It has been a strong year for BlackRock World Mining (LON:BRWM) with a NAV return of 24% in 2017. The performance has been driven by the pick-up in global economic growth, and sentiment towards the fund is finally starting to improve after a significant write-down in 2013 dented investor confidence. If the economic recovery continues the performance should continue to impress.
BRWM invests in a global portfolio of mining and metal securities, with its largest positions in diversified miners such as Glencore, Rio Tinto and BHP Billiton, each of which account for around 9% of the fund’s assets. There are also more focused investments to take advantage of the best opportunities.
The most significant of these are the pure-play copper producers that currently make up a fifth of the fund. Evy Hambro and Olivia Markham, the managers, believe that a supply-driven copper deficit is only 18-24 months away, and if they are right it would suggest that prices should increase quite dramatically and boost the earnings of these companies.
A further 15% is invested in gold producers, with the emphasis on companies with high quality deposits with sufficient resources to replace the reserves that are extracted each year. Demand for the precious metal remains healthy, especially from ETFs, but the World Gold Council is forecasting a fall in supply from 2019 as the level of reserves diminishes.
The pick-up in global economic growth has increased the demand for many natural resources and this has filtered through into higher prices with average year-on-year increases for 2017 of 38% for zinc, 27% for copper, 21% for iron ore and 32% for coking coal.
The managers believe that a supply-driven copper deficit is only 18-24 months away.
As well as offering the potential for capital growth, BRWM also pays an attractive yield of 3.9%, with the company distributing most of its income. About half of the fund’s revenue is from dividends, which appear to be well supported, but the rest comes from a combination of royalties, fixed interest and returns from option writing where there are growing headwinds.
Hambro and Markham have said that they will not chase income at the expense of capital growth. This probably reflects their ill-judged investment in a revenue related royalty over London Mining’s Marampa iron ore mine in Sierra Leone that had to be written off in 2013 wiping out 6.8% of the fund’s net assets.
The write-off and subsequent reduction in the dividend had a negative impact on the way that investors viewed the fund. Five years on, it is still trading at a 12% discount to NAV, but the broker Numis believes that sentiment is finally improving.
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Mining stocks have experienced a strong recovery in 2016 and 2017, yet shareholder returns are still a long way below their peak in 2011. If the global economy continues to prosper there could be much more upside, but it is important to remember that commodities are a volatile area and you need to be comfortable with the risk before investing.
BlackRock World Mining has a market value of £706 million and ongoing charges of 1.0%.