BlackRock World Mining suffers further falls

The day after the announcement, the trust's shares were down more than 7 per cent at 233.3p a share, and the trust now trades on a discount to NAV of 8.3 per cent, albeit tighter than the 10-15 per cent levels seen earlier this year.

The trust had recently increased the value of its investments in Banro. It reduced the discount applied to the company's senior secured note to nil and the gold-linked preference shares' discount from 30 per cent to 15 per cent. This was partly due to a $90m financing in February 2015, which meant Banro had sufficient funds to meet near-term liquidity needs - after the financing Banro's equity and bonds rallied sharply.

In December, BlackRock World Mining had written down the value of its investment in Banro Corp's 10 per cent note to a 25 per cent discount, reducing the trust's NAV by 1.49p a share. It also decided to hold its preference shares in Banro at a 30 per cent discount to the implied gold price. The trust's board did this because of the lack of trading activity in Banro Corp's 10 per cent note and ongoing financing uncertainty. Despite this, at the end of June the trust had received dividends totalling $6.6m from Banro.

Last year, the trust had to write down two investments issued by iron ore producer London Mining - a royalty investment in the Marampa mine and a convertible bond.

However, its royalty contract with Avanco Resources covering exploration licences in Brazil is proceeding. BlackRock World Mining has paid the company $4m out of an agreement to pay $12m, in return for future royalty payments which it could start receiving in 2016.

The trust has also been hit by falling mining shares and commodity prices. Over the six months to 30 June the trust's NAV fell 7 per cent and its share price fell 2.8 per cent, while its benchmark, Euromoney Global Mining Index, fell 9.1 per cent. Between 30 June and 11 August the trust's NAV fell 14.2 per cent, while its benchmark fell 13.6 per cent.

The trust's revenue over the six months to 30 June was 9.51p per share, compared with 10.13p over the same period last year. It is paying an interim dividend of 7p, the same as for that period in 2014.

It expects to maintain its full-year 2015 dividend, but may use some of its revenue reserve. The 2014 dividend was 21p and at 31 December 2014 the trust had revenue reserves of 8.15p a share.

Dividend levels beyond this year are unclear: "Future use of reserves will depend on the board's confidence in returning to a fully covered position in the near term," said Anthony Lea, chairman of the trust. "Given the widespread challenges facing the mining sector, the sustainability of dividends at the underlying stock level is being closely monitored to determine [the] appropriate dividend payments for the future."

The trust's managers expect deficits in commodity supply to support prices and enhance margins for producers. They add: "While we wait for this to happen, we continue to be compensated by the attractive dividend yields on offer across the sector. Dividend yields have now reached levels last seen during the late 1990s and with most balance sheets able to fund shortfalls in free cash flow for at least the next few years this should allow the companies to see out the transition from surpluses to deficits."

Analysts at Numis think that with a substantial yield and a discount to NAV, BlackRock World Mining "remains an interesting opportunity for a contrarian investor".

But Iain Scouller, head of the investment funds team at Stifel, believes "there is a growing risk to the 2016 dividend payment. The shares are yielding 8.7 per cent, which we think indicates the market expects a dividend cut in 2016, and so do we. The mining sector continues to see sharp falls in share prices and, with BlackRock World Mining shares on a relatively narrow 8 per cent discount, we maintain our negative recommendation."

F&C Managed Portfolio Trust (FMPI), meanwhile, sold its holding in BlackRock World Mining following its writedowns of royalty investments and has no direct holdings in commodity trusts.

If you still want to invest in commodity equities consider IC Top 100 Fund City Natural Resources High Yield (CYN). This has also experienced substantial share price falls and trades at a discount to NAV of 22.1 per cent. However it has good longer-term performance and analysts at Winterflood believe that "if/when there is a turnaround in fortunes for the sector this fund is well placed to outperform. The fund's historic dividend yield stands at 6.55 per cent, meaning that investors are being paid to wait."

BlackRock Commodities Income Trust (BRCI) offers a yield of more than 9 per cent, but trades on a premium of less than 1 per cent, in contrast to the levels of between 4 and 6 per cent seen at times earlier this year. The trust has a diversified portfolio that includes exposure to oil as well as mining. It has an ongoing charge of 1.46 per cent.

Open-ended fund options include BlackRock Gold and General Fund (GB00B5ZNJ896), which has the same manager as BlackRock World Mining, Evy Hambro. Mr Hambro has a good long-term track record and the fund does not have any exposure to royalty investments. However, it offers virtually no yield and nearly three-quarters of its assets are in companies that derive a significant proportion of their income from gold mining, in contrast to the widely diversified sector exposure BlackRock World Mining Trust offers.

BlackRock Gold & General can be picked up on platforms for an ongoing charge of 1.17 per cent, while BlackRock World Mining has an ongoing charge of 1.4 per cent.

If there was a turn in the commodity sector, an open-ended fund would not benefit from a potential re-rating in share price and discount, although investors will not suffer share price volatility with a fund of this kind.