Baker Steel Resources Trust — Upside potential from successful project funding

Baker Steel Resources Trust (LSE: BSRT)

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Last close As at 04/02/2023

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3.00 (5.88%)

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Research: Investment Companies

Baker Steel Resources Trust — Upside potential from successful project funding

Baker Steel Resources Trust (BSRT) posted an NAV total return of -16.3% in FY22, which was mostly a result of the de-rating of recently floated holdings Tungsten West and First Tin and the impact of Western sanctions against Russia on Polar Acquisition (PAL) and Azarga Metals. However, BSRT also agreed to sell its equity stake in its largest holdings (Bilboes Gold, completed in January 2023) and saw progress across several projects. BSRT’s maturing portfolio offers the prospect of attractive income from royalty payments (on production launch of Futura, PAL and Bilboes Gold) and dividends (from Caledonia Mining Corporation, CMCL, and later potentially also Cemos).

Milosz Papst

Written by

Milosz Papst

Director, Financials

Businessman talking about investment stock market and graph from computer laptop with broker trader, giving money plan management and analysis

Investment Companies

Baker Steel Resources Trust

Upside potential from successful project funding

Investment trusts
Metals and mining

18 January 2023

Price

49.0p

Market cap

£52.2m

NAV

£87.7m

NAV*

82.4p

*At end-2022.

Discount to NAV

40.5%

Yield

0.0%

Shares in issue**

107.2m

**Including 700k treasury shares.

Code/ISIN

BSRT/GG00B6686L20

Primary exchange

LSE

AIC sector

Commodities & Natural Resources

52-week high/low

76.5p

43.0p

98.4p

78.3p

Gearing

Net cash at end-2022

0.2%

Fund objective

Baker Steel Resources Trust (BSRT) is a closed-ended investment company aiming to achieve long-term capital growth through investing in equity, loans and related instruments issued by private natural resources companies. It targets a global, concentrated portfolio of 15–20 investments. BSRT’s objective is to create value through driving the development of investee companies, as well as exploiting market inefficiencies and pricing anomalies.

Bull points

Exposed to project development gains – not a simple beta play on commodity prices.

Downside protection is provided by BSRT’s focus on realising value from project development, valuations based on consensus forecasts for commodity prices and the use of convertible debt.

Maturing portfolio, with several projects approaching mine construction or production.

Bear points

Risk of cost overruns due to the inflationary environment.

Some projects are located in high-risk mining jurisdictions.

High portfolio concentration by project.

Analyst

Milosz Papst

+44 (0) 20 3077 5700

Baker Steel Resources Trust is a research client of Edison Investment Research Limited

Baker Steel Resources Trust (BSRT) posted an NAV total return of -16.3% in FY22, which was mostly a result of the de-rating of recently floated holdings Tungsten West and First Tin and the impact of Western sanctions against Russia on Polar Acquisition (PAL) and Azarga Metals. However, BSRT also agreed to sell its equity stake in its largest holdings (Bilboes Gold, completed in January 2023) and saw progress across several projects. BSRT’s maturing portfolio offers the prospect of attractive income from royalty payments (on production launch of Futura, PAL and Bilboes Gold) and dividends (from Caledonia Mining Corporation, CMCL, and later potentially also Cemos).

Contributions of key holdings to BSRT’s NAV total return in 2022 (pp)

Source: Company data, Edison Investment Research. Note: *Azarga Metals Corp’s contribution to end-May 2022 (last available data).

Year-end review results in a c 4% NAV increase

Following the year-end (December 2022) portfolio review, BSRT’s NAV per share increased by 4.2% versus end-November 2022. Key positive drivers included Cemos (a cement production project in Morocco) and Bilboes Gold (a gold mining company based in Zimbabwe). Cemos saw a 10% positive revaluation versus end-November, translating into a 1% overall decline in 2022, as the fall in multiples of listed peers and lower production volumes in 2022 versus 2021 were largely offset by the first-time recognition of the value attributable to the recently acquired second grinding line (which is yet to be deployed). Bilboes Gold’s carrying value went up by 10.6% versus end-November (and was stable in 2022 in sterling terms). It was valued based on the consideration BSRT negotiated as part of the sale agreement with CMCL (see our previous note for details) consisting of CMCL shares (whose price increased recently alongside other listed gold producers) and a 1% net smelter royalty from Bilboes Gold (which was revalued based on the year-end gold price).

