Last close As at 05/08/2026
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Research: Investment Companies
Baker Steel Resources Trust (BSRT) announced that Futura Resources (its second-largest holding, making up 25.3% of end-August 2023 NAV) closed a c A$26.2m funding round (A$21.2m convertible note and A$5m in-kind commitments from contractors and suppliers). This should fully fund the advancement of the Wilton coking coal mine to production. We see it as a major milestone and possibly also a considerable trigger for BSRT’s year-end NAV uplift. We note Futura’s high royalty and dividend income potential once in full production, possibly at a high single- to low double-digit yield on BSRT’s share price at its current c 47% discount to NAV.
Baker Steel Resources Trust |
Futura Resources financing is a major milestone |
Investment trusts |
20 September 2023 |
Analyst
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Baker Steel Resources Trust (BSRT) announced that Futura Resources (its second-largest holding, making up 25.3% of end-August 2023 NAV) closed a c A$26.2m funding round (A$21.2m convertible note and A$5m in-kind commitments from contractors and suppliers). This should fully fund the advancement of the Wilton coking coal mine to production. We see it as a major milestone and possibly also a considerable trigger for BSRT’s year-end NAV uplift. We note Futura’s high royalty and dividend income potential once in full production, possibly at a high single- to low double-digit yield on BSRT’s share price at its current c 47% discount to NAV.
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Base case scenario for unlevered Futura Resources cash flows (real terms) |
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Source: Baker Steel Resources Trust |
BSRT investing A$4.7m in the convertible notes
The unsecured convertible note issued by Futura has a tenure of three years and a coupon rate of 21% (paid every six months in arrears, with the first payment after 12 months). While this rate may seem high in absolute terms, BSRT highlights that it reflects recent precedents for the cost of financing for coal development companies in Australia. BSRT committed to invest its approximate pro rata interest of A$4.7m (£2.4m) into the convertible notes, with A$0.7m satisfied by rolling its existing bridging loan and the remaining A$4.0m representing new funding.
Production start within three months of funding
Futura (which owns the Wilton and Fairhill coking coal mines) has access to the nearby Gregory Crinum site for its coal processing and associated handling infrastructure (secured by 15-year binding agreements), and to the existing local port and rail infrastructure. Given this and the open-pit nature of its operations, both projects can be brought into production quickly, within three months of securing funding (with a production rate of 1m tonnes pa possible within approximately six months). Wilton should therefore be in or close to production at the time of BSRT’s year-end portfolio valuation review. BSRT expects that Fairhill can be advanced to production based on cash generated by the Wilton mine within c 24 months. However, Futura may accelerate it by a new fund-raising (most likely debt) once Wilton delivers on the expectations in terms of output quality. BSRT highlighted that A$50m is required to bring both Wilton and Futura to production (A$25m for each), and Futura left the convertible offer open for a short period to allow for potential further subscriptions, which could bring the total offer to up to A$30m.
Re-rating potential on start of Wilton production
The pre-conversion equity valuation implied by the deal is A$100m, translating into a conversion price of A$2.38 per Futura share. Noteholders have the right to convert the notes at any time and, in the case of an IPO, would have the right to convert their notes at the lower of A$2.38 or a 20% discount to the IPO price. We note that BSRT will carry out a valuation update of its investment in Futura during the year-end valuation review at end-December 2023, which will provide more clarity on the valuation impact of the deal on BSRT’s portfolio.
That said, we see some indication that the project may have considerable re-rating potential versus the current fair value reflected in BSRT’s NAV. Firstly, the A$2.38 per share valuation implied by the convertible note transaction is more than twice the A$1.14 per share valuation of Futura Resources that BSRT used to arrive at the value of its c 27% stake at end-August 2023 of c A$13m (or c £6.6m). Secondly, at the base case forecasts (see below for details), the conversion price implies a 1.5x EV/EBITDA ratio versus the valuations of comparable listed coal companies at 2.5–3.0x forward EBITDA at present, according to BSRT. Finally, BSRT notes that an 85% stake in the neighbouring Ensham coal mine was acquired by Thungela in 2023 for c A$340m (plus royalties), ie at a price per annual tonne of saleable product that would imply a A$270m valuation for Futura (on full production ramp-up).
