Performance: Muted NAV TR of 2.7% in H121
BSRT recorded an NAV TR of c 29.2% over the 12 months to end-June 2021 (based on unaudited data), which is only slightly below the 32.9% recorded by EMIX Global Mining Index in sterling terms over the same period (which is not an official benchmark but provides a useful broad reference point). We note that the robust fund performance was mainly attributable to the comprehensive review and revaluation of the portfolio at end-2020, resulting in a c 27.5% uplift against end-November 2020 figures, according to our calculations. In H121, BSRT reported an NAV TR of 2.7%, compared to the 11.4% recorded by the index. We believe that the relative underperformance could be attributable to the downward revaluation of Polar Acquisition due to the application of a higher discount rate (details below), resulting in a 2.8% decline in BSRT’s NAV, which largely offset the impact of favourable developments among other holdings.
Exhibit 3: Price, NAV and index total return performance, one-year rebased
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Exhibit 4: Price, NAV and index total return performance (%)
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Source: Refinitiv, Edison Investment Research; at 31 August 2021
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Source: Refinitiv, Edison Investment Research. Note: Three-year and five-year performance figures annualised.
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Exhibit 3: Price, NAV and index total return performance, one-year rebased
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Source: Refinitiv, Edison Investment Research; at 31 August 2021
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Exhibit 4: Price, NAV and index total return performance (%)
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Source: Refinitiv, Edison Investment Research. Note: Three-year and five-year performance figures annualised.
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Between end-June and end-August 2021, BSRT’s NAV declined by c 3.2% on the back of sterling appreciation and the share price decline of its listed holdings. Over the two-month period, the share price of Azarga Metals (listed on the TSX-V market) went down from C$0.13 to C$0.07, while Metals Exploration (listed on AIM in London) recorded a decline from 2.03p to 1.38p.
Recent portfolio developments
Bilboes Gold: Terminated sale negotiations
Bilboes Gold is BSRT’s largest holding (19.4% of NAV at end-August 2021) and is now valued in the portfolio at the cash offer figure of US$114m, after removal of the discount associated with the deal execution risk that had been in the final FY20 valuation carried out in March 2021. This led to a 17% increase in Bilboes’ carrying value, translating into a 3.7pp increase in BSRT’s NAV. The deal negotiations, however, were terminated in July 2021 due to the post-sale conditions requested by the potential acquiror. We understand that if not for these additional terms, BSRT’s investment manager was willing to accept the proposed price of US$114m in cash, given the potential buyer had guaranteed the financing of the mine construction (which was important for other shareholders who may wish to retain their stake in Bilboes for now). The company and BSRT’s management will now look for other exit opportunities, including preferably an IPO (potentially as soon as early 2022) or alternatively resume discussions with other potential buyers that had expressed interest in the asset. In the meantime, Bilboes plans to update its definitive feasibility study (DFS), which was completed in Q120. According to the study, the estimated average production rate is 170k ounces per year over a 10-year mine life, with significant exploration upside to extend it further (and also the potential to grow it through acquisition of other local sites). The implied post-tax NAV based on a 10% discount rate and a gold price of US$1,500 per ounce is US$236m, or US$412m assuming US$1,800 per ounce (slightly above the current spot price). BSRT’s management highlighted earlier that any new, large investments would be funded by the proceeds from the Bilboes exit.
We estimate that as at end-August 2021, BSRT held a minor c £0.5m in cash, cash equivalents and accruals (c 0.5% of NAV) and a further £2.1m in listed precious metals stocks (c 2.0% of NAV) with a bias towards silver mining stocks.
Tungsten West and First Tin eyeing IPOs in Q421 and Q122, respectively
Tungsten West (15.7% of BSRT’s NAV as at end-August 2021) targets a listing on the AIM market in October 2021. We note that the most recent pre-IPO equity fund-raising (completed in May 2021) was upsized from £2m to £4m due to significant investor demand and that it was conducted at a 33% premium to the valuation implied by the previous funding round at the beginning of 2021. In March 2021, Tungsten West completed a bankable feasibility study (BFS) on restarting the Hemerdon tungsten mine in Devon (UK). According to the study, the initial capital requirement of £44.6m (though BSRT assumes a possible additional £10m) would translate into an average EBITDA of £35m pa over 20 years. Based on Roskill's long term tungsten price of c US$330 per MTU (after applying a 5% discount rate), the net present value (NPV) of the project would reach £272m with a 45% IRR.
The refurbishment of the mine will be financed with the proceeds from the pre-IPO financing and the planned floatation (with the IPO proceeds targeted at £25–50m), as well as a senior loan and a 3% royalty. Tungsten West plans to begin works in the mine in H221, with the commercial production launch expected within 18 months. BSRT increased the carrying value of its shares and convertible loans in Tungsten West by c 8.3% in aggregate in FY21 to end-August.
Similarly in April 2021, First Tin (formerly Anglo Saxony Mining, 5.2% of last reported NAV) completed an equity raising of £6m at 15p per share and is currently considering listing its shares in Q122. Meanwhile, BSRT converted its convertible loan to equity, at 8 pence per share, which resulted in an increase of BSRT’s stake to 26% and underpinned the positive revaluation of the project by c 33% in FY21 so far.
