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BlackRock World Mining Trust: Income on the cheap

The trust offers a high yield and significant gold exposure – at a large discount
August 20, 2020

Gold mining companies have been among markets’ better performers this year as the price of the precious metal has soared. While this may leave a cohort of investors nervous that gold miners may not have further to go, recent coronavirus resurgences, dollar weakness and a potential return of inflation all support the price of the safe-haven asset.

IC TIP: Buy at 414p
Tip style
Income
Risk rating
High
Timescale
Long Term
Bull points

High dividend yield

Trades at a discount to NAV

Potential inflation protection

Focus on materials for modern industries

Bear points

Volatile sector

Economically sensitive sector

A way of getting some gold exposure but at a significant discount is via BlackRock World Mining Trust (BRWM), which had a 34 per cent allocation to gold stocks and bonds at the end of June. The trust holds the likes of Newmont MiningBarrick Gold, Wheaton Precious Metals and gold-focused royalty specialist Franco Nevada – all of which have made strong gains this year.

Commodities can be notoriously volatile, but the trust's shares traded on a 10.9 per cent discount to net asset value (NAV) on 18 August, with a 5.3 per cent dividend yield. While there is no certainty this dividend will be maintained, so far this year the board has paid its first half-year dividend of 4p a share, in line with last year, and stated its intention to continue this for the next two quarters.

“While BlackRock World Mining could see volatility in the short term, we believe that it remains an enticing long-term prospect, particularly on its current discount of 10 per cent. We see its dividend as a key part of its attraction, although the board does not have a progressive dividend policy," said Winterflood analysts in a recent note.

The lack of a progressive dividend policy, focused on increasing payouts each year, means the board could rebase the dividend in the event of a material revenue shortfall. But Winterflood suspects the board would be happy to use revenue reserves to make good a limited shortfall, something it has done in the past. Statistics from the Association of Investment Companies show that the trust has revenue reserves of £41.12m – enough to maintain current dividend payments for just over a year. 

The trust is managed by Olivia Markham and Evy Hambro, who have a good long-term performance record, beating Winterflood Commodity investment trust sector in terms of share price over one, three and five years. However, performance does lag its benchmark, the EMIX Global Mining index, over three and five years.

The managers argue that the mining sector will benefit from a rise in ‘green spending’, with certain commodities likely to see strong demand. Some 32 per cent of the trust is invested in ‘diversified’ commodities such as cobalt and lithium, used to make batteries for electric cars. Nearly 18 per cent of the fund is allocated to copper, which looks set to benefit from the decline in fossil fuels. Increased infrastructure spending, particularly in China, is also seen as a tailwind for the sector. 

The trust’s biggest holding is BHP, which recently announced a 10 per cent dividend reduction, but survived the second half of its financial year with profits close to last year's despite the pandemic. Rio Tinto, another Anglo-Australian miner, is another major holding and has held up well over the crisis largely thanks to resilience in the iron ore price.

“In general, companies in the [mining] sector are well financed and are benefiting from strong balance sheets and the disciplined capital expenditure over recent years,” Winterflood analysts said.  

However, the mining sector remains highly cyclical and any setbacks in the global recovery will likely lead to volatility for the trust. The valuations of gold mining companies may also look increasingly expensive, meaning investors might not enjoy the same growth the trust has recently had.

While the fund may experience volatility as we emerge from the pandemic, it looks like a good option for income investors and gives access to a range of commodities at a good price. Its heavy weighting to gold might also offer some protection should inflation pick up. Buy.