BlackRock World Mining: buy or sell?

The BlackRock World Mining Trust divides opinion with some analysts backing it as a good way to profit from the mining sector, while others see it as a clear sell.

BlackRock World Mining (LON: BRWM) is a £900m investment trust that provides exposure to a portfolio of mining and metals securities. It currently has around 56 holdings with the largest positions in diversified miners such as BHP Billiton, Rio Tinto and Vale.

Commodity prices varied significantly in the first six months of the year with gold, silver and iron ore all appreciating, whereas lithium and the base metals zinc, lead and aluminium all contracted sharply. During this period the fund generated a respectable 3.4% NAV total return and since then it is up by a further 8.7%.

Does Mining offer a golden opportunity

Lead manager Evy Hambro, who has been running the fund for almost 20 years, points out that the mining sector has held up relatively well, which is in sharp contrast to previous economic disruptions. He attributes this to the strengthening of balance sheets in recent years and believes that the sector will benefit from new investors who are attracted by the quality of the income stream.

The mining sector has seen relatively few dividend cuts and suspensions in response to the coronavirus crisis compared to the broader market, although the number of special dividends was markedly lower than in the same period last year.

BRWM has maintained its interim quarterly dividend of four pence per share during the six months to the end of June and has an historic yield of 5.3%, but it remains to be seen whether it will match it this year.

The analysts at Numis believe that the fund offers a good way to gain a diversified exposure to the mining sector, which can be highly volatile on a stock-specific basis. They like the 5.3% yield and point out that the shares are trading on an 11% discount to NAV.

Metal Fatigue?

You get a very different picture if you read the recent sell note issued by Investec. In fact it is rare to find such a critical report in respect of a well-established investment trust.

They particularly don’t like the fact that BRWM has recently changed its benchmark to one that has generated a much lower return and effectively backdated the move by largely removing the old one from the investment reports.

When you look at the long-term returns versus the original EMIX Global Mining benchmark it is clear that the managers have failed to add any real value (alpha), although the fund has demonstrated higher beta characteristics that have helped the recovery in the last few months.

Investec dismiss the double digit discount as it is within the long-term range of ten to fifteen percent and point out that the board has failed to do anything about it. They are concerned about the impact of the economic downturn on the sector and the looming ESG headwinds and have downgraded the fund from hold to sell.

Personally I think they have a very good point. If you want exposure to the mining sector it probably makes sense to use a specialist gold mining fund and then invest directly in diversified stocks like BHP Billiton (LON: BHP) and Rio Tinto (LON: RIO) to broaden it out.