SMALL CAP SHARE IDEAS: Baker Steel Resources Trust

‘At the beginning of the Covid crisis we decided that we should put some more money into precious metals,’ says Trevor Steel of Baker Steel Resources Trust.

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, so new stakes were acquired in several major gold and silver companies.

Baker Steel Resources Trust put more money in gold and silver at the start of the Covid crisis

Baker Steel Resources Trust put more money in gold and silver at the start of the Covid crisis

‘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 proposition in troubled times – in the past 12 months the company’s shares have gained more than 20 per cent to 69p, valuing the trust at £74million.

It’s helpful, of course, that the gold price has moved ahead, and helpful too that a Baker Steel problem child, Metals Exploration 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 Russian giant Polymetal, a holding in which accounts for around 1 per cent of net asset value.

‘Polymetal is a leader in the gold industry, along with Newmont, in terms of commitment to shareholder returns and dividend payment,’ says Trevor Steel.

‘Its policy is to pay out 50 per cent of earnings, and in addition it has discretion to pay out up to 100 per cent of cashflow.’

That’s nice for Baker Steel to have, since not all of its investments are at the stage where they generate revenue.

But there’s more to the relationship than that. Baker Steel retains significant FSU exposure through its partial ownership of a significant royalty on the giant high grade Prognoz silver project, which it sold to Polymetal not long ago.

The royalty is held through a 49.9 per cent 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 as well.

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 13.5million 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 15million ounces per year.

Add in further, the 100million or so resources not yet included in the reserve, and the mine life stretches 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 at between $3million or $4million a year at current silver prices, and $8million 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.

Amongst other assets in the portfolio, Baker Steel also has significant exposure to a multi-million ounce gold project in Zimbabwe called Bilboes, to the old Wolf Minerals project in Devon, and to a coal project in Australia, among other things.

A recent highlight has been a cement operation in Morocco that’s just completed its ramp up and achieved nameplate capacity of 240,000 tonnes per year, at which rate annualised earnings are forecast to be between €8million and €10million.

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 nevertheless 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.

‘We’re always looking for opportunities,’ says Steel. ‘We typically have between 5 per cent and 10 per cent 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.

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