BAKERSTEEL Electrum Fund Q3 2021 Investment Manager’s Commentary

Electrum Fund


  • The Fund outperformed during the quarter, amid headwinds for the mining sector.
  • Battery metals producers outperformed, as EV sales rose.
  • Inflation is a key theme for miners, and the Fund is focused on producers who can best manage cost increases.

‍Q2 Top performers:

  • Albemarle
  • Livent
  • Tronox

Q2 Underperformers:

  • Coeur Mining
  • Mineral Resources
  • Newmont Mining‍

Fund Performance

BAKERSTEEL Electrum Fund (the “Fund”) fell -6.0% (I2 EUR class) during the quarter compared with the EMIX Global Mining Index (“the Index”) which fell -13.0% (in Euro terms). Further Fund details, including performance, can be found here.

The metals and mining sector faced headwinds during the quarter as US dollar strength, speculation over the timing of US interest rate hikes, and a belief that the current surge in inflation will fade, kept pressure on many metals’ prices. That said, certain sub-sectors, most notably the lithium sector, outperformed strongly during the quarter. Despite recent volatility, we believe we are at the start of a transformational bull market for speciality metals. The speed of change underway within the green revolution is highly encouraging, with demand forecasts for many commodities brought forward. The shifting outlook for inflation is broadly a supportive factor for the metals and mining sector, in particular for precious metals, which have historically thrived during periods of heightened inflation.

Since launch the Electrum Fund has demonstrated that its actively managed investment approach, which blends bottom-up value-driven stock selection with top-down asset allocation across sub-sectors of the mining industry, delivers superior risk adjusted returns relative to a passive holding in the sector. Inception to date Electrum has returned +83.9% compared to the Index which has gained +26.9% (in Euro terms).

Market Update

Encouragingly, momentum for green industrial development has built faster than we had expected during 2021 so far. The green transformation for the mining sector has only just begun, yet selected speciality metals are already benefitting significantly, with demand forecasts for many commodities exceeding expectations. The potential impact of governments’ efforts to meet climate goals on commodity prices cannot be overstated. Recent price spikes for lithium and aluminium are canaries in the coal mine, and we expect to see materially higher prices for certain metals as surging demand meets tight supply.

Battery metals experienced a strong quarter, boosted by rising EV sales, with cobalt rising +6.8% and lithium up +49.3%, and hitting a new high. Industrial metals fared less well during the quarter, as supply chain issues and rising energy costs cast uncertainty over the outlook for global economic growth, with copper down -4.4%. Meanwhile precious metals continued to face headwinds, amid US dollar strength and ongoing speculation over the impending US interest rate hike programme, with gold down -0.7% and silver falling -15.1% (all data in US dollar terms).

A dominant theme for the sector during the quarter was rising inflationary pressure across the global economy. Following decades of low inflation, policymakers have been slow to recognise that we are entering a new era of higher prices. Yet with recent US CPI numbers exceeding expectations and growing alarm among businesses facing rising costs, the argument that inflation will persist for some time is gaining traction.  Rising inflation has historically been positive for real assets and commodities, which offer a hedge against inflation. The return of inflation presents opportunities for miners to benefit from higher metals prices, but also poses risks. As with general equity markets, rising costs threaten to squeeze profits, eroding the benefits of higher commodity prices for some miners. As evidence of rising costs grows, the Electrum Fund has become increasingly focused on those companies which will disproportionally benefit from a higher cost curve, such as hedged or fully integrated suppliers.

“Rising inflation has historically been positive for real assets and commodities, which offer a hedge against inflation”

Operating cost inflation among precious metals miners is currently about 2-5%, driven largely by labour costs, particularly in North America and Australia, as well as by higher oil and steel prices. However quality companies are partially offsetting this with cost improvements through changes to work practices, adjusting shift patterns and minimising the number of individuals on site, through technological change, most notably through automation, remote mining and driverless vehicles, and through continuous improvements across the industry as management teams seek efficiencies. An example of this is the growing use of renewable energy at miners. Oil amounts to c.20% of miners’ costs, yet we expect this to continue to be reduced as renewables, notably solar, offer a viable alternative. The growth of renewable use among miners is likely to grow in significance particularly as carbon taxes come into force.

Performance Attribution

Portfolio themes included rising costs for miners, the undervaluation of the sector, and continued improvements to ESG reporting. As discussed above the portfolio is focused on those companies which are positioned to limit cost increases, through continuous improvements to efficiency and technology advances. With regard to value, we continue to see extreme levels of relative and fundamental undervaluation across the mining sector. Importantly, we aim to focus on producers with strong margins as well as beta. Finally, we have been encouraged to see environmental, social and governance (“ESG”) reporting becoming increasingly common throughout the sector. Access to high quality ESG data is a key issue for Baker Steel; our team has been ahead of competitors in adopting a regulated, rigorous and informed ESG framework, and we see evidence that our comprehensive approach results in superior potential returns.

