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28. Uncovering Trusts – Baker Steel Resources Trust (BSRT) – High income potential from maturing assets.
94 Plays1 month ago
In this episode, our director of content, investment trusts Milosz Papst discusses the recent developments at Baker Steel Resources Trust, which pursues a bottom-up, value-focused strategy of investing in a concentrated portfolio of 10 to 15 unlisted junior mining companies. He discusses the progress made by its two major assets (Futura Resources and Cemos Group) and the trust’s prospects of significant royalty and dividend income which could represent a double-digit income yield on its current market capitalisation. He explains how the trust mitigates the risks associated with investing in junior mining projects, including the use of convertible debt and providing funding in stages as development milestones are met.
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About ‘Uncovering Trusts’
'Uncovering Trusts': is a podcast run by Edison analysts released every two weeks. Subscribe to hear analyst interviews on how investment trusts maximise returns while managing risks for investors.
About Edison:
Edison is a content-led IR business. We believe quality investment content should inform all investors, not just brokers. Our mission: engage and build bigger, better-informed investor audiences for our clients.
Edison covers 50+ investment trusts, read about them here: https://www.edisongroup.com/equities/investment-companies/
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Transcript
Introduction to 'Uncovering Trusts'
00:00:04
Speaker
Welcome to Uncovering Trusts, a podcast by The Edison Group, a content-led IR business integrating analyst content, digital targeting, and investor engagement. Tune in to find interesting investment ideas and to stay on top of what's happening in the investment company sector.
00:00:21
Speaker
I'm your host,
Guest Introduction: Miloš Pabst
00:00:22
Speaker
Will Manuel, and today i'm joined by Miloš Pabst, Director of Investment Trust Content at the Edison Group, who will talk about the Baker Steel Resources Trust, whose ticker is BSRT.
00:00:34
Speaker
Milos, thanks for joining us today. Hi Will, thanks for having me.
BSRT's Investment Strategy
00:00:39
Speaker
So regular listeners may remember that we spoke about the Trust in August last year. However, for the benefit of those less familiar with the Trust, can you start with a brief introduction?
00:00:50
Speaker
Yes, with pleasure. um The Trust pursues a bottom-up value-focused strategy of investing in a concentrated portfolio of 10 to 15 unlisted junior mining companies, which may be involved in the exploration for and production of base metals, precious metals, bulk commodities, thermal and metallurgical coal, industrial minerals and uranium.
00:01:11
Speaker
Its portfolio may include single asset as well as diversified natural resources companies. Okay, so sounds like quite a concentrated portfolio.
Risk Management in BSRT
00:01:20
Speaker
So I'm wondering how the trust managers ah limit risk.
00:01:25
Speaker
Yeah, that's a fair question. um In many cases, so the company seeks to mitigate the risks arising from investing in early stage mining businesses um by investing through convertible loan notes, as well as providing funding in stages as developed milestones are met.
00:01:41
Speaker
um The share of convertible loans in the trust portfolio went down to around 5% in recent years as several holdings matured and the trust converted into straight equity in recent years.
00:01:52
Speaker
ah But of course, this share may go up when the trust redeploys some of its future exit proceeds into new investments. um The trust also invests through royalties, which offer the potential for regular income once projects come on stream.
00:02:08
Speaker
And it also uses special clauses and in its investment contracts, such as ratchets and dilution clauses. um This, for instance, allowed it to convert into a larger equity stake in future resources, given the project delays this portfolio holding faced in the past. so um The trust also screens investments from an ESG perspective.
00:02:27
Speaker
um And finally, the trust often has a board seat. Okay, thank you. That's that's helpful. And do the managers have any skin in the game? ah Yes, they own over 20% of the trust.
00:02:40
Speaker
Okay, so a fair chunk. that That's encouraging. um So maybe
Market Influences on Junior Mining
00:02:44
Speaker
now you can tell us a bit more about the market backdrop and also the themes that the Trust is a play on. Sure, I will maybe start with mentioning that junior mining projects worldwide were in recent years affected by a combination of high interest rates, elevated inflation and geopolitical headwinds.
