Evy Hambro, BlackRock
Updated 18 Nov 2022
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Disclaimer

This is a non-independent marketing communication commissioned by BlackRock. The report has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on the dealing ahead of the dissemination of investment research.

Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. Investors may not get back the amount originally invested.

After gains since the start of the year, certain commodities have started to weaken over the summer. In particular, those commodities seen as dependent on global economic growth have seen prices fall. This includes metals such as iron ore, steel and copper.1 However, we believe the structural arguments for mining companies are still intact.

The short-term sell-off has been prompted by fears of global recession. These fears are well-founded, with rising interest rates and inflation weighing on economic growth. The immediate sell- off was sparked by weakness in China; in particular, the Chinese property sector, and ongoing, economically damaging restrictions as the government sticks to its zero-Covid policy.

Equally, earnings in the mining sector have been hurt by rising input costs, including higher oil prices, rising wages rates, higher raw material input costs and supply chain issues. These have dented share prices in the short term and could continue to impact results in the second half of the year.

Longer-term strength

However, we believe any price weakness for commodities is likely to be temporary. China is showing signs of recovery. Recent manufacturing data has shown the sector starting to grow once again.2 It has loosened monetary policy and announced support for the property sector and on infrastructure spending.

While there are unquestionably strains elsewhere in the global economy, many commodities are subject to structural forces that are likely to support demand even if the economy weakens. The Ukraine crisis has put a greater focus on energy independence, for example, accelerating the plans of governments across the globe to increase energy supply from alternative sources. We expect the mining sector to play a critical role in the coming years in supplying materials required for lower-carbon technologies, including wind turbines, solar panels and electric vehicles.

Broader global infrastructure needs are also supporting demand for commodities. Infrastructure development is becoming a priority across the globe to promote more efficient use of resources. The US Inflation Reduction Act, passed in August, announced significant spending on green energy infrastructure, including charging infrastructure for electric cars, plus improvements in rail services and other transportation networks.3 This shows how infrastructure is being prioritised by governments.

Supply constraints

Demand comes at a time when supply remains limited. The management teams of mining companies continue to maintain a focus on capital discipline, having learnt their lesson on expanding supply too quickly in previous commodities cycles.4 Equally, for a number of commodities, notably copper, we see mines ageing, creating less supply each year, so mining companies need to run simply to stay still.

It is plausible that more supply comes through over the longer term, particularly given the visibility on demand. However, it will take time for any new expenditure to feed through into new supply, given the complexity of bringing new mining projects on stream. In the meantime, weak supply and strong demand is likely to keep prices elevated for many commodities and support the mining sector.

Mining companies

Mining companies are generally in robust financial shape today, with high levels of free cash flow. This is helping them weather cost pressures. Balance sheets for nearly all mining companies remain strong. This gives them flexibility at a difficult moment.5

Of course, there are risks. Mining companies often operate in difficult parts of the globe and geopolitical tensions are rising, not just with the war in Ukraine, but between China and the US. We strive not to invest in countries where there is uncertainty over the mining code and high political risk. Good governance is vital and we only invest in companies where we have faith in the management team.

There are two other reasons to consider mining in the current environment. We believe mining equities are an effective way to hedge portfolios against persistent inflationary pressures. There are relatively few sectors that can thrive in the current market environment, but mining has been an area of strength.

Also – and in spite of the relative strength of mining shares since the start of the year - shares remain, in our view, good value relative to other sectors and to their own history. This should hopefully support buybacks and future dividend payments.

While short-term concerns have held back mining shares over the past few months, the factors driving the sector are durable and will start to become increasingly important for the remainder of 2022 and beyond. The world is in transition and this is likely to support the mining sector even in the face of weaker growth.

Evy Hambro
Co-Manager, BlackRock World Mining Trust plc

1 FT - Industrial metal prices melt as global recession fears flare up – 6 Sept 2022

2 Statista – 30 Sept 2022

3 https://www.eesi.org/articles/view/how-the-inflation-reduction-act-and-bipartisan-infrastructure-law-work-together-to-advance-climate-action

4 World Trade Organisation

5 Blackrock – August 2022

Risk warnings

Past performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a product or strategy.

Changes in the rates of exchange between currencies may cause the value of investments to diminish or increase. Fluctuation may be particularly marked in the case of a higher volatility fund and the value of an investment may fall suddenly and substantially. Levels and basis of taxation may change from time to time.

Trust specific risks

Exchange rate risk: The return of your investment may increase or decrease as a result of currency fluctuations.

Emerging markets risk: Emerging market investments are usually associated with higher investment risk than developed market investments.

Therefore, the value of these investments may be unpredictable and subject to greater variation.

Gold/Mining funds risk: Mining shares typically experience above average volatility when compared to other investments. Trends which occur within the general equity market may not be mirrored within mining securities.

Gearing risk: Investment strategies, such as borrowing, used by the Trust can result in even larger losses suffered when the value of the underlying investments fall.

Important information

Issued by BlackRock Investment Management (UK) Limited, authorised and regulated by the Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL. Tel: + 44 (0)20 7743 3000. Registered in England and Wales No. 02020394. For your protection telephone calls are usually recorded. Please refer to the Financial Conduct Authority website for a list of authorised activities conducted by BlackRock.

This document is marketing material. The Company is managed by BlackRock Fund Managers Limited (BFM) as the AIFM. BFM has delegated certain investment management and other ancillary services to BlackRock Investment Management (UK) Limited. The Company’s shares are traded on the London Stock Exchange and dealing may only be through a member of the Exchange. The Company will not invest more than 15% of its gross assets in other listed investment trusts. SEDOL™ is a trademark of the London Stock Exchange plc and is used under licence.

Net Asset Value (NAV) performance is not the same as share price performance, and shareholders may realise returns that are lower or higher than NAV performance.

The investment trusts [listed below/above/in this document] currently conduct their affairs so that their securities can be recommended by IFAs to ordinary retail investors in accordance with the Financial Conduct Authority’s rules in relation to non-mainstream investment products and intend to continue to do so for the foreseeable future. The securities are excluded from the Financial Conduct Authority’s restrictions which apply to non-mainstream investment products because they are securities issued by investment trusts. Investors should understand all characteristics of the funds objective before investing. For information on investor rights and how to raise complaints please go to https://www.blackrock.com/corporate/compliance/investor-right available in in local language in registered jurisdictions.

BlackRock has not considered the suitability of this investment against your individual needs and risk tolerance. To ensure you understand whether our product is suitable, please read the fund specific risks in the Key Investor Document (KID) which gives more information about the risk profile of the investment. The KID and other documentation are available on the relevant product pages at www.blackrock.co.uk/its. We recommend you seek independent professional advice prior to investing.

This material is marketing material. Any research in this material has been procured and may have been acted on by BlackRock for its own purpose. The results of such research are being made available only incidentally. The views expressed do not constitute investment or any other advice and are subject to change. They do not necessarily reflect the views of any company in the BlackRock Group or any part thereof and no assurances are made as to their accuracy.

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ID: MKTGH1022E/S-2458433

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