Baker Steel is converting its Genus Capital Fund, which is an open-ended fund in the Cayman Islands, fully invested with assets under management of US$61 million, into a closed-end British trust while simultaneously raising up to US$100 million via an initial public offering.

The rational behind the restructuring and the stock exchange listing, according to Steel, is that the Genus Capital Fund already holds an attractive portfolio of pre-IPO assets.

'We have a really good pipeline of investments opportunities for which we are seeking to raise further capital so that we can deploy into these opportunities,' Steel said.

He said the key attractions of the new fund is that it gives investors the flexibility of a listed vehicle while being able to capture the investment strategy of the trust, which is to invest in pre-IPO and specialist listed stocks, which tend to be relatively illiquid.

Steel said that an investment in a big mining company tends to be conditioned by the direction of commodity prices.

'This [BSRT] is much more bottom-up and stock-specific. A different risk being taken,' he said. 'But it is benefitting from a following wind of what we think are higher structural commodity prices which are coming from the industrialisation going on in China.'

Commodity prices, he explained, are not the key driver of BSRT's returns. 'It's picking the right projects. But with increasing demand for commodities the world needs more projects, therefore it needs more private capital to help these projects move through the development stages.'

There is, he argues, an increasing requirement for funds to invest in private mining opportunities. But there is a lack of skills.

'We have a team which has those skills to value the new project,' he said.

So typically the fund invests in resource or mining companies at the first resource stage, the point when the company first publishes its resource.

At this point, the mining company would be about 25 per cent of the value it can expect when it is in full production.

The next key stage in the company's development curve is the production of a bankable feasibility study in the form of a technical report carried out by an independent expert indicating the mineral content of the deposit together with an economic report of the extraction costs.

If the feasibility study is successful, a portion of the resource is identified as a 'reserve', which is the minable metal that can be economically extracted.

At this point, the company may be listed or other forms of capital raised to build a mine.

Its value at this stage is typically 50 per cent of its production value.

Investing early carries more risk but the returns are bigger.

The risk, hopefully for investors, is mitigated by the expertise of the Baker Steel team and its advisers.

The principals, David Baker and Trevor Steel, were founding members of the BlackRock Mining team in 1992 and have a geo-sciences background.

In addition they have partnered with two experienced groups with extensive experience in developing mining assets - AWR Lloyd and Rock Capital.

AWR Lloyd, which was co-founded by Jeremy Ayre, is a specialist in corporate finance providing advisory services to the mining, steel and power sectors in Asia.

Rock Capital, which was co-founded by Stephen Fabian and Francis Johnstone, is a specialist resource boutique advising clients in strategic development and has been involved in the development of various mining projects in South America and Africa.

Fabian put together Ferrous Resources, a large iron ore project in Brazil.

Genus Capital Fund was a seed investor in the project which is now the fund's largest investment.

Other investments include InvanPlats, a large copper project in the Democratic Republic of the Congo, Gobi Coal in Mongolia, Copperbelt Minerals, also in the Congo and First Coal in Canada.

The carrying value of these investments is US$61 million, which Baker Steel hopes to realise within a range of US$116 million to US$225 million.

RBC Capital Markets, one of the sponsors of the IPO, values BSRT at a potential value of US$81 million to US$153 million, adding that if the companies in the portfolio are listed the value rises to between US$178 million and US$331 million.

In pointing out the risks BSRT is exposed to RBC notes that because of its focused investment approach and significant ownership position in few companies, BSRT is exposed to the same risks as its underlying investments.

These include notably world economic growth and commodity prices, trends in operating costs.

'Commodity demand is derived from world economic growth. Consequently, the fund's exposure to iron ore, coal and copper prices in particular, but also consumables such as sulphur, oil and steel, is vulnerable should world growth, especially in China, be slower than we expect.'

Taking stock

Baker Steel Resources Trust focuses on pre-IPO mining resources

RBC Capital Markets values BSRT at a potential US$81 million to, in US$: $153m

If the companies in the portfolio are listed, the value increases to between US$178 million and, in US$: $331m