Risk-reward profile improved as discount widened

BSRT’s shares now trade at a wide discount to NAV of 41% (vs a five-year average of c 20%). Moreover, we see potential for an NAV uplift following the successful completion of the currently ongoing fund-raising processes to either initiate mine construction or enable production ramp-up (Futura, Tungsten West, Kanga Investments, Nussir). Also, a meaningful part of BSRT’s portfolio (c 27%, according to our estimates) is in listed equities, some of which (First Tin, CMCL) are reflected in BSRT’s NAV at a discount due to lock-ups, which will expire later this year.

Successful funding of maturing projects are key near-term portfolio catalysts

Futura ready to initiate production upon securing funding

Several of BSRT’s portfolio companies are currently in the process of securing funding for mine construction/refurbishment or production ramp-up (which could support their valuations through a reduced discount rate associated with project execution risk). This includes Futura Resources, BSRT’s largest holding (26.7% of end-2022 NAV) and the owner of the Wilton and Fairhill coking coal projects in Australia. Production launches at both sites were previously postponed due to the pandemic outbreak and subsequently the informal Chinese import ban on Australian coal, which adversely affected coal pricing (and led to a period of reorganisation in terms of global coal export/import directions). The projects were awarded mining licences in November 2022, but production launch remains conditional on Futura’s ability to secure project funding (which is planned to be primarily debt), which has been pending since 2021. We consider a potential successful fund-raise, followed by production launch (with Wilton likely to come first given limited start-up capex of c A$25m), as one of the major potential NAV triggers for BSRT in 2023. The company refrained from revaluing Futura upwards during the year-end valuation review (pending the fund-raise), though the holding’s carrying value increased earlier in 2022 on the back of the conversion of BSRT’s bridging loan to Futura into an additional 0.5% gross revenue royalty (on top of the existing 1.0%).

Tungsten West targets production launch in Q423

Tungsten West (5.2% of NAV at end-2022) has recently published its updated feasibility study (FS) based on the revised plan developed in response to the surge in energy prices (see our previous note for details). The FS release (which triggered a c 5.5% increase in Tungsten West’s share price on the day of the publication) indicates a base-case post-tax NPV5% of £297m and an internal rate of return (IRR) of 25%. Last year, the company agreed on a non-binding term sheet for a US$30m royalty sale with a global mine royalty investment fund. Management expects the funding to close in Q123, which we understand has been tied to the release of the FS. Tungsten West also seeks to secure up to £10m of further funding, which would allow it to commission its Hemerdon project in H123 and launch production in Q423. We note that BSRT (as one of the four founding shareholders) will be awarded 1.65m shares in Tungsten West upon full completion of project fund-raising and another 1.65m on commercial production. These additional shares represent 1.6% of the fully diluted number of shares accounting for all outstanding options and warrants (BSRT currently holds a 16.1% equity stake in Tungsten West, according to BSRT’s management).

Tungsten is becoming increasingly important as a strategic metal for the West, especially given that China accounts for c 90% of global reserves and 80% of mine production, according to Tungsten West. The results of the FS position Tungsten West to become the largest tungsten producer in the Western world, according to the management.

Considering various funding routes for previous IPO candidates

As the sentiment in public markets deteriorated last year, BSRT had to revise plans to list two of its portfolio holdings in 2022. Kanga Investments (5.4% of NAV at end-2022), a potash project in the Republic of Congo, completed its FS in September 2020 and recently obtained its mining licence. BSRT is seeking to sell or list the project in H123 to raise funding for mine construction. In this context, we note that muriate of potash prices remain favourable (above US$500 per tonne), supporting project economics. Nussir (4.0% of NAV at end-2022) completed its definitive FS for a fully electrified mine in January 2022 and last year received approval from the Norwegian authorities to go ahead with the copper project (despite some opposition from the indigenous Sámi community). The project now seeks to obtain financing, with listing being one of the considered options.

