Baker Steel Resources Trust (BSRT) has released its annual results for the 12 months ending 31 December 2023.
- Over the year BSRT’s NAV per share decreased by 2.8%, compared with the increase in the MSCI World Metals and Mining Index of 13.8%. BSRT’s share price fell by 15.1%, finishing the year on a 48.8% discount.
- BSRT’s 10 largest holdings make up 96% of its portfolio, however its two largest investments, Futura Resources (coal) and CEMOS Group (cement), now comprise 65% of net assets. While the managers acknowledge these weightings are not ideal for diversification purposes, the concentration reflects the outsized performance of these two companies.
- Despite the strong performance of these two companies, their performance was more than offset by the fall in share price of Tungsten West, First Tin and Azarga Metals Corporation and a reduction in the valuation of Kanga Investments. Their performance reflected a challenging environment for junior mining companies needing development finance, as rising financing costs and the market’s ‘risk off’ stance over 2023 disproportionately impacted junior miners.
- Futura Resources secured $30m in funding in September 2023 to commence production at its Wilton steel making coal mine in Queensland, Australia. The first coal was trucked in March 2024. Futura is now close to securing another A$30m facility to fund its second mine, Fairhill. At full capacity, the two mines are projected to produce 1.5-2Mt per year of coal at around US$85/t cost.
- CEMOS Group, a cement producer in Morocco, achieved its fourth year of profitable production in 2023 though sales were 10% lower at 185,000 tonnes. CEMOS has initiated construction of a calcination plant to produce lower carbon cement which should significantly reduce costs and enhance margins to around €50/t. A second grinding line is planned to double production.
- BSRT expects to receive significant dividends and royalties from Futura and CEMOS in coming years, which will support shareholder distributions and allow diversification of the portfolio. Another positive prospect comes from BSRT’s 1% net smelter royalty on Caledonia Mining’s Bilboes gold project in Zimbabwe which could generate US$3m per year at full production.
- The managers believe that the outlook for mining finance is expected to remain challenging in 2024 but potentially improve in the second half as interest rates and inflation ease. Structural trends of electrification, decarbonisation and deglobalisation should support commodity prices longer-term.
- BSRT will continue to support its existing investments to unlock value and no significant new investments are planned until a realisation occurs that would trigger a shareholder distribution. However the board believes that BSRT can look forward to receiving significant dividends and royalty payments in the coming years which will support distributions to shareholders and portfolio diversification.
- A discontinuation vote is scheduled for the September 2024 AGM which the board hopes shareholders will vote against.
- Howard Myles will step down as chairman at the end of 2024 after 14 years. Fiona Perrott-Humphrey will take over as chair.
Howard Myres, chair of BSRT, commented:
“The outlook for raising mining development finance is expected to remain challenging in 2024 albeit with some improvement beginning to emerge. Whilst investors have been firmly in “risk off” mode in recent years, now that interest rates appear to have peaked and as monetary policy starts to ease we are hopeful that the picture will improve in the second half of this year. High real interest rates in the fight against inflation have been a significant headwind for most if not all financial assets and the prospect of lower rates ahead is encouraging for our sector, which as we know tends to be particularly cyclical.
“However some risk remains that central bankers may be overly hawkish and that a soft landing for the world’s leading economies is not achieved.
“Higher energy costs in Europe following the Ukraine war do seem to be taking their toll on the German economy in particular, traditionally the powerhouse of the Eurozone. Nevertheless, the structural case for those metals and commodities essential for the electrification and decarbonisation transition continues to strengthen. Heightened geopolitical tensions will likely increase trends towards de-globalisation and the security of supply of critical minerals as well as potentially significant re-armament programmes, should underpin commodity prices in the longer term. The Company will continue to support its existing investments to unlock value as it did with the Futura Resources financing in September 2023. “