BlackRock World Mining 10 February 2021

The past 12 months has seen a significant shift in fortunes for BlackRock World Mining Trust (BRWM), which appears decisively for the better. The team’s long-running investment thesis – of investing in miners which show capital discipline and a willingness to reward shareholders with dividends – is paying off. Commodity prices have remained firm during 2020, and in most cases seeing gains with a background of supply constraints.

On the demand side, despite the pandemic induced economic slowdown, global demand for commodities seems rosy. Thanks to several themes identified by the managers, this looks set to continue for the short to medium term. As we discuss in Portfolio, amongst these are the stimulus-led synchronised global infrastructure spend in the offing. A further boost for BRWM is the apparent focus by governments to use stimulus to accelerate the decarbonisation of economies, which will mean a significant increase in demand for copper and other metals if it transpires. In the team’s view, inflation is also a likely prospect, which historically has been supportive of commodity prices and related equities.

Relative to the reference index and broader equity market, BRWM’s Performance during 2020 has been strong. BRWM is a specialist trust which aims to maximise total real returns. However, of ever-increasing interest – especially in an environment where income sources elsewhere are under pressure – is the Dividend component. The trust structure enables illiquid investments including debentures and unlisted royalties which are clearly contributing strongly towards helping BRWM achieve its yield objectives.

With a renewed interest in commodity related investments, the Discount has narrowed decisively. Over the past three years, the average discount has been 12.3%, compared to the current premium of 0.8%.

The convergence of several powerful themes that underpin BRWM have resulted in a swift narrowing of the discount. In our view, BRWM’s structural features fully justify the positive attention in what appears to be a bullish environment for the strategy.

BRWM appears to be in a strong income position in the current environment, with lowly geared underlying companies and supportive commodity prices. Whilst certainly a lasting recession would not be good for BRWM, over the short to medium term there appear to be a number of tailwinds which make BRWM attractive, including to investors focussed on income. Based on published information, the dividend for this year could be a maximum of 20.4p, representing at least a 7% reduction from 2019. If paid (and there are no guarantees), this represents a yield of c. 3.5%.

As regards capital, the team’s adroit asset allocation positioning during 2020 has clearly been a key driver of returns, and enabled a strong performance both relative to the reference index, but also wider equities. The mining sector has historically been significantly more volatile than broader indices. However, in our view BRWM offers some highly attractive attributes which the managers expect to be the beneficiaries of structural tailwinds. They are increasingly bullish, and the discount moving to a premium of 0.8% suggests that investors share their view. Whilst risks to the discount widening remain, we believe BRWM’s attributes relative to open-ended competitors mean the current level is justified.