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14. Uncovering Trusts – Baker Steel Resources Trust (BSRT)
64 Plays2 months ago
In this episode, our director of content, investment trusts Milosz Papst discusses Edison’s latest thematic piece on US Small Cap equities. He then explores Baker Steel Resources Trust whose bottom-up, value-focused strategy is to invest in a concentrated portfolio of 10–20 unlisted junior mining companies. BSRT’s objective is to create value through driving the development of investee companies, as well as exploiting market inefficiencies and pricing anomalies. He discusses how the trust mitigates the risks arising from investments in early-stage mining businesses. He elaborates on the implications of the portfolio maturity for distributions to shareholders. He also delves into the developments at the trust’s two largest holdings.
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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 and Overview
00:00:05
Speaker
Welcome to Uncovering Trusts, a podcast by the Edison Group. We're a content-led IR business integrating analyst content, digital targeting, and investor engagement.
Podcast Focus on Investment Companies
00:00:16
Speaker
Each episode will uncover the distinct features and latest developments of a selected list listed investment company. So tune in to find interesting investment ideas and to stay on top of what's happening in the investment company sector.
Introductory Remarks with Minosz Pabst
00:00:29
Speaker
I'm your host, Will Manuel, and today I'm joined by Minosz Pabst, Director of Investment Trust Content at Edison Group. ah so And today Minosz will talk about Bank of Steel Resources Trust, and we're going to refer to it under its ticker, which is BSRT. So Minosz, thanks for joining us.
00:00:47
Speaker
Hi, well, great to be back.
US Small Cap Stocks Discussion
00:00:49
Speaker
Before we delve into BSRT, can you maybe tell our listeners more about the thematic piece on US small caps? Edison's investment trust team recently published. Sure. We were encouraged to look into the US s small cap theme by the price action in this market segment in July, ah triggered by the weaker than expected US inflation data, prompting an increase in the probability of a September interest rate cut.
00:01:12
Speaker
the short market sell-off in early August due to fears of a US recession overshadowed this theme, but given that the probability of a US recession seems relatively low, um I believe it is worth revisiting the theme.
00:01:24
Speaker
Lower interest rates typically have a larger benefit to smaller cap businesses, as their prospects are more likely to be tied to the strength of the US domestic economy, and lower rates generally result in higher investor risk appetite, which benefits small cap equities. A successful bid by Donald Trump for a second term in office could also be considered a positive for small cap stocks, given his pro-business stance and the potential for lower taxes and decreased regulation.
00:01:51
Speaker
While this could be coupled with higher tariffs on imported goods due to US s-China trade tensions negatively affecting corporate profits, this should have a disproportionate effect on larger businesses. Valuations certainly add to the case for smaller companies. Large-cap US companies look considerably less attractive in terms of forward PE, price to book, and price to sales multiples, while offering a lower dividend yield.
00:02:15
Speaker
Although earnings growth expectations for 2024 favour large-cap stocks, um when we look at 2025 estimates, small and mid-cap stocks are expected to generate superior growth versus large-cap stocks. I would also note that the relatively small size of the US small-cap universe compared to the mega-cap stocks suggests that even a moderate reallocation away from US large mega-caps into small-caps may have a significant impact on small-cap companies' share price performance.
00:02:43
Speaker
In the thematic piece, we discussed the two members of the AAC North American Smaller Companies sector, along with four out of five funds in the Global Smaller Companies sector that have a meaningful exposure to US small caps. but We also discussed the case for listed private equity trusts as a play on small US companies. Finally, we have discussed Edinburgh Worldwide and the US small cap team with Bill Chatter, Global Small Cap Investment Specialist at Bailey Gifford, um in a reasonably insightful interview.
00:03:09
Speaker
Great, so thank you for that. It's a thematic definitely worth taking a look at.
BSRT Investment Strategy
00:03:14
Speaker
um And now turning to BSRT, I understand it invests primarily in unlisted mining companies. Can you tell us more about its investment strategy? Yes, of course. ah The core of the trust's bottom-up value-focused strategy is to invest in a concentrated portfolio of, well, 10 to 20 unlisted junior mining companies.
00:03:35
Speaker
which may be involved in the exploration for and production of base metals, precious metals, bulk commodities, thermal and metallurgical coal, industrial minerals, oil and gas and uranium. Its portfolio may include single asset as well as diversified natural resources companies.
