BlackRock World Mining Trust, which is managed by Evy Hambro and Olivia Markham, is a total-return focused portfolio that predominantly invests in global companies that operate in the volatile commodity industry.
The last year has represented a return to outperformance for the managers, as well as marking another very strong performance in absolute terms. Notwithstanding the gains, the managers remain positive on prospects based on fundamentals and valuations. They observe that in contrast to most global equities which are hitting all-time highs in terms of historical valuation ranges, they believe their companies remain within the mid-cycle range with valuation very attractive at current commodity price level.
As well as attractive valuations, the team report being bullish on fundamentals. They believe that periods of synchronized global growth are almost always good for commodity prices. As such, they have been continuing to add to their allocations to mid and small caps, but for the core of the portfolio maintain their holding in large-cap “self-help” companies that are deleveraging and have high-quality assets with good free cash-flow. They continue to believe that the sector is under-owned, and that investors still (in their view, wrongly) doubt management’s capital allocation discipline.
The managers tell us that market expectations for many companies they own are on the conservative side, and that if commodity prices hold their current levels, the managers expect earnings upgrades in the order of 30-80%, which - should it prove to be true - would provide a catalyst for strong performance in share price terms. Commodities are notoriously volatile, however, and forecasts are clearly not guarantees.
The board have recently announced the final dividend (now payable quarterly) which will mean a full year – covered - payout of 15.6p per share for 2017. The yield of 4.1% compares to Global Equity Income trusts (average yield 3.7%) and the IA Global Equity Income sector which currently has an average yield of 3.1%.
The trust’s discount has remained resolutely wider than the 10% level.
The trust’s objective is “to maximise total real returns to shareholders through a world-wide portfolio of mining and metal securities”, and has a benchmark of the Euromoney Global Mining Index. The team have a long track-record of investing in this area, and are amongst the biggest specialist investors in the metals and mining sector, globally. As such they have extremely good access to managements and corporates. Whilst the approach has always been to deliver total-returns, there has been a shift over recent years (echoed by the sector as a whole) towards income being more a part of the total return than had historically been the case.
The board decided that paying a “significant” dividend should serve as an effective discount control mechanism by stimulating demand for the shares from a wider audience. As such, whilst there is no formal objective to pay a higher income, the board have committed to deliver a yield premium to the benchmark. In order to deliver the yield, and make it sustainable, the managers have sought to diversify income sources and use the company’s low-cost gearing, so that the trust remains as fully invested in equities as possible, but benefits from a diversified income stream from bonds, convertibles, an unquoted preference share (Banro) and (also unquoted) a royalty contract (Avanco). The most recently available breakdown illustrating this can be seen below.
The company has c.13% of portfolio assets invested in corporate and convertible debt, where the managers are essentially arbitraging the interest rate these instruments typically pay (currently 7-8%), relative to the interest rate at which the trust itself is able to borrow (2.4%), thereby boosting the income distributable to shareholders. The Avanco royalty contract was recently revalued upwards again, and is now valued at around 3x the $12m that the trust invested, as well as contributing very healthily to the trust’s income (now 7% of portfolio revenue, up from 5% last year).
The Avanco royalty offers a direct exposure to the copper and gold mined from a specific mine which is now fully operational. Whilst the trust had some big problems with a previous royalty investment in the Marampa mine, they are a significant differentiator to open-ended peers and the Avanco royalty shows what a successful investment in royalties can look like. The trust has a risk guideline that a maximum of 3% of NAV can be held in any unquoted investment and if that investment accounts for over 30% of the companies revenue, the listed equity position of the producer will also be included. There is an overall cap of 20% of the portfolio being invested in unquoted investments.
Within the equity portion of the portfolio, the managers are increasingly bullish. They believe that periods of synchronized global growth are almost always good for commodity prices. They have been increasing their allocations to mid and small caps, but also maintain their “self-help” themes in which they look to invest with high quality, cash generative companies – either transforming themselves through deleveraging (such as Vale and Glencore), offer an opportunity to grow in an otherwise constrained environment (First Quantum Minerals), companies which have sector leading margins (Rio Tinto, BHP and Vale), and those which are expected to see replenishment of their asset base - which centres on companies the managers believe can grow production without depleting their reserves (Randgold Resources).
Whilst NAV returns have been strong over the past two years, the team argues that valuations are only back at the levels last seen in 2014 – a long way from the peaks seen in 2011. In their view, we are still in the early stages of the commodity cycle with only 2 years of positive returns from the bottom of the cycle and given the significant underinvestment over the last 5-6 years, they think we are likely to continue to see at least a couple more years of strong performance from commodities.
Support for the sector, in the view of the managers, comes from an ever- increasing conviction that company managements are maintaining capex discipline, but also that (according to the BoA Merril Lynch European Fund Managers Survey) investors are still underweight the sector. This means that, in contrast to global equities which are all at high valuations relative to history, the mining sector is at the mid-cycle level of 6.5-7x earnings. The main risks to share prices are (in the manager’s view) that management don’t maintain their rigour and capital discipline, that China has a wobble, or that the miner’s current margins won’t be maintained. The managers believe that the current valuation levels in the market are attractive relative to the likelihood of one or all of these threats coming to pass.
