local infrastructure means Futura is targeting first positive cash flows before the end of 2018.

Another investment that could see a valuation catalyst before the year is out is Sarmin, a world-class potash discovery in what Steel termed as “the good Congo”, i.e. the Republic of Congo.

“They’re both quite substantial investments in the portfolio. Futura is 10% of NAV and Sarmin is seven or eight per cent of NAV,” Steel revealed.

By the end of 2018 Steel thinks the carrying value of the investments on the trust’s books could be two to three times higher.

Next year, attention will switch to Bilboes, a Zimbabwean gold mine, and Cemos, a private company that is about to start producing cement from its Moroccan operations.

Bilboes is due to complete a feasibility study in the first quarter of next year, at which point Steel thinks there could be a re-rating of the investment, either through a trade transaction of the pursuit of a market listing.

Steel observed that the trust is carrying that investment on its books at US$10 per ounce whereas comparative projects in Africa are valued at US$100 an ounce or so.

“Of course, this is in Zimbabwe, where you may have said US$10 was the right price,” Steel quipped, “but with the positive changes there we feel very optimistic that there’s plenty of scope for a re-rating.”

Bilboes currently represents 13% of Baker Steel’s portfolio.

As for Cemos, that is currently being carried at book cost but Steel thinks that valuation will need to be revised next year.

“We anticipate the company will make 10 million a year of Ebitda for next year and we’re carrying that at a valuation of around US$20mln so we think there’s meaningful upside potentially there,” Steel revealed.

The shares have been whittling away an absurdly large discount to NAV

As Cosmo Sturge, the company’s director of marketing, outlined for Proactive Investors, the company’s shares have been on a roll over the last year, rising from around 34p to 46p.

The share price has still got some way to go before it catches up with the NAV – and that’s before the NAV uplifts Trevor Steel is expecting – but the discount to NAV has come down to about 18% compared to around 30% a year ago.

Sturge thinks now is a very interesting time to be looking at the mining sector.

“If you look at where we are in the natural resources cycle, most fundamentally, the return of inflation has been a very influential point for the resources sector and, of course, current robust levels of economic growth are positive for us,” Sturge said.

Of course the US tariffs – “Trump’s tariffs”, Sturge calls them – are potentially highly inflationary.

“There’s a varied impact at the moment but given the escalation which we’ve seen in recent weeks we think higher prices are very much the likely outcome there,” Sturge said.

“We believe the longer-term outlook is very much supported by strong growth from China’s ambitious infrastructure plans,” Sturge added.

Tity-for-tat tariffs may have a short-term effect but it is important to take a longer-term view

Steel concedes that there is a risk that the trade war could escalate but emphasised – as just about all investment officers do – that the company takes a longer-term view on commodity prices.

For instance, the company has some exposure to copper through its investment in Nussir, which is moving forward with a definitive feasibility study on its Nussir/Ulveryggen copper project in Norway, and sentiment towards the metal might take a short-term hit from the wrangling between the US and China.

“In the case of copper, we feel that the medium to longer-term fundamentals are really excellent with the demand and prospects from electric vehicles. I think that’s actually the more important driver than potentially the tariffs,” Steel opined.

About half of the company’s current portfolio is currently in precious metals but this is largely a by-product of the company’s successful investment in the Prognoz asset.

Steel clearly likes the battery metals but it steers clear of what Steel calls “the more esoteric metals” that are not traded on an exchange; geographically, it also steers clear of projected in “risky countries like the Democratic Republic of Congo”, so do not expect to see the trust taking a punt on cobalt any time soon.


 

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