BlackRock World Mining 27 May 2020

BlackRock World Mining (BRWM) is a specialist trust which aims to maximise total real returns. As opposed to an investor buying shares in a ‘real’ miner, BRWM aims to deliver returns with a smoother trajectory, but also to be more nimble than a diversified miner in re-allocating between commodities.

A recent example is the success BRWM has had from sharply increasing its exposure to gold, which started in early 2019. With ballooning government debt, negative rates and a slowing economy, gold retains its place as a diversifier and the ultimate safe-haven asset. Gold and precious metals now constitute around 36% of the portfolio, as at 30/04/2020.

BRWM’s portfolio also reflects other long-term themes. Chief amongst them is the ‘era of the shareholder’, in which global diversified miners will continue to focus on dividends. Given these companies’ strong balance sheets, the team believe they should ride out Covid-19 related issues better than many other sectors.

A key differentiator of BRWM is its exposure to fixed interest, debentures and royalties. An increased investment in a Vale debenture last year contributed significantly to revenues; while 2019 also saw a landmark moment for the OZ Minerals royalty, whose income surpassed US$12.3m, a more than full payback on the trust’s initial investment. Currently it represents an impressive 176.5% total return.

BRWM's dividend yields 6.5% on a historic basis. The managers have worked hard to diversify their income stream over time, but the immediate outlook for dividends everywhere is cloudy. The managers believe that the diversified miners – in addition to the gold miners – are in a relatively good place, with strong balance sheets and strong free cashflow.

Last year BRWM paid a record dividend of 22p, indicating the success of the managers’ core theme. Income diversity – alongside the balance sheet strength of the underlying companies – puts the trust on a solid footing on a relative basis. In the immediate term, however, a historic yield of 6.5% shows there is some uncertainty about this year’s dividend. Taking into account BRWM’s diversified revenue sources, and its gold mining and dollar exposure, a revenue cut of c. 25% would translate into a dividend of c. 16p, representing a prospective yield of c. 4.7%: still a significant yield premium to other areas of the market.

BRWM’s discount has remained resolutely wide, and has widened further this year, with the board buying shares back at around the 15% level. In a recently published article, we note that BRWM has one of the lowest discount volatilities in the sector, meaning that NAV returns usually translate into share price returns for shareholders. At the same time, the current wide discount offers potential for a re-rating should a recovery for commodities companies take place.

As we have observed before, should there be an improvement in sentiment towards the mining and metals sector, the discount may narrow of its own accord. In the meantime, the trust is likely to offer a yield premium compared to other equity income funds and trusts. The board has showed renewed vigour in its willingness to buy shares back, which could provide a degree of reassurance on the discount.