“We continue to see extreme levels of relative and fundamental undervaluation across the mining sector”

Top performing positions during Q3 included Albemarle, Livent and Tronox. Albemarle (2.5% NAV) gained +30.7% (USD) during the quarter. The company is the largest non-Chinese listed lithium producer globally and, as such, tends to trade at a premium. Yet we would argue this is deserved, given the current strength of the market and Albemarle’s unique position. Even with growing uncertainty over the impact of the incoming Chilean administration, Albemarle does not expect its operations in the country to be affected, due to the long-term nature of its contracts to produce lithium, as well as its long history of operating in Chile.

Livent (3.3% NAV) gained +21.4% (USD) during the quarter. A 100% focused lithium producer, Livent enjoys premium pricing for its downstream products. The company is doubling production from its brine resource in Argentina and importantly has a 25% share in a large scale fully integrated hard rock producer in North America that we believe is not fully reflected yet in the current valuation. Livent also offers greater exposure to spot lithium prices than some of its competitors.

Tronox (2.8% NAV) gained +18.5% (USD) during the quarter. A vertically integrated mining and chemical company, Tronox has seen margin expansion continuing, as cost savings offset rising commodity and freight costs.

A selection of lithium producers outperformed, amid rising EV sales and record high lithium prices.

Underperforming positions during Q3 2021 included Coeur Mining, Mineral Resources and Newmont Mining. Coeur Mining (2.5% NAV) fell -30.3% (USD) during the quarter. The company was negatively impacted by subdued investor sentiment towards silver. Coeur is growing its silver production from 12mozpa to over 18mozpa with the development of its Rochester project in Nevada and we do not believe this expansion to be fully reflected in the company’s valuation.

Mineral Resources (3.4% NAV) fell -16.1% (USD) during the quarter. A leading mining services company, Mineral Resources trades on low multiples relative to other contractors, despite having strong potential for growth, particularly with regard to its iron ore and lithium assets. The Company is joint ventured in two high quality lithium deposits and its partner (Albemarle) is building the related downstream chemical plant. The company also pays a healthy dividend out of its robust free cash flow generation so despite some challenges around labour availability this quarter we remain supportive.

Newmont Mining (5.1% NAV) fell -14.2% (USD) during the quarter. The world’s largest gold producer, Newmont was negatively impacted by weaker investor sentiment towards gold during the quarter.


2021 has been a year of mixed fortunes for the natural resources sector so far, but with many opportunities for active investment managers seeking value and long-term gains in this sector. Year-to-date the Fund has remained ahead of its Index, in positive territory, highlighting the strength of its investment strategy, which combines bottom-up value-driven stock selection with top-down asset allocation between sub-sectors of the mining industry.

“Year-to-date the Fund has remained ahead of its Index, in positive territory, highlighting the strength of its investment strategy”

It is our view that speciality metals will continue to see strong demand growth in 2022 as the green revolution continues to gain momentum. Meanwhile precious metals will move towards recovery as the headwinds which have dogged the sector this year, namely the belief that inflation would be transitory and the spectre of a hawkish rate hike program, fade and the new global economic reality sets in.

The Fund’s objective is to give investors exposure to secular growth trends in the mining industry, including decarbonisation and the transition towards green energy, through investments in high-quality, undervalued producers. Through active management with a strong emphasis on ESG factors and a focus on “future facing” metals producers, we believe the Electrum Fund offers investors the potential for superior risk-adjusted returns relative to a passive holding in miners or commodities. We believe the Fund’s strategy has become increasingly relevant for investors during 2021 so far and will remain so as green technology continues to advance and monetary imbalances continue to build.

Mark Burridge & James Hayter





Please Note: This document is a financial promotion and is issued Baker Steel Capital Managers LLP (a limited liability partnership registered in England, No. OC301191 and authorised and regulated by the Financial Conduct Authority) on behalf of BAKERSTEEL Electrum Fund (“the Fund”) for the information of a limited number of institutional investors (as defined in the Fund prospectus) on a confidential basis solely for the use of the person to whom it has been addressed. This document does not constitute or form part of any offer to issue or sell, or any solicitation of any offer to subscribe or purchase any shares or any other interests nor shall it or the fact of its distribution form the basis of, or be relied on in connection with, any contract therefor. Recipients of this document who intend to apply for shares or interests in the Fund are reminded that any such application may be made solely on the basis of the information and opinions contained in the relevant prospectus or other offering document relating thereto, which may be different from the information and opinions contained in this document. This report may not be reproduced or provided to any other person and any other person should not rely upon the contents. The distribution of this information does not constitute or form part of any offer to participate in any investment. This report does not purport to give investment advice in any way. Past performance should not be relied upon as an indication of future performance. Future performance may be materially worse than past performance and may cause substantial or total loss. Some figures are approximate and are for information only, being drawn from different sources. Data and statements are as at end of reporting period unless otherwise stated. Investors should be aware that where a fund and / or share class are denominated in a currency other than investors’ home state currency, the fund’s / share class’s returns will be subject to currency fluctuations which may increase or decrease overall returns. The value of underlying fund investments denominated in another currency may also rise and fall due to exchange rate fluctuations causing the returns of the fund in its base currency to increase or decrease.

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