Baker Steel Resources Trust Ltd (LON:BSRT) is set to play a key role in the revitalisation of the old Wolf Minerals tungsten project at Hemerdon in Devon.

Now being worked up inside a new company called Tungsten West, it looks as though Hemerdon could end up making Baker Steel quite a tidy sum in the medium term, give the low entry costs and the positive economic modelling that’s been done so far.

Having had around £200mln spent on it by Wolf, or by Wolf’s backers RCF, depending on which way you look at it, by the time Hemerdon came across the Baker Steel desk as a potential deal, it was largely moribund. The asking price was just £10mln.

“About eighteen months ago, in the first quarter of 2019 it was shown to us as a distressed asset,” explains Baker Steel’s Trevor Steel.

“And we liked the idea, because we like buying things cheap, so we agreed to be a cornerstone investor, subject to the completion of some further technical work.”

Given the context, it’s perhaps not surprising that Baker Steel would ask for further technical work. Wolf died an extremely slow and well publicised death, and at around the same time the death rattle was issuing out from Devon, the UK’s only other major high value mining project, the Sirius Minerals project in Yorkshire, was also imploding.

It’s only a mild exaggeration to say that as a mining jurisdiction the UK was getting a reputation for being difficult. It wasn’t helpful either that both Wolf and Sirius were very popular with UK investors, keen to have a stake in something on their own doorstep rather than in a corner of a foreign field. The press had followed these stories closely too, and had also, to some extent, bought in.

So once the dust settled from those two high-profile busts, anyone moving in to pick up the pieces had to be pretty careful about what they were getting into.

But Baker Steel is an investment company that’s made to be careful. This is a company that has made a success of assets in Russia and in Zimbabwe, two notoriously difficult jurisdictions. Along the way it’s built up a portfolio worth over £80mln at the time of writing, has managed to diversify across continents – Australia, Asia, Africa, Europe – and across commodities – gold, silver, coal, tungsten, concrete.

It’s built a strong, but not volatile, growth profile for its share price, and its employed capable and steady managers for its investments. There’s no overpromote or flashiness, but there is nevertheless a can-do attitude.

As far as Tungsten West is concerned, none of that is particularly to the fore. But that’s the point. Unlike with Wolf, where Hemerdon was do or die, and the project was only kept alive for as long as it was because RCF was reluctant to crystallise its loss, with Baker Steel, Tungsten West is only 8% of the portfolio at the last count, and, comparatively at least, eminently affordable.

“We’ve taken it step by step,” says Baker Steel’s Francis Johnstone. “As a founder and main cornerstone we’ve been able to dictate our terms.”

Initially it was thought that Tungsten West would have to tear down the entire plant at Hemerdon. But it became clear as more testwork was done that it was really ore sorting and the front end of the plant that had been problematic.

To fix it will cost money, to be sure, but probably not more than £40mln. Given that the current estimates for net present value at Tungsten West ring in at over £300mln, the investment case is compelling. Set that valuation against the initial £10mln outlay, and the upside to Baker Steel becomes clear as day.

More work needs to be done, but a few of the positive drivers of the project are already apparent. First, it looks as though it will be at the lower end of the cost curve. It helps that all those costs that were previously sunk have been written off to someone else’s balance sheet, but even on operating costs Tungsten West does well.

“The breakeven cost is US$130 per metric tonne unit,” says Johnstone. “The current price is well above that.”

So, one way or another Baker Steel looks like making a significant turn on its interest in Tungsten West down the line. But there should be some upside in the more immediate term too. Back in March, when the coronavirus chaos was in full crisis mode, Baker Steel wrote down its investment in Tungsten West by about 20%.

It wrote down other assets too, but has been able to readjust those others as the market has recovered. With Tungsten West though, there’s currently a £5mln fundraise in the works, which means Baker Steel hasn’t been able to do anything with the valuation. The fundraise is oversubscribed, according to Johnstone, so that’s one tick in the box.

But it’s also worth noting that once the Tungsten West funding is over the line, Baker Steel will be free to reappraise the value of its overall investment. As things stand there’s only one way that valuation’s going, and there could well be a corresponding impact on the Baker Steel share price.

Watch this space.

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