Strong performance from BlackRock World Mining

The natural resources investment trust has benefitted from the increase in commodity prices with the surge in earnings supporting a bumper yield of six percent.

It has been a profitable time to be invested in real assets and with inflation still rising and the conflict in Ukraine creating supply shortages this seems unlikely to change any time soon. Even after the crisis has been resolved, the global fiscal stimulus and the need to decarbonise should ensure further demand growth for natural resources.

The £1.5bn BlackRock World Mining (LON: BRWM) aims to provide a diversified exposure to mining and metal assets worldwide and is the largest trust operating in this area. Over the last two years its net asset value is up 163% in total return terms with its shares now trading close to the underlying NAV.

It is also an interesting option for income seekers as the board distributes all of the available revenue in any given financial year, rather than pursuing a progressive dividend policy. This means the pay-outs can be highly variable, but after last year’s bumper increase the shares offer an attractive historic yield of six percent that should be maintainable in the current environment.

The underlying portfolio

At the end of 2021 the trust held 56 investments, almost all of which were listed equities. It has a reasonably concentrated portfolio with the ten largest positions accounting for around 58% of the total assets. These include global, diversified miners such as: Vale, BHP, Anglo American, Glencore and Rio Tinto.

The diversifieds make up 41% of the underlying exposure, followed by copper 21%, gold 15% and then steel at seven percent. Most of the capital is invested in companies that operate globally (72%) with a further eight percent in Latin America, five percent in Australasia and four percent in the US. There was only a one percent investment in Russian companies before the war in Ukraine, but that has now been written down.

Over the last 18 months or so managers Evy Hambro and Olivia Markham have considerably reduced their allocation to gold from 35% to 15%, a period in which the precious metal has underperformed. Their strategy in this area is to focus on high-quality producers that are in the best position to weather cost inflation and maintain production levels.

Positive outlook

Hambro and Markham have a positive outlook for the mining sector as they expect continued strong demand from the global fiscal stimulus, as well as long-term structural demand growth from the transition to a low carbon economy. Despite this supportive backdrop, many of the constituent stocks are still trading on valuation multiples that remain below their long-term average.

Mining companies are in a strong financial position at present, with high levels of free cash flow, solid balance sheets and a continued focus on returning capital to shareholders. It is also an area that typically does well during periods of rising inflation and interest rate hiking cycles.

The broker Winterflood rates the experienced management team highly and continues to recommend the trust for investors who are looking for a well-managed, diversified exposure to the commodities sector. It has had a strong couple of years, but it is hard to see that turning around unless the global economy heads back into recession.