00:03:53
Speaker
The Trust's investment manager is Baker Steel Capital Managers, a specialist natural resources asset management and advisory firm, headquartered in London with a branch office in Sydney. It has an experienced team of fund managers covering the precious metals, base metals and mineral sectors worldwide, um including equity markets and underlying commodity markets.
00:04:14
Speaker
An important feature of SRT's investment strategy is that the manager focuses on capturing the alpha rising from the development progress made by these businesses as they move from a pre-feasibility stage to completion of a definitive feasibility study and then towards mine construction. ah Therefore, the trust does not merely provide geared exposure to rising commodity prices. Right. Thank you. That's interesting. um I understand there's a lot of upside in junior mining companies, but there's also quite a lot of risks. So how does the trust manager address these risks? I would start by highlighting that the trust's objective is to create value through ah driving the development of investing companies, as well as exploiting marketing in efficiencies and pricing anomalies.
00:04:59
Speaker
ah The trust does not exclusively invest in plain equity. and In many cases, the company seeks to mitigate the risks arising from investing in early stage mining businesses by investing through convertible loan notes and ah providing funding in stages as developed milestones are met.
Mining Portfolio and Key Players
00:05:15
Speaker
Although the current share of convertible loans in this portfolio is already below around 20% as several of the trust holdings matured and therefore the trust converted its investments into straight equity in recent years. so The trust also invests through royalties which offer the potential for regular income once projects come on stream.
00:05:31
Speaker
Right, thanks. So you mentioned that the trust portfolio matured recently. Can you shed some light on this? Yeah, sure. The trust currently has several holdings that have operated mines or projects that have just launched production. These include the trust's two largest holdings, which combined make up roughly two thirds of its portfolio. Futura Resources, the owner of two cooking coal mines in Australia, and Samos, a Moroccan cement producer.
00:05:56
Speaker
It also has holdings in several production stage-listed companies, such as the two gold producers Caledonia Mining Corporation and Metals Exploration, um as well as well as ah Silver X, whose Tangana Silver Mine also mines gold, zinc and lead in the process. Caledonia Mining Corporation operates the Blanket Mine in Zimbabwe and holds one pre-development project and one early exploration project.
00:06:18
Speaker
and Moreover, it acquired the Bilbo's Gold development project from Bakersfield Resources Trust in exchange for its shares and a 1% net smelter royalty ah from Bilbo's Gold with the trusts which the Trust's country holds. so ah Right, that's interesting. So what are the implications there for potential distributions to
Financial Projections and Income
00:06:36
Speaker
shareholders?
00:06:36
Speaker
The trust offers the prospect of potentially significant income. The trust manager estimates that upon full production, ramp up of its major projects, that is, Futurary Resources, Samos and Bilboos Gold, as well as the Prognostiver Mine in Russia in which the trust holds a net smelter royalty. The trust portfolio could potentially generate total royalty and dividend income of around 11 to 17 million pounds by 2025-2026. This represents a very healthy double-digit annual yield on its current market cap.
00:07:06
Speaker
ah That said, this is, of course, subject to project execution risks, and I believe that Bilbo's gold is likely to move to production later than 2026. Finally, I would also note that the trust has been receiving dividends on its stake in Calendonia Mining Corporation. Right. so okay there is Indeed, there's some very solid potential for income ah from this company. Interesting. um Maybe now you can say a few words on the trust's historical performance.
Performance and Strategic Positioning
00:07:35
Speaker
Yes, so the junior mining sector has recently experienced multiple headwinds, higher interest rates, coupled with high inflation and geopolitical headwinds, as well as less demanding valuations for more of more established mining companies, translated into a more challenging funding environment for development projects, especially for single asset junior mining companies.
00:07:54
Speaker
These conditions have reduced global appetite for M&A and IPOs, also in the natural resources industry, yeah which have made it difficult to sell junior mining projects to larger, more established trade buyers or float them on public markets. The trust's 12-month NAV total are return to end July 2024 stands at a strong 17%.
00:08:15
Speaker
supported, among others, by the revaluation of footwear resources following their successful fundraising in September last year. The trust's 5 and 10-year NAV total returned almost to end July's more modest at 2.7% and 3.6% per annum, respectively, due to the above-mentioned sector headwinds affecting, for instance, its tungsten less project, um but also the trust exported to assets in Russia.
