Disclosure – Non-Independent Marketing Communication
This is a non-independent marketing communication commissioned by BlackRock World Mining. 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.
- Last week saw BRWM release its annual results for the period ending 31 December 2020. Over the year, the Trust delivered NAV total returns of 31.8%, while the share price rose by 46.7%. This compares very favorably to the reference index, the MSCI ACWI Metals & Mining 30% Buffer 10/40 Index, which returned 20.6%, and the FTSE All-Share Index which returned -9.8%.
- Over the full year, the revenue return per share amounted to 20.40p compared with 22.46p for the previous year, representing a decrease of 9.2%. This was predominantly due to a fall in special dividends. After paying three quarterly interim dividends of 4.00p, the Board is proposing a final dividend payment of 8.30p per share. This would take the full year dividend to 20.30p, representing a decrease of 7.7% relative to the previous year.
- The Managers believe that world equities now appear to be on a firmer footing, following the US election and the rollout of COVID-19 vaccines. This has increased optimism and the hope for some return to normality. Looking forward they believe that commodity demand and pricing outlook is strong, and they will look to capitalize on this through their consistent focus on high-quality companies with strong balance sheets and low costs.
BlackRock World Mining (BRWM) has delivered a very strong set of results for investors. This might come as a surprise to some, with the mining sector typically performing poorly in the face of large scale global economic and market corrections. The companies held within the portfolio have been selected for their rigid capital discipline, programs of balance sheet repair and sensible growth plans, leaving them particularly well placed to navigate the challenges brought about by the global pandemic.
To 31 January 2021, the Trust has produced NAV total returns of 246.0% over the past five years, in comparison to 193.1% from the reference index according to BlackRock. This also compares exceptionally well relative to the Morningstar Commodities and Natural Resources sector which has delivered NAV total returns of just 16.5%. Past performance does not necessarily reflect future growth; however, we are excited by the prospects of the trust because of four structural drivers which each currently provide tailwinds for BRWM.
The first reason to be optimistic is the stage of the mining cycle. The Managers note that with many mining companies having had a “near death” experience in 2015, managements have remained highly disciplined in terms of capital expenditure and have been paying down debt rather than fund new projects. As such, supply of commodities is likely to remain relatively tight for the next few years. If demand increases, then prices are likely to rise providing strong support to earnings.
Supporting the demand outlook, governments around the world are running significant fiscal stimulus programs. Most governments are planning big infrastructure projects as the they look to ‘build back better’ in a post pandemic world. As such, a significant pipeline of future demand for raw materials looks likely. For metals such as copper, the Managers of BRWM note that supply is being fully absorbed by the current demand for metals. We see this as crucial, because infrastructure project spending hasn’t really fully begun.
This further leads into the third structural tailwind; decarbonization. Increasingly governments are committing to ‘net zero’ emission targets, including, significantly, China. This will be impossible without significant investment into physical infrastructure in areas such as renewable energy, and many metals (such as copper) are absolutely essential to building this. Over the longer term, increasing investment into areas such as renewables means that forecast copper demand is expected to not just increase, but accelerate in the coming years. BRWM holds exposure to several high-grade copper producers, both through dedicated copper mining companies and through diversified miners.
A final driver for growth in the sector is likely to be inflation. The Managers note that inflation expectations are already rising and they find this unsurprising against a backdrop of rising global production costs, with significant policy stimulus and pressure to keep policy loose. Production cost pressures are likely to increase as we see reshoring production and deglobalization. Ultimately this leads to wage inflation giving more discretion to spend and creating a more inflationary cycle. The Managers note that against such a backdrop, commodities and miners have historically fared well. Their exposure to underlying ‘real’ assets makes them beneficiaries of any inflationary pressures. Given that few areas of the market perform well in real terms under rising inflation, this makes BRWM potentially attractive in an inflationary environment.
Given the strength of the underlying companies, and the aforementioned catalysts for further growth, BRWM should continue to deliver an attractive level of income. Over the results period, underlying revenue income did fall but this appears to in large part to be down to lower levels of special dividends (noting BRWM did still receive some specials in 2020) rather than large scale cuts to regular dividends. This again goes back to the improvements to balance sheets and focus on improving free cash flow generation among many mining companies over the past few years.
Currently BRWM is trading on a discount of 0.3%, although we would not be surprised should the Trust once more start to trade at a premium, as was seen earlier in 2021. Given structural tailwinds we highlight above, the diversified nature of the portfolio, and the income generating capacities for investors, BRWM offers a number of compelling attributes for investors which seem increasingly relevant at the current time.
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