Baker Steel Resources Trust (BSRT) extended its impressive New Year rally today after the £115m investment company launched its first share buyback programme in 11 years and flagged up potential further gains in its biggest investment, the unquoted Australian miner Futura Resources.

Fund manager Trevor Steel raised the prospect of Futura, in which more than 24% of BSRT’s assets are held, achieving a “meaningfully higher value”. An option for UAE investor International Resources Holdings (IRH) to exercise an option to buy out shareholders, including BSRT, at A$3.15 a share had expired, leaving Futura free to pursue other buyers.

Having completed a US$90m refinancing at the start of the year and repaid a US$15m loan from IRH, Futura is in a strong position to move its two coking coal mines at Fairhill and Wilton to full production and take advantage of a rebound in prices from US$180 a tonne to over $240 for the vital ingredient for steel making. Advanced discussions for supplying steel mills in Japan, Europe, Taiwan and India were underway, the manager said. 

In addition to its 24.1% equity stake in Futura, BSRT holds a 1.5% gross revenue royalty on both its mines.

BSRT originally paid A$1 a share for its stake in Futura that was valued at A$2.21 last May. Steel said he agreed with Futura executive chair Donald Caroll that the expiry of the option restored the company’s strategic options. Caroll told his shareholders that “Futura and its shareholders are free to engage with other interested parties should opportunities arise, in what we believe is a more favourable market environment.” 

Coking coal is often cited as less polluting than ordinary coal, because impurities are removed during a heating process. However, according to Canadian environmental group Wildsight, steelmaking is still responsible for roughly 5.8% of global emissions, three times more than the aviation industry.

Historic buyback launch

Shares in BSRT rose 3% to 111.3p, increasing the Jersey closed-end fund’s year-to-date gain to nearly 44%, following the announcement that broker Shore Capital would use the annual facility approved by shareholders last September to re-purchase up to 15% of its stock.

The decision to resume buybacks after only a couple of repurchases in 2015, follows a recent widening in the company’s share price discount. Although data provider Morningstar puts BSRT on a 21% discount, that is against the out-of-date net asset value (NAV) per share of 136p at 31 December.

However, as we reported last week, NAV per share rose 11.9% in January to 152.2p with its holdings in mining companies boosted by the surge in gold, silver, copper, tin and tungsten. Even after today’s spike, that puts the shares on a 27% discount, warranting the board’s intervention.

The lagging share price means shareholders do not get the full growth the company is generating. For example, last year NAV jumped 51.8% but shareholders received 36%. Buying up excess stock should help narrow the gap and will add a little to NAV by acquiring the shares for less than they are worth.

According to the 2024 annual report, at the end of that year BSRT’s shareholders included activist Asset Value Investors with 8%, and RIT Capital Partners (RCP) with 7.3%. Private investors held over 16% through share dealing platforms.

After adopting a capital returns policy in 2015, BSRT made two transactions in its shares although it did return nearly £5m in a tender offer four years later. 

Our view

Matthew Read, senior analyst at QuotedData, said: “We are pleased to see Baker Steel Resources Trust join the growing list of trusts taking a more proactive approach to tackling a stubborn discount. However, while we are yet to see how aggressive BSRT will be with its repurchases, we would caution that, for a trust of this size, there is a delicate balance to be struck between providing short term liquidity, and putting upwards pressure on the ongoing charges ratio, as well as the risk of reducing liquidity over the longer term, which could have a negative impact on the discount. That said, it is clear that BSRT’s peer, CQS Natural Resources Growth and Income (CYN), has benefited from cleaning up its share register and, following strong performance on the back of a rising gold price, has been in a position to issue stock and grow again. We think BSRT’s board may be hoping to emulate that success.”

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