BlackRock World Mining 12 April 2024

BlackRock World Mining (BRWM) takes a highly active and flexible approach to maximising the returns on offer from the global mining sector. While this industry is economically sensitive, it is also vital to the green energy transition, which is seeing multiple opportunities emerge at the top level as well as at the individual company level. Managers Evy Hambro and Olivia Markham find a particularly attractive outlook for copper, which has seen restricted new supply coming to the market even as long-term demand for electrification is soaring. In fact, they note that at the industry level, there are all the classic signs that higher commodity prices are coming: tight supply, high demand and low inventories. It seems to be fears of weak growth in China and recession in the developed world that is currently handing over commodity markets and has led to a sell off over the past 18 months (see Performance).

Evy and Olivia are unusually flexible in how they can invest, with investments in unlisted companies, debt and royalties held alongside public equities, and the tactical use of gearing. They can also write options to boost income, or take positions in commodity futures. Arguably it adds up to a more flexible diversified mining company than the large caps listed on the LSE, with greater ability to tactically adjust exposures.

Dividends in the mining sector rose to extraordinary levels in 2021, and have since declined somewhat. However, with the final dividend for 2023 of 17p to be paid in May, the total payout for FY 2023 would amount to a 6.2% yield on the share price.

At the time of writing, BRWM’s shares trade on an 8.3% discount compared to their 5.6% five-year average.

When we met with the managers recently they noted that there were all the classic signs of high commodity prices: tight supply, high demand and inventories low and declining. On top of this, major commodities have been resilient in the face of weakness in the Chinese economy. However, prices in the mining sector mostly remain muted, due largely to wariness about the economic outlook in China and in the West. We think high interest rates have also reduced the relative attractiveness of riskier, yielding investments, contributing to weakness in the stocks and in BRWM’s share price relative to NAV.

However, the attractions of an investment in commodities remains high, in our view. In particular, the growing importance of renewable energy production to commodity demand is a secular trend which suggests less cyclicality going forward. A focus on ESG is also contributing to a higher pricing environment by increasing the costs of doing business – higher standards need to be met. As a consequence, Evy and Olivia argue we could see a green premium in the sector open up over time, as companies seek to decarbonise their own operations, potentially leading to higher valuations than their ‘dirtier’ peers.

We would view this combination of short-term macro worries and a share price discount as a potentially attractive entry point over the long run, although we acknowledge downside risks remain if there is indeed further economic weakness in the world’s major economies.