Results analysis: BlackRock World Mining

• 2022 represented “another year of excellent performance”, according to the Chairman of the trust. BRWM’s annual results showed an increase in NAV on a total return basis of 17.7% and a share price total return of 26.0% (for the year to 31/12/2022). This represents outperformance of the reference index, the MSCI ACWI Metals & Mining 30% Buffer 10/40 Index, which returned 11.5%.
• The performance was split into distinct periods with excellent gains made during the first four months, followed by falls during the summer before a decent rally in the final quarter. This volatility allowed the manager to take advantage of opportunities by adjusting holdings, as well as selling volatility out to the market using options.
• With all the economic and political turmoil of 2022, the Chairman applauds mining companies “for being responsible in capital allocation and balance sheet discipline”. At the same time, the sector was aided by supply constraints across a number of commodities which kept prices higher and the continued growth in demand for mined commodities for the transition to net zero carbon emissions.
• 2022 was the second-best year in the company’s history for income and only marginally short of last year’s record. Income amounted to 40.68p compared with 43.59p for the previous year, representing a slight decrease of 6.7%. The board is proposing a final dividend payment of 23.50p per share, making a total of 40.00p per share (2021: 42.50p per share) representing a small decrease of 5.9%. The manager points out that portfolio companies’ free cash might be impacted by capital expenditure as the sector transitions to producing “greener” commodities. This may mean less available for dividends, and a lower level of distributions. The managers note that in the results announced to date in 2023, dividends from some portfolio companies have decreased.

Kepler View

BlackRock World Mining’s (BRWM) managers are specialists, and their stock picking helped BRWM outperform handsomely during the year. Notable has been the contribution from unquoted investments, an area of the portfolio which the team have been building up exposure to and representing 6.6% of NAV at 31/12/2022. Ivanhoe Electric and Bravo Mining both completed successful IPOs during 2022 at big premiums to BRWM’s entry prices. Elsewhere, Jetti Resources completed its Series D financing at a substantial valuation uplift. Ongoing income from the royalty investments has continued with the OZ Minerals Brazil Royalty starting to benefit from the ramp-up of the Pedra Branca mine. OZ Minerals has received a recommended takeover offer from BHP, expected to complete in Q2 of 2023, which will see BHP become the operator of the mines linked to BRWM’s royalty.

As we note above, BRWM’s managers sound a note of caution on the dividend prospects for next year, following on from two record breaking years. For income investors, the shares yielding 5.5% (based on the announced 40p total dividend for 2022) gives plenty of cushion, given BRWM’s starting point of yielding well above other areas of the equity market (the FTSE All Share currently offers a yield of 3.6%). Demand for BRWM’s shares has been strong, with the share price near NAV, and at times at a premium. Over 2022, the board issued c. £34.9m worth of shares at an average premium of 1.3%.

The chairman notes that “whilst the macro environment in developed market economies continues to present near-term headwinds for commodity markets, the structural backdrop with low inventories, limited investment in new production and a more rapid recovery in China than expected, are supportive tailwinds. The energy transition will require enormous scale of investment by mining companies over the coming decades. Mining companies are in an excellent financial position, with high levels of free cash flow and solid balance sheets and these factors combined with the above potential tailwinds could be a major factor in how 2023 shapes up for the sector”. As a result, we suggest that BRWM continues to offer an interesting diversifier from global equity portfolios. The managers have shown they are adept at exploiting opportunities as they develop, effectively as a nimble virtual miner. The opportunities to benefit from the transition to net zero appear vast, but in our view demand the expertise of a specialist investment team such as that behind BRWM to best harness them.

In terms of the near term outlook, the managers note the potential impact of China re-opening, expecting a “year-on-year pick-up in underlying demand, but also a re-stocking of commodities such as copper and aluminium assuming China reverts back to its pre-COVID-19 levels of inventory cover. Given the tightness in physical markets and low level of base metal inventories today, this creates upside risk to commodity prices over the next two years if Chinese growth stabilises and the slowdown in the US economy is not protracted”.

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