BlackRock World Mining writes off London Mining investments

The iron price has fallen over the past six months, while the Ebola outbreak in Sierra Leone, where London Mining's mine is based, has left the company unable to secure funding. Its share price fell to 4.7p last week in contrast to around 120p this time last year.

London Mining said on 8 October saying that it "believes that there will be little or no value remaining in the equity of the company and the other listed securities of the group."

Read its statement

BlackRock said on 8 October it "has therefore concluded that the most prudent approach is to value [its] holdings in the London Mining Marampa royalty contract and convertible bond at nil (previously valued at £47.8m and £4.6m respectively)."

The trust had already written down the value of the royalty contract from $110m to $75m after London Mining released poor half-year results on 21 August, not announced via a separate stock market announcement. London Mining had highlighted there was a need for financing but stated they were in discussion with a strategic partner with "several non-binding expressions of interest." They also flagged the impact Ebola could have on their operations but that it would only "marginally increase costs."

Evy Hambro and Catherine Raw, managers of BlackRock World Mining added: "We had carried out our own site visit in May 2014, which indicated that with changes being made to the processing circuit as well as other proposed changes to the operations and logistics, that this production guidance was achievable. We have had regular contact with London Mining management throughout the investment period (and prior) and a member of the team has visited the Marampa operation every year since 2011. We met with London Mining's management team and Chairman following the publication of their results and expressed our concerns, particularly around the need for financing but continued to be assured that strategic partner discussions were progressing."

BlackRock World Mining started to invest in royalties to diversify its sources of income following the adoption of a high dividend policy in 2012. The London Mining royalty was expected to be immediately income enhancing and gave direct long-term commodity price exposure to iron ore, while avoiding mining sector cost inflation. At the end of June 2014, BlackRock World Mining had received a total of $7.7m in royalty payments from it.

In July the trust also invested $12m in a royalty agreement with Australia's Avanco Resources over its exploration licences within the Carajas area in Brazil. And the trust has a gold-linked preference share from Canada's Banro.

BlackRock World Mining's NAV is now about 390p, reflecting the write-downs which took off 29p per share.

BlackRock World Mining expects revenue return per ordinary share of around 19.6p per share this year, down from 22.36p for 2013. Year to date it has received £0.5m in respect of the royalty contract and £1.3m interest on the convertible bond, but expects nothing further. However, the trust has revenue reserves of 27.1p a share so it will maintain the 2014 dividend at the same level as in 2012 and 2013 at 21p.

Ewan Lovett-Turner, analyst at Numis Securities, said: "It brings into question the future sustainability of the dividend. The write-down may have an impact on the future dividend growth because the royalties were expected to deliver a high and steady income over time."

Oriel, meanwhile, has downgraded its recommendation on the trust from 'positive' to 'negative', saying that "this is a significant write-down to the NAV which is likely to derail BlackRock World Mining's moves to diversify income with royalty investments in future". Oriel also expected the discount to de-rate.

But analysts at Investec point out that the trust's revenues are quite diverse, with the royalty contributing only 5.5 per cent of first half 2014 revenues.

Nevertheless, analysts remain concerned about BlackRock World Mining's lack of transparency. It did not initially make a specific announcement on the write-down but rather included it as a foot note with its daily NAV update which comes out late in the day.

Source: Morningstar, *BlackRock.

Source: Winterflood as at 14 October 2014

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