Back then that was a bolder decision than hindsight makes it seem now. But sometimes you just need to hold your nerve.
Baker Steel had ready cash to hand, and new stakes were acquired in several major gold and silver companies.
“It was quite well timed,” says Steel simply. “We continue to hold these companies in our portfolio, and they account for around five or six per cent of the fund.”
But they do more than that: they also help underpin the market’s confidence in Baker Steel as a steady hand in troubled times.
It’s no coincidence that although Baker Steel’s share price took a hit in March during the worst of the turmoil, the shares have now recovered all the lost ground. Indeed, they’ve moved significantly ahead, such that in the past 12 months they’ve gained more than 20% in value.
Looking back over a longer horizon, the shares have more than tripled.
It’s helpful, of course, that the gold price has moved ahead, and helpful too that a Baker Steel problem child, Metals Exploration (LON:MTL), seems at last to be coming good, following a relisting at the end of October.
At a deeper level, though, the market knows that Baker Steel has become adept at managing a balanced portfolio of assets in regions that often turn out to be the undoing of others. Thus, Baker Steel continues to make a success of its relationship with Polymetal, which, even allowing for the sales earlier this year, still accounts for around 1% of net asset value.
“Polymetal is a leader in the gold industry, along with Newmont, in terms of committment to shareholder returns and dividend payment,” says Trevor Steel. “It’s policy is to pay out 50% of earnings, and in addition it has discretion to pay out up to 100% of cashflow.”
That’s a nice plus for Baker Steel to have, since not all of its investments are at the stage where they generate revenue. But it’s also a testament to the company’s trust and understanding of the way things are done in Russia, where Polymetal has the bulk of its assets.
Baker Steel has worked this jurisdiction well for many years, almost, if not absolutely uniquely among London companies, and retains significant exposure through its partial ownership of a significant royalty on the giant high grade Prognoz silver project. Baker Steel sold Prognoz to Polymetal, which is how it came by so many Polymetal shares and acquired the royalty.
Now though, the exposure comes in the form of the royalty held through a 49.9% interest in a holding company called Polar Acquisition Ltd, or PAL. In due course this interest could end up delivering significant cashflow into Baker Steel’s coffers.
Polymetal recently completed a pre-feasibility study on Prognoz. Although the production numbers weren’t as high as Polymetal had previously guided, nevertheless, based on existing reserves, the project looks set to produce 13.5mln ounces of silver per year over a nine year life.
However, add in the credits from lead and zinc, and the silver equivalent production is boosted to around 15mln ounces per year. Add in the 100mln or so resources not yet included in the reserve, and the mine life streatches out significantly too. So, there’s significant upside to be had here. Either way, a basic back-of-the-envelope calculation would put the annual income due to Baker Steel from production at Prognoz of at least between US$3mln or US$4mln a year at current silver prices, and US$8mln a year in a upside case.
With that sort of number knocking around in the background, it begins to become clear why Baker Steel shares have steadily strengthened, and why there may yet be more upside to come.
But it’s not just about Prognoz.
Amongst other assets in the portfolio, the company also has significant exposure to a multi-million ounce gold project in Zimbabwe called Bilboes, to the old Wolf Minerals project in Devon, to a coal project in Australia, and to a cement operation in Morocco that’s recently completed its ramp up and achieved nameplate capacity of 240,000 tonnes per year at which rate annualised earnings are forecast to be between €8mln and €10mln.
These are significant strings in the bow of a company which has clear strength in depth. Although Baker Steel will buy and sell assets, as it did with Prognoz and may be about to do with Bilboes, it goes to work at a deep and complex level. Not for this company the flipping that takes place at the lower end of the market.
This ability to stay focussed on, and to stay with projects until the timing of a sale is exactly right is underpinned by a combination of strength in financial depth, and many years of market experience.
And expect more deals in the future.
“We’re always looking for opportunities,” says Steel. “We typically have between 5% and 10% in cash or liquid stocks, so we can be flexible.”
What’s more, if the sale of Bilboes succeeds, then there would be significant extra ammunition for further deals.