Exhibit 1: BSRT portfolio summary

 

% of end-2022 NAV

Commodity

Location

Next development step

Futura Resources

26.7%

Coking coal

Australia

Production launch in 2023 subject to funding

Cemos Group

22.0%

Cement

Morocco

Capacity expansion, clinker line being considered

Bilboes Gold

15.6%

Gold

Zimbabwe

Restarting oxide mining operations in 2023

Kanga Investments

5.4%

Potash

Republic of Congo

Funding of mine construction

Tungsten West

5.2%

Tungsten

UK

Funding for mine refurbishment, project commissioning in H123, production launch planned for Q423

Silver X Mining Corporation

5.2%

Silver, lead, zinc

Peru

Resource update and expanding production

Polar Acquisition

4.9%

Silver

Russia

First production in 2023, production ramp-up in 2024

First Tin

4.6%

Tin

Germany, Australia

Definitive Feasibility Study for Taronga and Tellerhäuser completion in Q423

Nussir

4.0%

Copper

Norway

Funding of mine construction

Prism Diversified

1.4%

Lithium, iron, vanadium

Canada

N/A

Listed precious metal shares

2.4%

Gold, silver

Various

-

Other investments

2.4%

-

-

-

Net cash, equivalents and accruals

0.2%

-

-

-

Source: Baker Steel Resources Trust, Edison Investment Research

Carrying value of second-largest holding stable, supported by expansion prospects

Production volumes at Cemos (22.0% of end-2022 NAV) declined by c 11% y-o-y in 2022 (according to management estimates), affected by clinker availability in the first half of the year and subsequently a decrease in demand for cement from the local construction sector amid an overall economic slowdown in Morocco. The carrying value of the project was also affected by the decline in earnings multiples of public peers. For example, the current EV/EBITDA multiples for FY22e of LaFarge Holcim Maroc and Ciments du Maroc stand at 10.2x (based on Refinitiv consensus), versus EV/EBITDA FY21 multiples of c 13.5x for both at the time of publishing our February 2022 note.

However, the above effects were largely offset by the first-time recognition of the value associated with the project’s planned expansion. Cemos acquired a second production line in late 2022 and is now identifying a suitable location to install it, with an ongoing geological exploration program evaluating pozzolan deposits, which Cemos would like to utilise to reduce the amount of consumed clinker. Upon the launch of the second line (which BSRT expects in 2025), Cemos will have a total capacity of 570k tonnes pa, with a cost of expansion of only c €7m (which can be funded internally by Cemos). The company is still evaluating the construction of its own clinker line and expects to complete the associated technical work in H223.

Growing income potential from maturing portfolio

We believe that BSRT’s portfolio offers an attractive potential for future recurring income from royalties upon successful production ramp-up. A key contributor in this respect may be Futura Resources, in which BSRT holds a 1.5% gross revenue royalty (on top of a c 26% equity stake). For illustrative purposes, at the current spot price for Australian coking coal (free on board, FOB) of US$280 per tonne and at full capacity utilisation of both projects of 2.3m tonnes pa, the annual pre-tax royalty income potential would be around c US$10m pa, or 7.4p per BSRT share (vs end-2022 NAV per share of 82.4p). This does not account for any discounts (eg related to an off-take agreement or impurities). BSRT’s management is cautiously indicating a royalty income potential from the project of at least US$3m pa.

Further income may come from the 0.8% to 1.9% net smelter royalty over the Prognoz silver project (first production scheduled for 2023), with BSRT’s management suggesting an income potential of at least US$1.5m pa (based on the annual output of 6.5m ounces implied by the revised development plan). However, we acknowledge that there are certain risks related to BSRT’s ability to collect the royalty given that the project is located in Russia. Polymetal International (Jersey-domiciled), which is the owner of this project, is considering breaking up its operations into two entities (one of which would hold Polymetal’s Russian assets). Finally, BSRT received a 1% net smelter royalty from Bilboes Gold as part of the sale agreement with CMCL (with management guiding to an annual income potential of at least US$2m).

BSRT now also holds 800k shares of CMCL, which has been a regular dividend payer with US$0.56 per share distributed in total in 2022. This level would translate into a dividend for BSRT of c US$0.45m pa. Here, we note that BSRT is likely to sell down its CMCL holdings over the medium term to deploy the proceeds into unlisted junior mining projects, in line with its core strategy. BSRT has a six-month lock-up from the date of Bilboes deal completion on half of the held shares.

While the near-term cash flows of Cemos may be affected by the cyclical macroeconomic slowdown and the start-up costs of the second line (and potentially also the clinker line), it should become an important earnings contributor for BSRT and a potential source of dividend income in the longer run.


General disclaimer and copyright

This report has been commissioned by Baker Steel Resources Trust and prepared and issued by Edison, in consideration of a fee payable by Baker Steel Resources Trust. Edison Investment Research standard fees are £60,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

General disclaimer and copyright

This report has been commissioned by Baker Steel Resources Trust and prepared and issued by Edison, in consideration of a fee payable by Baker Steel Resources Trust. Edison Investment Research standard fees are £60,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2023 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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