Baker Steel Resources Trust says that, during the first six months of the year, the unaudited net asset value per share rose 15.7% to 38.8p in a recovering market for mining shares, with the Euromoney Global Mining 100 Index rising 58.9% in Sterling terms. The most significant factor in the recovery of the Euromoney Global Mining 100 Index was a 24.6% rise in the gold price in dollar terms, to US$1,322.20 per ounce, which translated into a 38.3% rise in Sterling terms during the period. This in turn led to a recovery in gold mining stocks with the FTSE Gold Mines Index up 133.7% during the first half of 2016 in Sterling terms. This, has been reflected in the carrying value of the fund’s investment in Bilboes Gold which was increased by 86% in June 2016 in US$ terms in line with the performance of a basket of similar listed companies.
The increase in the Company’s NAV would have been greater but the Board considered it necessary to provide against the carrying value of the Company’s convertible loans to Black Pearl. The Black Pearl beach placer iron sands project had been hit by the weaker global iron ore price, although they believe it should have been able to withstand this as its simple process and proximity to China meant it expected to be able to deliver iron ore concentrate, CIF China, at one of the lowest costs in the world. However it was also hit by the Indonesian Government 2014 ban on the export of unrefined raw materials. As a consequence of these new regulations Black Pearl had to revise its strategy for the mine and engaged with a number of parties interested in utilising Black Pearl’s operations as the basis for a new iron/steel smelter in Indonesia. As Baler Steel Resources had invested in the project via convertible bonds rather than equity, at the end of 2015 it was still expected that there was a reasonable prospect of the loans and accrued interest thereon being recovered following any transaction. However the latest information at 30 June 2016 suggested that bondholders might be asked to accept a reduction in the amount they are owed or to convert into equity. Accordingly the Company decided to reduce the carrying value of its bond and accrued interest by 68%.
During the half year, the Investment Manager’s main focus has been on resolving the impasse over the Company’s largest investment, Polar Silver Resources Limited (“Polar Silver”) and its wholly owned subsidiary ZAO Argentum (“Argentum”) which holds a 50 per cent. indirect interest in the Prognoz silver project, 444km north of Yakutsk in Russia. The majority of the Company’s investment in Polar Silver is in the form of convertible loans to Argentum and Polar Silver and despite being the majority loan holder, the Company was only a minority shareholder in Polar Silver and therefore unable to control the strategy of that investment.
The dispute between Polar Silver shareholders was the subject of an Extraordinary General Meeting at the beginning of January 2016 at which the support of the Company’s shareholders gave it the authority to increase its interest in Polar Silver up to 35% of the NAV of the Company. This allowed a specially formed subsidiary of the Company to offer to acquire the interests of the other shareholders of Polar Silver. During June 2016, following negotiations with the other Polar Silver shareholders an alternative settlement was reached whereby all loans in the Polar Silver group would be converted into equity in Polar Silver. In addition, the Company agreed to acquire the interests of certain other Polar Silver shareholders, immediately following the debt conversion, for a total outlay of US$1.2 million in cash. The overall effect at 30 June 2016 was an approximate 2% increase in the Company’s NAV before currency considerations but more importantly this enables the Company to take control of the investment in order to progress the development of the Prognoz asset which remains one of the most attractive undeveloped silver projects in the world. An NI 43-101 compliant resource report by independent consultants Micon International Limited in July 2009 estimated an indicated resource of 5.86 million tonnes of ore grading 773 g/t silver containing 146 million ounces silver and inferred resources of 9.64 million tonnes of ore grading 473g/t silver containing 147 million ounces silver. An NI 43-101 compliant preliminary economic assessment by Micon envisages a mine producing an average of 13 million ounces of silver per annum over a 16-year mine life.
A second step is envisaged, dependent on an extension to the terms of the Prognoz Mining Licence, which will incorporate a further reorganisation and a subscription by a new investor.
The majority of the Company’s remaining investments continued to make progress. In particular Metals Exploration Plc commenced the commissioning of its 100,000 ounce per annum Runruno gold project in the Philippines, following the delays to repair damage caused by a super typhoon in October 2015 and it announced the first pour of gold from Runruno in June 2016. Ivanhoe Mines has also continued to make progress on all three of its major projects during 2016. Following completion of the sale of 49.5% of its Kamoa copper project in Democratic Republic of Congo to Zijin Mining for US$412 million, Ivanhoe announced the results of a positive pre-feasibility study for the first phase of development and also the discovery of a major new extension to the mineralisation. In May 2016 Ivanhoe announced the results of an independent, preliminary economic assessment for the planned redevelopment of its Kipushi zinc-copper joint venture also in the Democratic Republic of Congo. The capital costs of the redevelopment were estimated to be US$528 million, giving an after-tax net present value at an 8% real discount rate of US$533 million and a 30.9% after-tax real internal rate of return. Meanwhile, at its Platreef Project in South Africa, Ivanhoe commenced sinking of the first development shaft and reported a 45% increase in Indicated Mineral Resources to contain an estimated 42.0 million ounces of platinum group metals and gold plus an additional 52.8 million ounces in the inferred mineral resource category.
BSRT : Baker Steel Resources hit by Black Pearl writedown