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Polymetal’s strong operating and share price performance should bode well for Baker Steel

The Baker Steel portfolio continues to expand, underpinned by significant exposure to Polymetal

The rising gold price is boosting Polymetal's shares

Shares in Russian gold miner Polymetal International PLC (LON:POLY) have performed very strongly over the past six months, rising from a low of 597p in September to the current 871p.

That’s a chunky 45% rise for a company that’s now capitalised in London at over £4bn.

So Polymetal’s share price weakness of 2018 is now a thing of the past, although there is still ground to be made up on 2017 and 2016 when the shares often traded above the 1,000p mark.

Still, the ongoing recovery is a positive sign. And there two reasons for the recent uptick.


First, sentiment towards gold has been steadily improving as the US Federal Reserve has grown more cautious about its interest rate outlook in the face of ongoing uncertainties in the global economy.

Second, Polymetal’s own operating performance is also improving.

Full year gold equivalent production for the year to 31 December 2018 rang in at a healthy 1.5mln ounces, ahead of guidance, helped by a 22% increase in gold equivalent production in the final quarter, as against the corresponding period a year ago.

What’s more, net debt fell, although not by as much as some analysts had expected, to US$1.52bn.

At this stage, Polymetal hasn’t released hard data on costs, saying instead that it expects all-in sustaining costs to come in US$875 and US$925 per gold equivalent ounce.

Cost outlook

What’s more, costs next year are likely to fall to between US$800 and US$850 per ounce, with production currently forecast to hit 1.55mln ounces of gold equivalent.

All of which bodes well for Baker Steel Resources Trust LTD (LON:BSRT), the listed investment vehicle run by mining industry professionals Trevor Steel, David Baker, and Francis Johnstone. Fully 28% of the Baker Steel portfolio is accounted for by Polymetal shares, according to a filing of 11 January 2019.

With that in mind, it’s not surprising to see Baker Steel’s shares tracking up in line with Polymetal’s over the past few months, even though the net asset value of Baker Steel itself suffered a recent correction following a steep decline in the value of another holding, Metals Exploration.

In addition, around 9% of the portfolio by value is accounted for by a stake in Polar Acquisition LTD, a vehicle which holds a variable rate royalty over future production from another Polymetal mine, Prognoz.

So, for those whose taste in Russian risk is also tempered by caution, Baker Steel looks like a useful way to gain exposure to the upside that Polymetal is now delivering, whilst also allowing for some hedge on any downside through exposure to gold and other assets elsewhere in the world.

Foremost amongst the jurisdictions represented in the portfolio are Australia, Morocco, Norway, Zimbabwe, Indonesia, Republic of Congo, Canada, Philippines, and the DRC.

And the most recent acquisition, that of a royalty on two Australia coal mines, looks decidedly useful. For a total investment of A$8mln, Baker Steel looks set to reap annual pre-tax cash flow of around A$3.5mln from the royalty for upwards of 25 years.

It’s a deal that will pay for itself many times over and is a testament to the ability of the Baker Steel team to unearth value in what remains a very tough market.

So, the non-Russian assets provide extra upside to a portfolio that’s solidly anchored around a stake in one of the world’s major producing precious metals miners.

And if the Polymetal upside does begin to taper off, a big boost from one of these other development projects could still put wind in Baker Steel’s sails. In the medium-term, there’ll be useful cash flow from the Australian coal projects.

For the meantime though, watch as Polymetal’s ongoing strong performance continues to feed through into the Baker Steel share price.



Quick facts: Baker Steel Resources Trust Ltd


Price: 83.44 GBX

Market Cap: £88.83 m

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