For illustrative purpose, we estimate that if BSRT’s equity stake was valued at A$2.38/share, this would translate into a £7.2m (or 10%) uplift to BSRT’s total NAV at end-August 2023 (or c 19% of the current market cap, given the c 47% discount to NAV at which BSRT’s shares are now trading). This does not account for a potential revaluation of BSRT’s 1.5% gross revenue royalty (eg as a result of a reduction in the currently applied discount due to project execution risk). The fair value of BSRT’s total investment in Futura at end-August 2023 (including the royalty and bridging loan) was c £17.8m.
Healthy margin based on forward price expectations
Futura’s management forecasts that Wilton and Fairhill will produce around 2m tonnes of saleable product per year (after washing and processing) on full production ramp-up in 2025 (with potential to increase production further, subject to additional licences and available processing capacity). Forward price expectations used by Futura’s management to forecast EBITDA and cash flow assume a hard coking coal price of US$230/tonne in 2024 (broadly in line with the current spot price), which then gradually falls to the long-term expected price of US$185/tonne by 2027. In its resources and energy quarterly report in June 2023, the Office of the Chief Economist of the Australian government indicated that prices for Australian metallurgical coal are forecast to decline to around US$200/tonne by 2025 and that it considers the risks around this assumption to be balanced. In this context, it is also worth noting the sustained strong iron ore prices, which may be an indication of continued solid demand for steel (which would also assist coking coal prices).
The forward price expectations compare with Futura’s all-in sustainable cost of c US$80/tonne, with BSRT management highlighting that this represents a second quartile cash cost, benefiting from low strip ratios. Based on the above, Futura’s management expects EBITDA of c A$92m in 2025 (see chart on front page). Based on a 10% discount rate, Futura’s NPV stands at A$339m over the 20 years of planned production based on forward price expectations, or A$642m at current prices. BSRT highlighted that the overall extensive mineral reserve could sustain a mine life well beyond the currently planned term.
A successful production and sales ramp-up of both Futura projects would likely translate into solid dividend and royalty income for BSRT. Assuming a coking coal price in line with the long-term assumption of US$185/tonne and 2m tonnes annual production volume, the royalty would generate c £4.5m of pre-tax income per year. That said, this does not account for any potential price discounts included in any offtake agreements or for other reasons, such as impurities. BSRT’s management indicates a more cautious A$4m annual income potential (ie c £2m pa) based on forward curve prices, which would represent a significant 2.8% and 5.4% yield on BSRT’s end-August 2023 NAV and current market capitalisation, respectively. On top of this, BSRT may receive sizeable dividends from its equity stake (which we believe could be of a similar order of magnitude to the royalty income or even higher) and will also receive the 21% pa coupon on its convertible note holdings (resulting in interest income of c A$1m or £0.5m pa). Together with the potential future royalty income from BSRT’s two other projects, Polar Acquisition and Bilboes Gold, estimated by BSRT’s management at c US$1–2m pa and US$1–2.5 pa, respectively, as well as dividends from other holdings (eg Cemos), this could form a very solid income base for BSRT’s shareholders in the medium to long term.
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Research: TMT
Team Internet (previously CentralNic) marked its 10-year anniversary of being listed with a name change and a capital markets day. Both reinforced the company’s transformation into a diversified digital marketing platform group. The group consists of a network of people, technologies and tier one partners focused on creating successful connections between consumers and companies online. We believe that this strategy and platform provide a resilient foundation for Team Internet to continue to generate strong growth and cash flows. In our view, the current value rating is at odds with the company’s growth track record and prospects.