BlackRock World Mining 23 October 2019

The objective of BlackRock World Mining (BRWM) is ‘to maximise total real returns to shareholders through a world-wide portfolio of mining and metal securities’. Income has become a more important part of the total returns objective, and the board’s view is that a ‘significant’ dividend will serve as an effective discount control mechanism over time.

BRWM uses all of the tools available to it as an investment trust, a clear differentiator to peers. Chief among these is the managers’ ability to make private royalty investments, which are now starting to contribute meaningfully to returns to shareholders. The managers also invest in fixed income which serves as a useful boost to returns, and to write covered call options on an opportunistic basis to generate extra income. The managers aim to use gearing so that, broadly speaking, investors maintain a fully invested exposure to equities, but achieve much greater diversification than would otherwise be the case.

One of the central tenets of investing in BRWM for metals and mining exposure is that the managers can deploy the company’s assets to different commodities in a far more nimble and opportunistic way than the large listed diversified miners. Illustrating this, one of the key themes in the portfolio currently is exposure to gold and precious metals. The managers have been adding to positions over the last year, such that gold now makes up 26.6% of the portfolio, an increase from 13% a year ago.

A long-running theme in the portfolio is that the wider market is underestimating the mining sector’s resolve to maintain capital discipline, to deliver dividends and buybacks to shareholders, and to pursue only value-accretive growth opportunities. As evidenced by the trust’s strong income flow so far this year, the managers’ view has been proved correct, and prodigious cash flows are being used to reward shareholders in the form of special dividends.

The trust’s historic dividend yield is 5.2%. Over the six months to 30 June 2019, BRWM’s net revenue earnings (including specials) amounted to 11.43p per share, an increase of 23% over the same period last year. The board has committed to pay out substantially all of the trust’s income in dividends, which means that the entire increase in income is likely to flow through to dividends.

The trust’s discount has remained resolutely wide. The board has been buying shares back, most recently on 26 September 2019 at a discount of 15.2%.

BlackRock World Mining remains the largest trust offering exposure to the metals and mining sectors in the sector. The fact that the mining sector as a whole is under-owned, and has lagged behind wider equity markets, appeals to the contrarian in us. Certainly the travails of the sector in 2015 appear to be a thing of the past. Having substantially de-geared, companies are on a much more sustainable footing, and are now starting to pay out large chunks of earnings as dividends, which is reflected in BRWM’s bulging income account. With interest rates now perhaps less likely to increase any time soon, the trust’s dividend yield and increased exposure to gold look particularly noteworthy.

Our relatively crude analysis (taking the difference between the cum-income and ex-income NAVs) suggests that so far BRWM has undistributed income of around 11.7p per share on the balance sheet. Assuming income over the rest of the year covers costs, and therefore that no further income is available for distribution, this analysis suggests that the full year dividend will be in the order of 19.7p, representing an increase of 10% over 2018. Clearly much can change between now and the year-end, but this projection serves to highlight that the revenue account is in a good position.

The historic yield of 5.2% compares very well, in our view, to other Global Equity Income trusts (average yield 3.9%) and the IA Global Equity Income sector, which currently has a median yield of 3.1% according to data from Morningstar. In fact, with a yield of 5.2%, the trust is among the very highest yielding equity trusts in the wider investment trust sector. This yield is to some extent underpinned by revenue reserves of 0.72x (based on a dividend of 18p).

As well as a very high yield, BRWM also continues to trade at a significant discount to NAV, both in absolute terms and relative to its own history. The board has been buying shares back at a discount of 15.2%, which could provide shareholders with a degree of downside reassurance at the current level. Should sentiment towards the sector improve, the discount could narrow. In the meantime, the dividend yield of 5.2% is higher than many other equity income funds.