BRWM is concentrated when compared to typical equity funds (as is the benchmark), and is made up of c.60 holdings with the top 10 positions accounting for 60% of NAV. That having been said, BRWM is diversified when it comes to commodity exposure, which is part of the ‘raison d’etre’ of the trust and is shown in the graph below. The team aim to offer a significantly more flexible and dynamic exposure to commodities than that capable of being offered by the diversified miners, as well as diversify the risk to any commodity or company on the dividend – as we discuss in the dividend section, the trust weathered the impact of dividend cuts in 2016 significantly better than some of the diversified majors.
As we allude to above, the trust’s exposure to long-term growth plays (small cap miners and other higher risk specific mine projects) has been increasing and currently represents c. 10% of the portfolio, and could in time increase. One of the specific themes that the team are exposed to here is that of electric vehicles, and the opportunities that a large shift away from traditionally powered engines will present to the mining sector.
In this regard, the trust now has around 5% of the portfolio invested in lithium and cobalt miners, which should be beneficiaries of increased demand for components for batteries. The company has exposure to Lithium stocks such as Albemarle, Nemaska Lithium, Bacanora Minerals, Altura and Galaxy. Within Cobalt the managers have done extremely well from an investment in Katanga Mining, but also have an exposure through Glencore. They also own a Cobalt ETF – Cobalt 27. The team have done well out of being relatively early into Lithium and Cobalt stocks, and whilst the long-term picture is supportive, do expect some volatility.
Copper is expected to be another beneficiary of electrification, with electric vehicles using up to 4 times as much copper than conventional vehicles, not to mention the extra infrastructure in distribution and recharging that will be required. The trust has 26% of NAV invested in copper bearing assets, of which c. 20% is in copper related equities.
Overall, the managers aim to own higher-quality companies than the benchmark, which will continue to remain disciplined as regards to capital allocation and are to some extent in a phase of “self-help” – paying down debt and de-risking their businesses, and which in the managers' view have good downside protection (the lowest cost producers), and good exposure to the upside (long term growth themes).
At the end of February, BlackRock World Mining was 12% geared, well below the maximum limit of 25% of NAV. As we discuss above, the team aim to balance this gearing with the trust’s fixed income exposure to generate income. However, reflecting their confidence in the outlook, the team have allowed gearing to marginally creep above the fixed income exposure, meaning that investors are starting to have a very modestly geared equity exposure. The managers have said that they are happy to continue gently in this direction, reflecting the confidence and the de-gearing of balance sheets in the underlying equity investments. Gearing is provided by a flexible facility which the company can draw down or repay at any time.
BlackRock World Mining’s NAV has been something of a roller-coaster ride. The graph below shows the NAV versus the benchmark over the past ten years. 2017 represented a return to outperformance from the managers, as well as marking another very strong performance in absolute terms.
The years 2011 to 2015 were ones of consecutive declines in NAV. The more recent past has seen extremely strong performance, with a NAV total return of 92.9% in 2016, and 24% in 2017.
As the graph below shows, BRWM underperformed the index in three out of the past five calendar years. However, the only major period of underperformance came in 2014, which was the year the Marampa royalty was written-off. Whilst it may not be the case in the future, BlackRock World Mining’s outperformance has usually been generated during periods of more positive sentiment. For example, it significantly outperformed in 2009 and 2010. 2017 saw a return to outperformance of 3.2% ahead of the benchmark. YTD the trust is 2% behind the benchmark.
As we refer to above in the portfolio section, the managers remain positive on prospects based on fundamentals and valuations. They observe that with most global equities hitting all-time highs in terms of historical valuation ranges, they believe their companies remain within the mid-cycle range. This can be illustrated by comparing the fortunes of the trust and benchmark against that of global equities over the past five years. The divergence in fortunes has been quite stark. Clearly, however, demand for commodities can be volatile and unpredictable, and any forecast on the outlook must be considered with these factors in mind.
BRWM aims to be able to adapt and provide a more flexible allocation to commodities than the “diversified majors”. This should help provide a less volatile exposure over time, but in income terms, the team were also able to cushion the blow when the sector started cutting dividends aggressively in 2015/16. For example, whilst Anglo American and Glencore cut their dividends entirely, and BHP Billiton cut their dividend by 76%, BRWM cut the dividend by 38%.
The team achieved this by being able to diversify and change allocations to commodities relatively quickly, but also by diversifying the income stream yet further through targeting other sources of income. During 2017 for example, the income generated from options was a net £6.1m, constituting 18% of total revenues. Ordinary dividends have been the key driver of the 20% revenue increase relative to last year. Glencore, the biggest holding in the trust resumed payment of a dividend, as well as other holdings such as BHP Billiton and Rio Tinto increasing their dividends substantially in 2017. US dollar weakness has been a headwind for the trust, given a large proportion of companies that the trust holds, if not quoted in dollars, report and pay dollar based dividends. The Avanco royalty has also meaningfully contributed to income again this year, rising from 5% to 7% of total revenues.