00:03:01
Speaker
However, a turn in the interest rate cycle may drive a recovery in global M&A activity in the natural resources sector. Monetary easing coupled with geopolitical uncertainty also proved supportive for precious metals, as illustrated by the recent gold price rally.
00:03:17
Speaker
um Finally, secular drivers such as the green energy transition and digital infrastructure should drive high demand for certain industrial and specialty metals, ah which may be coupled with supply constraints for some of the commodities and in turn support prices.
Commodities Market Forecast by Baker Steel
00:03:34
Speaker
um As a result, Baker Steel expects a market deficit across a number of commodities by 2030, including for copper, cobalt, aluminum, silver, nickel and lithium, among others.
00:03:46
Speaker
um I would note that some metals are classified as critical metals, for instance, tin in the US, Germany and Indonesia. Okay, thanks. That's interesting. um So now I understand that the trust returns come not only from favorable commodity prices, um but its manager also focuses on capturing the alpha arising from the development progress made by its businesses as they clear the pre-feasibility and definitive feasibility study stages and move towards construction and production.
00:04:15
Speaker
ah Can you give us an update on the progress made by its major holdings?
BSRT Major Holdings Update
00:04:21
Speaker
Of course. um Maybe I would add to what you just said that more recently, um because the investor appetite for funding development projects has been more muted, the manager realized that a financing event has become a quite important valuation catalyst for junior mining projects, and i'm allowing to generate a high valuation uplift in a relatively short period of time.
00:04:41
Speaker
Now, coming back to your question, um the Trust's current portfolio includes several maturing assets, many of which are already in production. The Trust's manager believes that upon full production ramp up of its major projects, its portfolio should generate significant royalty and dividend income, which would represent a double-digit income yield on its current market capitalization, ah although the exact level of income is, of course, dependent on the commodity price environment.
00:05:10
Speaker
and Most of this potential comes from two assets, Futura Resources and Semos Group, which plan to complete their production ramp up and expansion in the next 12 to 24 months. um These two holdings represented close to two thirds of the Trust's NAV at the end of February 2025. Okay, so it's ah it's a big chunk of the NAV. So um maybe you can give us some more details on both of those projects.
Futura Resources and Income Expectations
00:05:35
Speaker
Sure. um Futura Resources is the owner of two coaking coal mines in Australia. It has been ramping up production at its Wilton coaking coal mine in line with its budget. And after successfully securing an offtake offtake finance agreement,
00:05:49
Speaker
um It also saw encouraging development progress at its second coking coal mine, Fairhill. ah Management recently estimated that the project should generate an overall EBITDA of 60 to 80 million Australian dollars by 2025 2026.
00:06:05
Speaker
The last exposure to Futura is a combination of a 1.5% gross revenue royalty, 4.6 million Australian dollar convertible notes with a 21% coupon and an equity investment representing 23.4% stake on a fully diluted basis.
00:06:25
Speaker
The trust already earns interest on the convertible note and started receiving royalty income on Wilton's production. ah Management estimates that upon full ramp up of both coking coal mines, royalty income to the trust could reach around $4 million Australian dollars.
00:06:41
Speaker
ah Dividends represent further significant mid- to long-term income potential, though in the short term their level will be dependent on Futura's debt repayment schedule.
Semos Group's Expansion Plans
00:06:51
Speaker
um Now, Semmel's group is a Moroccan-based cement producer, which has two major investment projects.
00:06:56
Speaker
A compact calcination unit, which should be completed well in the first quarter of 2025, and a second grinding line, which should be installed sometime in 2025 and could lead to a doubling of production.
00:07:09
Speaker
These projects offer the prospect of a significant increase in earnings from 2025. ah Last year, Semos increased its sales by 10% with an expected EBITDA for 2024 at €8 million, euros and the trust's manager expects around €8 to €12 million euros this year.
