Over the 25+ years that it has been in existence, the BlackRock team that have been managing this trust has demonstrated a strong track-record, and is one of the most experienced teams of specialist investors in the metals and mining sector, globally. Echoing the wider sector in which they invest, income has increasingly become a more important part of the total-returns objective. The board’s view is that a “significant” dividend will serve as an effective discount control mechanism over time.
Currently, the managers believe the wider market is underestimating the mining sector’s resolve to maintain capital discipline, deliver dividends and buybacks to shareholders, and only pursue value accretive growth opportunities. This theme remains the mainstay of the portfolio, with “mega-cap” diversified miners forming 45% of the portfolio, and five of the top ten holdings. Their positions as the globe’s lowest cost producers means that their prodigious cash-flows, having been previously used to repay debts, are now increasingly being used to reward shareholders.
The thesis behind BRWM has always been that investors would benefit from an investment trust that offered exposure to different commodities, but with much greater flexibility to shift allocations between commodities than the listed diversified miners that own mines rather than shares in other companies. The current commodity breakdown reflects this, especially the managers' positioning in what they describe as “sustainable metals” and “green metals" – themes that the managers are gradually building up exposure to, and which constitute 4% of the portfolio. The sustainable metals theme offers shareholders exposure to the huge changes that will occur with the rise of electric vehicles (EVs), and includes companies that produce metals for cathodes in batteries, such as lithium, cobalt and nickel. Green metals is another environmentally-related theme. The managers' thesis is that the environment, carbon footprint and energy efficiency will increasingly be factors impacting the price of commodities, with the managers positioning themselves to be more exposed to those miners that own high grade iron ore, which results in less waste, energy and processing to produce products than competitors.
BRWM’s outperformance has usually been achieved during periods of positive sentiment. 2016 and 2017 gave grounds for optimism on performance, but over five years, the trust is marginally behind the benchmark, with much of the underperformance attributable to the write-off of the Marampa royalty in the summer of 2014. So far this year, performance has been challenging, with the trust lagging the benchmark due to the Vale tailings dam failure and the strong rally in pure play iron ore names.
The trust’s historic dividend yield is 5.5%. The managers use the company’s low-cost gearing to ensure that investors have a full exposure to equities, but benefit from a diversified income stream stemming from other investments in fixed income, a recently significantly increased holding in an illiquid royalty-type debenture and the unquoted Avanco royalty contract (which has been renamed the OZ Minerals Brazil royalty following the acquisition of Avanco in 2018). Aside from these revenue sources, the managers also make use of option writing to boost income from the portfolio, which helps them achieve a yield premium to the benchmark.
In the managers' view, 2018 was the first time that underlying portfolio holdings’ managements had the latitude and the opportunity to prove their commitment to capital discipline and put shareholders first. Strong dividends received by the trust tell their own story, and so Olivia Markham (co-manager) is optimistic that managements will not give back the credibility they have won so far, and that the dividend path – assuming spot prices for commodities don’t weaken significantly – remains on an upward trajectory. The yield of 5.5% compares very well in our view to other Global Equity Income trusts (average yield 4%) and the IA Global Equity Income sector, which currently has a median yield of 3.14% (according to data from Morningstar). In fact, with a yield of 5.5%, the trust is amongst the very highest yielding equity trusts in the entire investment trust sector.
The trust’s discount has remained resolutely wider than the 10% level, and currently sits at around 12%. However, the discount has started to move in gently from it’s lows. The board last bought shares back at a discount of c.14.9% in October 2018, and so the narrowing discount since then could suggest the tide of buying interest has turned, with investors perhaps now recognising the attractive yield and prospects for the trust.
BRWM remains a pre-eminent vehicle for those looking for exposure to metals and mining. Recent performance has been moderately disappointing, but not entirely unexpected in our view given the historic pattern of outperformance during positive periods for the sector.
The managers continue to note that the mining sector remains under-owned by generalist investors. Olivia tells us that the diversified miners are trading on low ratings of c. 4.5x - 5.5x on an EV / EBITDA basis, compared to a historic average of 6.5x. With net debt having been significantly reduced, these companies have less financial risk but are throwing off significant free cashflow which can be used for dividends, buybacks or special dividends.
As we have observed before, should an improvement in sentiment occur, the discount should narrow. In the meantime, the current dividend yield of 5.5% is attractive compared to Equity Income funds and trusts. The board has showed its willingness to buy shares back historically at levels marginally wider than the shares currently trade, which could provide a degree of reassurance to the share price rating on the downside. As such, the combination of a high yield and wide discount in absolute terms, looks attractive.
|Large liquid trust in a specialist sector, using structure’s flexibility
||Volatile NAV, likely to be impacted strongly by Chinese sentiment (for good or bad)
|Dividend yield attractive
||Concentrated portfolio, in a relatively narrow sector
|Discount is wide in absolute and relative terms