Mining investment trust focused on capital appreciation, with 'high-conviction' portfolio of no more than 15 investments
Closed-ended fund status allows high proportion of unlisted investments, making it pretty unique fund among London peers
Managers interests aligned with investors as own 30% of the shares
The mineral resources-focused trust’s largest investment, Polar Acquisition Limited (PAL), agreed last 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.
“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.
Since then, Baker Steel has employed some of its cash by acquiring an Australian coal royalty and investing US$3mln via a convertible loan and warrants in Canadian-listed Azarga Metals Corp (CVE:AZR) as it undertakes a second-phase of exploration drilling at its Unkur copper-silver project in Russia.
In June 2019, the trust reported an unaudited net asset value per share at 31 May of 59.10p, boosted by a tender offer where 9.68mln shares were purchased at 51p apiece and then cancelled. NAV was up from 56.9p at the December year-end, of which 6% was in cash.
At a Mining Capital conference in May, Steel, a former Merrill Lynch and Blackrock mining fund manager, said the company was also currently in advanced evaluation of two more potential royalties, a pair of convertible loan opportunities as well as how best to rotate the Polymetal funds.
Chief investment officer highlights four investments with revaluation potential
Although more than 40% of the portfolio is in early stage investments, Steel said the team believe the portfolio was "maturing nicely and it's ripe for some further realisations in due course".
He has outlined four stocks that he thinks could provide significant uplifts to the trust’s NAV in the short- to medium-term, led by Futura Resources.
Futura, at 14.7% of the portfolio as of May 2019, has two advanced coking coal developments in the Bowen Basin in Australia, where capital costs to bring the projects into production are likely to be low and Futura anticipates first positive cash flows shortly.
Another investment that could see a valuation catalyst is Sarmin, a world-class potash discovery in what Steel termed as “the good Congo”, i.e. the Republic of Congo.
Attention has also been moving towards Bilboes, a Zimbabwean gold mine, and Cemos, a private company that is about to start producing cement from its Moroccan operations.
Bilboes, currently representing 14.4% of Baker Steel’s portfolio, is due to complete a feasibility study in mid-2019, 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.
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 US$10mln 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
The company's share price has still got some way to go before it catches up with the NAV – and that’s before the NAV uplifts Steel is expecting – but the discount to NAV has come down to about 17% compared to around 30% a year and a half ago.
Cosmo Sturge, the company’s director of marketing, outlined for Proactive Investors how he feels it 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 are potentially highly inflationary.
“We believe the longer-term outlook is very much supported by strong growth from China’s ambitious infrastructure plans,” Sturge added.
Tit-for-tat tariffs may have a short-term effect but it is important to take a longer-term view
Steel concedes that there are risks from the trade war 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 he 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.