1st October 2021
Manager meetings are the single biggest source of ideas for us and is why we strive to do as many as possible. It is a continual process of proactively getting in touch with our existing managers for a routine regular update, exploring new areas to get to know them better (such as a mini-review of China funds to get a better feel for the heightened regulation and implications for markets) or simply saying yes to most of the inbound offers of meetings we receive from brokers and sales managers.
Between the four fund managers that adds up to around 500 meetings or video calls a year.
Very occasionally we get the chance to do some more interesting due diligence in the form of a site visit – with my recent tour of a tungsten mine down the road in Devon a particular highlight.
Previous to this, our last site visit was in 2019 when we went to Berlin to view some of the assets held within one of our largest investments, Phoenix Spree Deutschland (PSDL), and speak to local valuers and lawyers in the wake of the imposition of the rent freeze. That visit was invaluable to see the quality of the assets first hand, but crucially it also enabled us to get a better understanding that the controversial Mietendeckel was unlikely to be upheld by the Federal Court and helped us maintain conviction in PSDL’s business model.
The reason for this visit to a tungsten mine was that the company, Tungsten West, is a soon-to-be AIM listed company held within the Baker Steel Resources investment trust (BRST), which is owned in our Global Opportunities Fund. Determining whether this company will do well post-IPO was important given it is likely to be a material needle-mover of BSRT’s net asset value.
A group of investors and potential investors of BSRT and Tungsten West were given a briefing in the Portakabin, I mean board room, before donning high-vis jackets, blue helmets and steel-capped boots and heading off to the mine to look at some rocks and play ‘spot the tungsten’.
After the trip I was able to tell anyone who would listen about how tungsten is mined and produced (too complicated for this note), what it is used for (strengthening steel and hardening drill bits among other things) and the financial model of the business (which like any other mine can be boiled down to having a low cost of production and a well-supported commodity price).
The favourable financial dynamics are very much in existence but the major advantage of this company is the failings of the previous owner of the mine who sank hundreds of millions of pounds into the project, had very poor production methods and couldn’t make a profit despite the abundance of tungsten in the area. The mine was shut down in 2018 and the new owners will be investing the IPO proceeds and new debt into upgrading the machinery with production due to start within 18 months.
One of the most striking stories that illustrated the problems with the previous production process was that the magnet machine (it probably had a more technical name) was erroneously rejecting the tungsten rather than accepting it. This meant that so much of the good stuff was going to waste.
Further very simple and obvious improvements, including selling the previously wasted aggregates, suggest the new management will be able to beat the base case scenario laid out in the listing documents.
These are things I wouldn’t have been able to ascertain without visiting the mine and speaking to the CEO, Chairman and the Technical Directors, or having the conversations with other investors accompanying me on the trip. This is what made this site visit really worthwhile.
My conclusion is that the position in Baker Steel Resources has the potential to be very accretive to its net asset value and gave me confidence that its position in our Global Opportunities Fund will prove to be a positive contributor to the Fund’s future performance.
Daniel Lockyer – Senior Fund Manager
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