BlackRock World Mining 26 November 2018

BlackRock World Mining Trust celebrates its 25^th anniversary this year. Over the last 25 years, the team has demonstrated a strong track record and is now one of the most experienced teams of specialist investors in the metals and mining sector globally. Over this time, the team has developed strong relationships with company management teams, which helps them fully understand each company’s aims and strategy.

As we noted earlier in the year, the managers went into 2018 relatively bullish on the prospects for the sector. Whilst this confidence has not yet been rewarded, the managers’ central investment thesis remains that mining companies will be disciplined in terms of capital expenditure, and will continue to prioritise deleveraging and returning cash to shareholders for much longer than the market is giving them credit for. As such, BlackRock continues to believe shareholders will enjoy the benefit of strong dividends from underlying companies over the short term, but over the medium term, once the wider market catches on to the fact that capital discipline is here to stay, the managers expect a rerating.

Aside from electric vehicles, which remains a major theme within the trust through copper, lithium and cobalt exposure, the team is developing a “green metals” theme in the portfolio. Recognising increasingly strict environmental regulations, as well as the evolving preferences of consumers, the managers have been investing in companies which can produce aluminium either carbon free (Alcoa and Rio Tinto), or with a significantly reduced environmental impact (such as high grade iron-ore). The managers are also looking at how demand for metals will change over time, and as such have introduced a new holding in Umicore, which specialises in the recycling of metals and battery components.

On it’s 25^th Anniversary, BRWM has achieved strong returns for investors since it’s launch, both relative to generalist global funds and the MSCI ACWI. Whilst there have been good and bad periods to time an investment since then, the trust has made strong returns over the benchmark (demonstrating the benefits of being an active manager), and this has shown that it pays to take a long-term view on the sector.

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 more challenging. However, the managers observe that whilst global equities are near all-time highs in terms of historical valuation ranges, the mining sector has struggled to make ground, which may mean it has an element of relative protection should the current “growth correction” become more entrenched.

The trust’s historic dividend yield is 4.5%. 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 bonds, convertibles, and the Avanco royalty contract. Aside from these revenue sources, the managers also make use of option writing to boost income from the portfolio.

The trust’s discount has remained resolutely wider than the 10% level. Indeed, the board has been buying back shares since the interim results, with the last buyback on a 16% discount. This is in marked contrast to Global investment trusts which have seen their discounts continue to narrow.

The managers’ experience and breadth of resources, as well as active approach to delivering total returns from this specialist area, mean that 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 sector remains out of favour, but the managers seem confident that their investment thesis will play out. Certainly, if generalist investors can get over their worries on the trade war, China’s growth and capital discipline within the diversified majors, a small shift in sentiment will go a long way, both in NAV and discount terms.

In the meantime, income per share over the first six months of the year to 30th June was up 10.9% to 9.29p per share, driven by a broad improvement across almost all revenue sources. We understand that most of the major mining companies announce their dividends in February, so the picture for the final dividend will become clear soon after that, but all the signs suggest that the historic dividend of 4.5% seems well underpinned.