If sentiment holds up as the global economy gets back on its feet, then this specialist mining trust should be able to deliver an attractive total return.
It has been a volatile couple of months for the £800m BlackRock World Mining Trust (LON:BRWM) with a 13.6% fall in NAV in March followed by an 18.1% increase in April. The portfolio of mining companies has been battered by the pandemic, but the managers believe that the sector offers an attractive valuation opportunity.
They say that mining stocks sold off in anticipation of a lower level of global economic growth in 2020, yet the global stimulus measures on infrastructure and carbon transition are likely to be commodity intensive.
The balance sheets of many mining companies are in strong shape and the businesses remain focused on capital discipline. This should mean that these stocks are well-placed to continue to generate robust free cash flow and return capital to shareholders through dividends and share buybacks.
On the up
Managers Evy Hambro and Olivia Markham expect most mined commodity prices to finish the year above the recent lows. On the demand side they do not anticipate a hard-landing type event in China, while on the supply side the situation is tight and is likely to remain so given the extensive cuts to capital expenditure since 2012.
China’s National Development and Reform Commission recently announced a step-up in infrastructure spending to boost economic growth after the pandemic. Sentiment towards the mining sector has improved as a result with most mined commodities’ prices rising in April.
The main reason for the strong rebound in performance was the fund’s gold equities that at the end of the month represented 31% of the portfolio, an allocation that was second only to the 32% weighting in diversified miners. These stocks had lagged the gold price throughout the first quarter and have now largely caught up.
Many mining companies have significant cash balances on their balance sheets and this should enable them to continue to pay a good level of dividends. The managers believe that the outlook for income is relatively bright compared to other sectors and they hope that this will encourage more investors to move into this area.
BRWM has built up a diversified stream of income that comes from dividends, option writing premia and royalties. It is the board’s intention to distribute most of the available income each year, although it doesn’t have a progressive dividend policy so the size of the distributions can vary.
Last year was a particularly good one for income with the fund’s revenue per share increasing from 18.15p to 22.46p, which enabled a dividend of 22p to be declared. This gives the fund a prospective yield of 6.2%, although there were a number of special dividends last year that are unlikely to be repeated.
The shares are currently trading at a discount to NAV of 14%, which is broadly in line with the average discount over the last 12 months. If sentiment holds up as the global economy gets back on its feet then the fund should be able to deliver an attractive total return, especially once the stimulus starts to kick in.