BlackRock World Mining (LON: BRWM) invests in a diversified portfolio of mining and metals assets worldwide. It has just released its interim accounts for the six months to the end of June, which show how quickly the picture can change for this type of specialist sector specific exposure.
The £1.4bn trust started the year strongly as inflation took hold and commodity prices surged in value. There was then a dramatic reversal in early April as the ongoing lockdowns in China, the threat of a recession in the developed economies and Russia’s invasion of
Ukraine triggered a violent sell-off that the managers describe as reminiscent of the panic selling in 2008.
Over the six months as a whole these two contrasting periods more or less cancelled each other out with the trust experiencing a modest 1.7% decline in NAV. Since then it is up seven percent in sterling terms, but if you are thinking of investing you need to be comfortable with this sort of elevated level of risk.
The underlying exposures
In total there are 64 separate holdings, with the largest positions being in the diversified miners such as Glencore, BHP, Vale and Rio Tinto. There is also gearing (borrowing) of 14.5% of net assets, which magnifies the potential returns.
Copper and iron ore are the main commodity exposures in the portfolio and both have been volatile. The former hit an all-time high in April, although the subsequent falls are likely to trigger downgrades in the earnings estimates for the associated mining stocks in the second half of the year, unless China decides to relax its zero Covid policy.
It is interesting to note that the portfolio is underweight in respect of the precious metals, which generally moved lower in the period, including platinum and palladium where the demand is being undermined by the ongoing production issues in the auto sector. The fund is also underweight with regards to steel, an area that has suffered from the reduced level of economic activity in recent months.
Margins are generally healthy throughout the sector, although there is significant dispersion across geographies. The managers believe that the US producers are best positioned to weather the storm due to the less volatile domestic energy market, whereas in Europe, producers are under significant pressure from the high power prices.
Dividends and prospects
The Board’s policy is to distribute almost all of the income earned in the year via three interim dividends and a balancing final dividend. So far it has made one payment of 5.5 pence per share with another planned for the end of September. This makes it difficult to assess the effective yield, especially as the fourth payment tends to be significantly larger than the others.
Writing in the accounts the managers said that despite an extremely positive period for mining companies, ‘the realities of the challenges that lie ahead started to be priced in by investors’. The inflationary pressure is likely to impact results in the second quarter, yet they remain positive on the outlook for the sector given that balance sheets are as strong as they have ever been.
BlackRock World Mining is currently trading close to its underlying NAV, but the broker Numis says that volatility in sentiment may lead to near term discount risk, particularly as the trust does not have a firm share buyback policy. It is possible that fears of a recession could result in further falls, although if commodity prices remain structurally higher for a sustained period this would provide a more positive long-term backdrop for the fund.