00:08:37
Speaker
polar acquisition and as argumentals, which were heavily written down after Russia's invasion of Ukraine. However, I would note that this performance does not differ much from the share price performance of listed junior mining companies over these periods.
00:08:51
Speaker
ah Moreover, BSRT's NAV was not subject to the same extent of derating as listed junior mining stocks since its inception in 2010. We believe that this was assisted by the fact that many of its investments were structured as convertible debt and royalties rather than plain equity, as I've just discussed.
00:09:08
Speaker
That said, I would note that the potential peak in the interest rate cycle at still relatively moderate real and interest rates may further support precious metals prices, as illustrated by the recent price action in gold, to which 16% of BSRT's portfolio had exposure as at the end of 2023. And ah yeah, the peak in the interest rate cycle, the term interest rate cycle may also um drive a recovery in global M&A activity in the natural resources sector.
00:09:35
Speaker
ah Moreover, ah secular drivers such as the green energy transition and the resulting high demand for certain industrial and specialty metals, coupled with supply constraints for some of the commodities, ah could prove supportive for the sector going forward as well. Finally, further operational progress at Futura Resources and Samos this year are potential NAV catalysts. This embedded optionality um is important to note in the context of the trust's discount to NAV, which is currently around 30%.
00:10:03
Speaker
Right, so I'm thinking a bit more into future resources because that's a key part of the portfolio. You mentioned the successful fundraising in September. why What was the significance of this?
Milestone Achievements and Future Plans
00:10:15
Speaker
um The company completed a 35 million Australian dollar dollar financing in September 2023 via a 30 million convertible note and 5 million in-kind commitments from contractors and suppliers.
00:10:28
Speaker
This was a major milestone for the business, as it fully funded the advancement of Wilton, one of its two cooking coal mines, to production. This resulted in a significant re-evaluation of the holding during the Trust's full year 2023 evaluations review. Wilton already launched production early this year, with first coal shipped to the coal handling and preparation plan for processing and integral coal sales.
00:10:50
Speaker
The trust management highlighted that the company has seen encouraging coke and call quality and recoveries from the mine. However, the fair values of the trust's equity and royalty investment in Futura remain unchanged following the half-year 2024 valuation review, as ah more data is needed to justify a reduction in the development risk discounts applied to the valuation model for this holding.
00:11:14
Speaker
The end June 2024 valuation also does not capture the offtake finance agreed post-reporting date to fund the quicker development of Putra's second mine, Fairhill, which the company now expects to move to production in the fourth quarter of 2024.
00:11:29
Speaker
The SRT highlighted that the above developments will be examined during the year-end valuation review in anticipation of old mines reaching full production in 2025. The company had earlier indicated Futura's EBITDA potential of 80 to 90 million Australian dollars upon full production ramp-up, with the midpoints implying an well undemanding EBITDA multiple of around one and a half times ah based on Futura's current fair value.
00:11:55
Speaker
Right, thank you. And how about the trust's other large holding, CMOS? Yes, so the trust holds a combination of equity and convertible loan, um which translates into a 31.3% stake on a fully diluted basis in the business. Its first production line has been operational for several years now and reached its full production capacity of 250,000 tonnes per year ah in the second half of 2020.
00:12:22
Speaker
though capacity utilization in 2022 and 2023 was ah somewhat lower. and The company recently decided to build a clinker manufacturing plant which will make CMOS vertically integrated and this is scheduled for commissioning in the second half of this year with the full benefit in 2025.
00:12:40
Speaker
Semos was revalued by 11% during the half-year 2024 evaluation review, driven by rebounding sales this year after a more muted 2023, as well as good construction progress at its clinical plant.
00:12:53
Speaker
Okay, that's good news. Are there any other aspects of the trust which you you think is worth mentioning?
Management and Distribution Policy
00:12:59
Speaker
Yeah, I would highlight the high management ownership of more than 20% as well as BSRT's distribution policy, um according to which the company will distribute no less than 15% of the aggregate net realized cash gains after deducting losses for each financial year. And the distributions may include share buybacks, standard offers and dividend payments.
00:13:19
Speaker
Right, thank you very much, Milos. I think you've given us a very good rundown about what the BSRT has to offer. ah So you've been listening to Uncovering Trusts, a podcast by the Edison Group. If you want to find out more about Baker's Steel Resources Trust and other investment companies we cover, please visit www.eddisongroup.com.