Between 2010 and 2015, BlackRock World Mining posted consecutive losses during a challenging period for mining companies. The trust’s share price and dividend tumbled after its £68 million revenue-related royalty contract for Sierra Leone iron ore miner London Mining had to be written down. The re-based dividend is now paid quarterly and generates a yield of 3.9% in contrast to the double-digit yield the depressed stock reached before the cut in payouts.
‘We had five negative years in a row, which was extraordinary,’ Hambro reflected.
‘This has been extremely disappointing, but I think we have reached a low in the cycle,’ he added.
Over the past five years to 15 June, the trust’s share price has fallen 22.6%, while its net asset value (NAV) is also down by 25.8%. The past 12 months have been a completely different story with waning fears of a China slowdown and improved investor sentiment to the mining sector lifting the trust’s share price by 54% and NAV by 45%.
After the problems at London Mining Hambro is relieved to see the trust's Avanco royalty has made gains after the Antas North copper mine in Brazil went into commercial production last year.
Another boost came from the strong financial discipline that mining companies have started to exhibit by cutting costs and paying down debt.
Following these developments, Hambro hopes the trust’s discount will narrow further from its current level of 10%, which has narrowed from a one-year average of 13.5%. Over the past few years, he and co-manager Olivia Markham have made significant changes to the portfolio, adapting to a challenging environment for commodity-producers.
‘What we have tried to do is to get away from people thinking about the trust as a series of commodity-related bets,’ Hambro said.
Hambro acknowledges that commodity bets comprise a portion of the portfolio, as the team backs commodity producers where they expect output will enhance cashflow and profitability over time.
However, a core part of the portfolio is allocated to stock-specific bets with catalysts to improve performance, which are uncorrelated to underlying commodity prices. He hopes the combination of the two components will drive returns in the portfolio.
Around 46% of the portfolio is exposed to companies in the process of debt reduction, or deleveraging, which Hambro hopes will provide a tailwind for their share prices.
‘The fact that most of the growth capex [capital expenditure] that was invested in the past has been poorly timed and executed has damaged returns in underlying businesses. The fact that companies are no longer doing this, using that free cashflow to pay down debt and return cash to shareholders should be positive,’ Hambro explained.
The team currently favours well-managed, well-financed companies, with strong margins and a focus on growth. They also like companies that are able to replace what they produce over time.
He describes top position Rio Tinto (RIO) as being ‘very high quality’ after deleveraging in recent years. While it is able to replace its reserves, Hambro said its management team have spoken of a lack of growth opportunities over the coming years.
‘So where are we going to get some of our growth from if we can’t get it from a big company like that? Well, First Quantum is a company that is still spending money, so they are not deleveraging.
'They have got fantastic growth coming through, and the company’s production is going to increase significantly over the next few years,’ Hambro explained.
The decision to back ‘longer-dated’ investments, such as exploration and early stage companies, represents another change to the portfolio in recent years. Here, investments include Albemarle Corp (ALB.N), the world’s biggest producer of battery chemical lithium.