BlackRock World Mining Trust (BRWM) has had a torrid history involving asset write-downs and a commodity sector rout. But it has emerged through the other side with a repaired balance sheet, improved dividend cover and diversified portfolio, making it a solid choice for high-risk income investors.
Good recent performance
BlackRock World Mining had a tough period between 2011 and 2015. In 2013 it was forced to write off its investment in the Marampa mine and a convertible bond both issued by iron ore producer London Mining, and the trust was hit by a stark downturn in commodities throughout 2011-15.
But a bounce back in the mining sector has bolstered the trust's balance sheet. It is currently yielding 3.1 per cent and has so far paid two 3p half-year dividends in 2017, a 50 per cent increase on the same period in 2016. The trust’s policy is to distribute a substantial amount of the income it has available and it increased the frequency of dividend payments from twice to four times a year in 2017.
Its dividends are now better protected, too – so far its 2017 dividends have been covered by 8.38 per share of revenue compared with just 6.51p a share in 2016. In the first half of 2017 dividends received by the fund contributed 63 per cent of revenue, up from 42 per cent in 2016 and in line with 2016, and the manager expects the level of dividends as a proportion of revenue to continue according to Winterflood.
The improved outlook is a result of a significant rebound in the mining and commodities sector, which soared in 2016 after emerging from a painful recession. The trust’s share price rallied strongly in the 2016 calendar year as a result and the trust delivered a share price total return of 100.6 per cent compared with 93.4 per cent for the Euromoney Global Mining index in 2016.
That performance has cooled slightly in 2017 but the trust’s share price total return is still comfortably beating its index over the short and medium term. And over one year the trust has delivered a net asset value (NAV) total return of 28 per cent, beating the Euromoney Global Mining index return of 21 per cent. Over three years it has delivered a NAV total return of 33 per cent compared with an index return of 29 per cent.
It currently trading at a discount to NAV of 10.1 per cent, according to Winterflood, narrower than in recent history.
According to BlackRock World Mining's managers, Evy Hambro and Olivia Markham, the sector is at the start of a cyclical recovery and valuations have not yet caught up to the strong earnings growth posted by companies throughout 2016 and 2017.
The managers have also been diversifying the portfolio away from pure commodities and into a wider range of themes including resource replenishment, deleveraging, growth and early-stage opportunities.
And the trust is also positioning itself to take advantage of increased global demand for batteries and electric vehicles. Miners who produce lithium, cobalt, vanadium and graphite (the raw materials used in lithium-ion batteries) have all seen interest in their shares surge and BlackRock World Mining has been "selectively adding exposure to this area" in recent years, according to Numis.
To gain access to the electric car theme the trust holds Albemarle (US:ALB), an established lithium carbonate producer, emerging lithium producer Galaxy Resources (Aus:GXY), Nemaska Lithium (Can:NMX) and Bacanora Minerals (Aus:BCN).
Numis said in August: "We believe that sentiment towards the fund is finally improving after dividend cuts and the ill-fated investment in a revenue-related royalty over London Mining’s Marampa iron ore mine."
Winterflood says: "We rate the well‐resourced BlackRock Natural Resources team highly and we continue to recommend BlackRock World Mining within our model portfolio."
Commodities and natural resources remain a very high-risk and volatile area and the trust is still fresh from a spell of poor performance. However, it is larger and more liquid than peers and has demonstrated a clear strategy going forwards. For a high-risk bet on a recovering sector, buy. KB
BLACKROCK WORLD MINING (BRWM)
|AIC SECTOR:||Sector specialist: Commodities and natural resources||NAV:||433.22p|
|FUND TYPE:||Investment trust||DISCOUNT TO NAV:||10.1%*|
|SET-UP DATE:||15.12.93||ONGOING CHARGE:||1.10%|
|MANAGER START DATE:||Evy Hambro: 1.09.00, Olivia Markham: 30.04.15||MORE DETAILS:||blackrock.com/uk/individual/products/investment-trusts/our-range/blackrock-world-mining-investment-trust/trust-information|
Source: Morningstar, as at 16.10.17, *Winterflood, **BlackRock
|Fund / benchmark||1-year share price return (%)||3-year cumulative share price return (%)||5-year cumulative share price return (%)|
|Blackrock World Mining||36.34||33.39||-12.85|
|Euromoney Global mining index||20.54||27.01||-7.16|
|AIC commodities and natural resources sector average||14.16||-4.13||-44.63|
Source: FE Analytics, as at 16.10.17
Top 10 holdings, as at 31.08.17 (%)
|First Quantum Minerals||8.2|
|Sociedad Minera Cerro Verde||3.2|
Sector breakdown, as at 31.08.17 (%)
|Iron & steel||1.1|
|Net current assets||-0.4|