Commodity-related stocks have had a difficult time of it in recent years with the main sector indices still trading well below their pre financial crisis levels. Funds that specialise in this area can provide a useful source of diversification and protection against inflation. They also offer huge upside potential if you can get the timing right.
The natural resources sector started to recover at the beginning of 2016, yet despite this the associated investment trusts are mostly still trading on large double digit discounts. For example, BlackRock World Mining (LON:BRWM), which is one of the largest and best known, is available on a 10.5% discount despite returning 38% in the last 12 months.
It is difficult to predict whether the rally in the sector will continue, but if it does one of the biggest beneficiaries would be the Baker Steel Resources Trust (LON:BSRT). This differs to the other investment trusts in the sector as it provides exposure to a concentrated portfolio of natural resource projects via stakes in unlisted companies and specialist listed opportunities.
BSRT was launched in April 2010 soon after the financial crisis and has had a difficult time of it with the shares down about 56% in the last five years. It has been a challenging environment for the early stage mining companies that it invests in, but the broker Numis rates the management team highly.
Despite the rally that started in 2016, the fund’s shares still trade on a 27% discount to NAV.
They point out that despite the rally that started in 2016, the fund’s shares still trade on a 27% discount to NAV and they believe that ‘its largest investments have considerable upside potential’.
In a recent research note the broker explains that the value of a mining company typically increases as it progresses through several stages of development and the risk profile of its projects decreases. BSRT aims to capture this added value as its holdings move up the development curve.
The fund typically invests in unlisted companies and the manager aims to negotiate a purchase price that is below the risk-adjusted valuations to provide an additional safety margin. Their aim is to uncover good quality projects with capable management teams that have a decent track record of delivering on their plans.
BSRT is a small fund with total assets of just £62m and the managers have put together an extremely concentrated portfolio of 12 meaningful investments, of which the top three account for 55% of the allocation. The main holdings have all been successful and offer further upside. It is also comforting to note that the fund has an active presence on the Boards of six of its investee companies.
The financial crisis has made it difficult to fund these development stage assets, so BSRT’s main aim has been to help investee companies to survive until the market recovered. It now seems that that process has started as the fund’s NAV rose by 43% in 2016 and is up by a further 10% in the first eight months of 2017. If the recovery continues there is likely to be considerable additional upside, although it must always be considered a high risk investment.