The board now pay dividends quarterly, and with the final dividend now having been recommended, the total payout for 2017 will be 15.6p, representing a yield at the current price of 4.1%. The dividend represents a 20% increase over 2016, and was achieved with dividend cover of 1.06x.
The yield of 4.1% compares to Global Equity Income trusts (average yield 3.7%) and the IA Global Equity Income sector which currently has a yield of 3.1%. The board has revenue reserves of just under a year at the current level (c 13pps), although no formal plan is in place regarding how they should be used in the future but do provide a degree of reassurance for shareholders on their income, should the manager’s bullish outlook not transpire.
As we note above, whilst the trust has a total return objective, the board see the dividend as a powerful protector of the discount widening out too far. The board have undertaken to distribute “substantially” all of the company’s available income to shareholders going forward.
Whilst the US dollar weakness is a headwind, and the managers caution that it is early days yet, they believe that if commodity prices maintain their current levels, many of their underlying equities will be able to provide reasonable dividend growth from current levels.
The managers aim to be invested in companies that are deleveraging and have high-quality assets with good free cash-flow. The managers expect that their companies will be working hard to deliver increased dividends in 2018 as they benefit from capex and debt reduction initiatives undertaken in previous years. They believe that market expectations for many companies they own are on the conservative side, and that if commodity prices hold their current levels, the managers expect earnings upgrades in the order of 30-80%, providing a catalyst for strong performance in share price terms.
The lead manager, Evy Hambro, has been part of the BlackRock Natural Resources team since the trust launched in 1993. Olivia Markham was appointed co-manager in 2015. She joined BlackRock in 2009 from her role as head of commodity research on the sell-side at UBS. Prior to this she worked at BHP in their M&A team. The co-managers are supported by a team of eight additional investment professionals within the Natural Resources team.
As the graph below shows, the trust suffered a significant derating from the very narrow level shareholders enjoyed in 2014. The derating was initially a result of confidence in the royalty strategy evaporating in mid-2014 (Marampa), and then uncertainties on the level of dividend during 2016 also affected sentiment. In the graph below, we compare the discount with the average discount for Global trusts – which on average trade at a considerably narrower level than BRWM.
The current dividend yield of 4.1% compares with the IA Global Equity Income sector and AIC Global Equity income sector yields of 3.1% and 3.7% respectively. Yet the trust’s discount has remained resolutely wider than the 10% level.
The ongoing charge for 2017 was 1% (1.1% in 2016) of NAV. The annual management fee is based on 0.8% of gross assets. However, if the NAV decreases on a quarter-on-quarter basis, the fee will then be paid on net assets for the quarter. The trust does not levy a performance fee. The KID cost at 31st December 2017 was 1.61%.
Material produced by Kepler Trust Intelligence should be considered a marketing communication, and is not independent research. Please see the important information by following this link.
Kepler Partners is not authorised to make recommendations to Retail Clients. This report is based on factual information only, and is solely for information purposes only and any views contained in it must not be construed as investment or tax advice or a recommendation to buy, sell or take any action in relation to any investment.
This report has been issued by Kepler Partners LLP solely for information purposes only and the views contained in it must not be construed as investment or tax advice or a recommendation to buy, sell or take any action in relation to any investment. If you are unclear about any of the information on this website or its suitability for you, please contact your financial or tax adviser, or an independent financial or tax adviser before making any investment or financial decisions.
The information provided in this report is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation or which would subject Kepler Partners LLP to any registration requirement within such jurisdiction or country. Persons who access this information are required to inform themselves and to comply with any such restrictions. In particular, this report and its contents are exclusively for non-US Persons. The information contained herein is not for distribution to and does not constitute an offer to sell or the solicitation of any offer to buy any securities in the United States of America to or for the benefit of US Persons.
This is a marketing document, should be considered non-independent research and is subject to the rules in COBS 12.3 relating to such research. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research.
No representation or warranty, express or implied, is given by any person as to the accuracy or completeness of the information and no responsibility or liability is accepted for the accuracy or sufficiency of any of the information, for any errors, omissions or misstatements, negligent or otherwise. Any views and opinions, whilst given in good faith, are subject to change without notice.
This is not an official confirmation of terms and is not to be taken as advice to take any action in relation to any investment mentioned herein. Any prices or quotations contained herein are indicative only.
Kepler Partners LLP (including its partners, employees and representatives) or a connected person may have positions in or options on the securities detailed in this report, and may buy, sell or offer to purchase or sell such securities from time to time, but will at all times be subject to restrictions imposed by the firm’s internal rules. A copy of the firm’s conflict of interest policy is available on request.
Past performance is not necessarily a guide to the future. The value of investments can fall as well as rise and you may get back less than you invested when you decide to sell your investments. It is strongly recommended that Independent financial advice should be taken before entering into any financial transaction.
Please see also our terms and conditions
Kepler Partners LLP is a limited liability partnership registered in England and Wales at 9/10 Savile Row, London W1S 3PF with registered number OC334771.
Kepler Partners LLP is authorised and regulated by the Financial Conduct Authority.