Futura Resources going ahead with its projects despite the Chinese ban
Progress on the two projects of Futura Resources (16% of NAV) was affected by the above-mentioned unofficial Chinese ban on imports of Australian coking coal. With China dominating purchases from other producers, the Australian coking coal enjoys strong demand from the rest of the world. Consequently, its price has risen from US$100/tonne at the beginning of 2021 to close to US$360/tonne currently. This sits well above BSRT’s long-term assumption of US$135/tonne reflected in the project’s carrying value, encouraging further development of the projects. According to the investment manager, the acquisition of a mining licence and production launch (originally planned in 2019) at the Fairhill mine should be realised by the end of the year, with Anglo American (a British listed multinational mining company) willing to provide debt financing of around A$50m and also offering an off-take arrangement (for a certain fee). Futura Resources will also execute a minor equity raise of c A$7m. Based on current forward market prices, management expects that Futura should record EBITDA of c A$124m in 2022 and A$200m in 2023. If we were to apply the multiples of listed coking coal companies (including Peabody and BHP Group), which trade at an average EV/EBITDA of c 4.3x on 2022e figures, this would imply an enterprise value of c A$533m. Having said that, we note that as at end-August 2021, Futura’s equity (in which BSRT’s holds a c 27% stake) is valued at c A$77m.
Silver project’s carrying value down due to discount rate adjustment
On 26 August, Polar Acquisition (PAL, 8.7% of NAV) announced the approval of an accelerated development plan for the Prognoz silver project, targeting first production as soon as 2023, which is about three years earlier than previously scheduled. However, due to a modified business model, which now incorporates concentrate production at a nearby site, the annual output is now expected to bet c 6.5m ounces, down from 13.5m ounces estimated in the September 2020 pre-feasibility, but with a longer mine life, extended to c 18 years. We note that based on the preliminary economic assessment of the project, the annual output had been planned to sit even higher at c 20m ounces. This could account for the 19.4% decline in PAL’s valuation in March 2021, which translated into a 2.8pp reduction in BSRT’s portfolio NAV, mainly as a result of applying a higher discount to the royalty, in line with the 9% rate used by Polymetal across all its mining assets (which compares to a 7% rate used by BSRT previously). While the discount rate may be reduced given that the project has moved up the development curve, BSRT still considers a net negative valuation effect upon the year-end portfolio revaluation as likely.
Cemos: Potential extension of debt or conversion into equity
Cemos’s plan to build a second production line was recently put on hold due to soaring clinker prices. The company is currently waiting for prices to stabilise and is considering the construction of its own clinker line. BSRT will have the option to convert its loan into equity after November 2021 (which is BSRT’s common approach in the case of well performing projects like Cemos). Alternatively, it may extend the loan at a higher interest rate to support the construction of the second production line and/or the clinker line.
Other portfolio developments: MMTP merged with Oro X
Among smaller holdings, it is worth highlighting the 50:50 merger between Mines & Metals Trading (Peru) (MMTP) and TSX-V-listed mineral exploration company Oro X Mining Corp into a new entity called Silver X. On 15 April 2021, Oro X and MMTP announced that they had closed a C$14.2m equity raising, which was one of the key conditions of the merger. It was followed by a conditional acceptance from the TSX-V Exchange on 3 May and completion announcement in June 2021. We note that the merger has not resulted in any significant change to the carrying value of BSRT’s holdings despite a c 40% share price decline after trading was resumed, as it brought the share price just slightly below the conversion price of the loan held by BSRT. The decline could be partially attributable to the high level of political uncertainty in Peru, as the new president wants to increase taxes on mining companies to fund social programmes.
Meanwhile, Azarga Metals, another listed BSRT holding, recorded a share price increase of over 85% in H121, followed by a significant downturn in subsequent months, which led to a more than 21% decline in the year-to-date. In August 2021, the company released the results of an updated preliminary economic assessment, assuming average annual production of 11.7k tonnes of copper and 2.9m ounces of silver over a 14-year mine life. This translates into a post-tax NPV of US$205m and an IRR of 27%. Kanga Potash (previously Sarmin) is seeking partners to finance the construction of the project, Prism Diversified is in discussions that could result in bringing a new partner to acquire a majority stake in the project, while Black Pearl continues discussions with its Chinese partners regarding the use of its mine as the basis for a new steel plant in Indonesia.
Exhibit 5: Portfolio's NAV triggers
Company |
NAV trigger |
2021 |
2022 |
Q421 |
Q122 |
Q222 |
Bilboes |
IPO/sale to strategic investor |
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Futura Resources |
Financing, licensing and production launch |
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Tungsten West |
IPO |
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Cemos |
Potential decision to build second production line |
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First Tin |
IPO |
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Mines and Metals Trading |
Resource update and expanding production |
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Azarga Metals |
Seeking strategic investor/potential IPO |
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Nussir |
Optimisation of FS; finance mine construction; listing |
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Kanga Potash |
Marketing of project/listing |
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Source: Baker Steel Resources Trust