BlackRock World Mining results hit by asset writedowns

The poor performance was almost entirely driven by exposure to iron ore, in particular because it wrote down a royalty investment in the Marampa mine in October 2014, as well as a convertible bond. Both securities were issued by iron ore producer London Mining. The fall in the iron price, the slower-than-expected ramp-up of a second plant and the Ebola outbreak in Sierra Leone, where the mine is based, meant London Mining could no longer meet its financial obligations.

These investments were among BlackRock World Mining's larger holdings, respectively accounting for 6.5 per cent and 1.3 per cent at the end of June 2014.

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Meanwhile, in December, BlackRock World Mining Trust wrote down the value of its investment in gold miner Banro Corp's 10 per cent note to a 25 per cent discount to its last traded price on 21 November 2014, and this reduced the trust's net asset value (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.

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However, at the end of February 2015, following details of a $100m financing for Banro, which will enable it to pay interest on its 10 per cent note and accrued dividends on its gold-linked preference shares, BlackRock World Mining's board has reduced the discount on the gold-linked preference shares from 30 per cent to 15 per cent and the discount on the corporate bond to 10 per cent.

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 trust says investing in royalties is attractive because this allows it to participate in long-term production revenues and resource growth, as well as diversifying the trust's sources of revenue. However, it has tightened up its guidelines on investing in royalty and unquoted investments.

The trust can still invest up to 20 per cent of its assets in this area, but new investments into individual royalties and unquoted investments must not exceed around 3 per cent of gross assets at time of investment. Total exposure to any single operator, where greater than 30 per cent of its revenues come from the mine over which the royalty lies, must also not be greater than 3 per cent at time of investment. If a company's royalties and unquoted investments are revalued upwards, the trust's managers will reduce exposure to its listed securities.

BlackRock World Mining still has a non-binding memorandum of understanding with Avanco Resources for a contractual royalty covering its exploration licences in the Carajas mineral district in Brazil. The purchase is conditional on certain requirements being met, so this royalty is not yet in the portfolio.

The trust also had 10.5 per cent of its assets in fixed income at the end of 2014.

BlackRock World Mining's revenue return per share for 2014 was 21.13p, compared with 22.36p in 2013 - a 5.5 per cent decrease. The full-year dividend is 21p - the same as in 2013 - but some analysts are concerned that there may be cuts going ahead.

Iain Scouller, head of the investment funds team at Oriel Securities, is "surprised that the board has not given guidance on the level of dividend for the year to December 2015", and says: "With the shares yielding around 7 per cent, it appears the market thinks the dividend is vulnerable to a cut and so do we."

Alan Brierley, director of the investment companies team at Canaccord Genuity, says: "Although a yield of 6.7 per cent has obvious attractions, we have reservations about sustainability."

Fee cut

From 1 July BlackRock World Mining's annual fee will be reduced from a flat fee of 130 basis points (bps) to:

■ 120 bps on the first £500m of gross assets;

■ 100 bps on the next £500m; and

■ 85 bps on gross assets above £1bn.

BlackRock World Mining currently has total assets of £723.99m.

Between 1 April 2015 and 30 June 2015 the annual fee, chargeable on the gross assets under management, will be reduced to:

■ 110 bps on the first £500m of gross assets

■ 70 bps on the next £500m; and

■ 40 bps on gross assets above £1bn.

Analysts at Numis estimate that this will reduce the ongoing charges ratio by 0.17 per cent for the current year. The trust's ongoing charge for 2014 was 1.4 per cent. The trust's board says it intends to keep fee rates under review, and particular note will continue to be taken of the manager's performance relative to the benchmark, and the views of shareholders.

Co-manager Catherine Raw is being replaced by Olivia Markham from 30 April, who is also co-manager of BlackRock Commodities Income Investment Trust (BRCI), and joined the BlackRock natural resources team in 2011.

Analysts have mixed views on the trust. Unless there is a strong recovery in the mining sector Mr Scouller thinks BlackRock World Mining is vulnerable to further discount widening and this could go out to a high-teen level, from its current level of about 14 per cent. "We maintain our Negative recommendation and would continue to reduce weightings," he says.

But Numis argues: "Mining is a cyclical sector. BlackRock World Mining has suffered a number of difficult periods for performance in the past, but each of these was followed by a strong recovery, and the trust has been able to add significant value over open-ended funds and trackers by adopting a long-term investment approach. The fund is currently trading on a 13.92 per cent discount to NAV, compared with an average of 6.83 per cent over the past 12 months. This offers some value for contrarian investors."

Source: Morningstar, *BlackRock

Performance

Source: Morningstar as at 22 March 2015

TOP TEN HOLDINGS as at 28 February 2015 (%)

Asset breakdown (%)