00:07:27
Speaker
um On completion of its two major investment projects, Semos Group plans to adopt a progressive dividend policy. um I had the chance to visit the company's cement grinding line in southern Morocco in October last year and published a detailed research note discussing the key takeaways from the visit, ah which I encourage our listeners to read to gain more insights.
00:07:48
Speaker
Yeah, that's great. Yes, that that report can be found on the Edison website. So thanks for that, it's all useful background. um Are there any other holdings you'd like to highlight?
Other BSRT Holdings and Geopolitical Impact
00:08:00
Speaker
Yes, another important holding is the 1% net smasher royalty in the Bilbo's Gold project in Zimbabwe, which made up close to 9% of the Trust's end February NAV.
00:08:11
Speaker
um The Trust sold its equity stake in the project to the listed listed mining company Caledonia Mining Corporation in exchange for shares in the latter while ago, ah but retained the royalty.
00:08:22
Speaker
calladona Caledonia Mining Corporation operates the Blanken mine and apart from Bilbo's Gold, also holds one pre-development project and one early-stage exploration project. Baker's Tea Resources Trust highlighted in its interim report last year that at a gold price of 2,400 per ounce,
00:08:41
Speaker
so significantly below the current spot price, it would receive more than $3 million dollars of royalty income for from Bilbo's gold per year. um However, I must note that this project is at an earlier development stage than Futura Resources and Semos, with production launch likely after 2026.
00:08:59
Speaker
But in the meantime, the trust receives regular dividend on its equity stake in Calendonia Mining Corporation. I guess I would also mention Nusir, which is the owner of a copper mine project in in Norway and which the trust recently sold to the Canadian-listed Blue Moon Metals in exchange for the latter's common shares.
00:09:17
Speaker
was basically a reverse takeover and the trust will hold around 10-12% of its enlarged share capital. The trust managers believe that the project could move to production by the end of 2026. Blumen Metals fully owns a zinc, copper, gold and silver mining project in California.
00:09:35
Speaker
And finally, I would note that the trust still holds a net smelter royalty in the Prognos silver mine in Russia. ah This investment was heavily written down following Russia's invasion of Ukraine, so you won't find it among the trust's top 10 holdings.
00:09:48
Speaker
While the previous owner of the mine, the Kazakhstan-based Solid Core Resources, formerly known as Polymetal International, sold its Russian assets, including the Prognos mine, to Mangazia Plus back in 2004, the obligation to make the royalty payments to the trust remains with Solid Core Resources.
00:10:05
Speaker
The manager expects around one to two million dollars of royalty income from this asset per year, and the trust advisor recently said that the trust should start receiving royalties this year. Alternatively, Solid Core Resources could offer to pay Baker Steel Resources Trust for cancelling its obligation.
00:10:22
Speaker
And please note that this asset is currently valued at a mere $1 million dollar or so in the trust's NAV. Okay,
BSRT's Listed Holdings Discussion
00:10:30
Speaker
im you mentioned the the consideration for the disposal of shares in Bilbos Gold and Nusir was a stake in the listed acquirers.
00:10:39
Speaker
there I'm just wondering, are there any other listed holdings in the trust portfolio at present? Indeed there are. Beyond Blue Moon Metals and Caledonia Mining Corporation, the Trust holds investments in multiple listed companies, such as the Gold Producer Metals Exploration, Tankstone West, which is a developer of the Tankstone and Tin Hammerdun Mine in the UK, First Thin, which has assets in Germany and and australia Australia, as well as Silver Axe, which holds the Recuperada Silver Project in Peru.
00:11:09
Speaker
Okay, so what is the overall share of listed holdings in the Trust portfolio? It's around 22% overall rome based on end February 2025 data. Okay. um So thank you for this detailed and a insightful conversation on this interesting niche mining trust.
Conclusion and Further Information
00:11:28
Speaker
You've been listening to Uncovering Trust, a podcast by the Edison Group. If you want to find out more about Baker Steel Resources Trust and other investment companies we cover, please visit www.edisongroup.com.
00:11:40
Speaker
Thank you.