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BlackRock World Mining raids reserves for dividend
Embattled investment trust digs into revenue reserves to finance 14p final dividend, but warns payments will be lower next year.
Embattled investment trust BlackRock World Mining (BRWM ) has raided its revenue reserves to pay a 14p final dividend for 2015, but warned payments next year are likely to be lower.
The trust's final payment takes full-year dividends to 21p, taking the yield on the shares, which have slumped over the last year as the commodities crunch worsened, to over 10%.
But only 18.5p of that payment has been financed from revenues over the year, with the trust, as it had flagged in interim results last year, using reserves to bring the payment in line with 2014's level.
That has left the trust with dividend cover of just over four months at the current level, according to estimates from Numis. Chairman Anthony Lea said payments in 2016 were likely to be lower, despite the trust's efforts to diversify sources of revenues through the use of bonds, option writing and royalties.
'Whilst these income sources provide important diversification at a time of continued uncertainty in the sector, shareholders should nevertheless expect a lower dividend in 2016 than the previous year,' he said.
Revenues this year will be hit by big cuts to the dividends of the trust's two largest holdings, BHP Billiton (BLT) and Rio Tinto (RIO). Both FTSE 100 miners last month abandoned their progressive dividend policies, with Rio halving its payout and BHP implementing a swingeing 75% cut.
The news comes as investors in the trust suffered their fifth consecutive year of losses, as the commodities crunch worsened throughout 2015. Shares in the trust fell 37% over the year, and are down 75% from their peak in April 2011.
The trust's manager Evy Hambro (pictured) said the mining sector had 'ventured further into uncharted territory' in 2015 given the scale of the losses.
'Like a set of dominos falling in a row, the commodity price falls triggered earnings falls which in turn increased the prospect of indebted companies not being able to meet covenants on their debt,' he said. 'In this environment, share prices took the full force of such fears given equity investors would have the most to lose.'
Hambro acknowledged it would be 'small comfort' to investors that the trust's net asset value (NAV) fell marginally less than its benchmark, the Euromoney Global Mining Index. The shares suffered a heavier fall, and their discount to net asset value remains close to lows not seen since the financial crisis. The latest Numis estimates put the discount at 17.8%, having reached 20.4% earlier this year.
The board has the authority to buy back nearly 15% of the trust's shares, and Lea said this could be employed if the discount persisted, despite a lack of buy-backs last year.
'Whilst share buy backs are one method of addressing discount levels, in recent years the board has believed that the most sustainable way to close the share price discount was to place much greater emphasis on seeking to generate additional demand for the shares by increasing dividend distributions,' he said.
'Mining sector weakness has clearly impacted this strategy but dividends remain key to discount management, although not at the expense of potential capital growth.'
The trust's use of bonds, option writing and royalties contracts could play a big role in helping soften the fall in dividends next year. 'At the time of writing these other areas look likely to be less volatile than the significant falls seen in company dividends,' said Lea.
Royalties are a controversial area for the trust, which in 2014 was forced to write off a 7.7% holding in a London Mining royalty, after the miner went bust. The trust has since restricted the use of royalties so no more than 3% of assets can be held in a single one.
Lea said the trust expected to receive payments from its royalty with Brazilian copper miner Avanco (AVB.AX) in 2016, with a new mine set to move into production in the first half of the year.
Under the terms of the $12 million (£8.6 million) investment, the trust will receive 25% of gold revenues from the company's Antas North and Pedra Branca mines, which are under construction, and 2% from other metals produced.
But the trust has been forced to write down its 2.5% position in gold-linked preference shares from Canadian miner Banro (BAA.TO) by 30%. The value of the shares moves in line with the gold price, with payments to the trust varying between 10% and 15% depending on Banro's production levels.
Shares in the trust are up 15% since the start of the year, as miners have rebounded from 12-year lows since mid-January. But Hambro held back from calling the bottom of the sector in his outlook for the year.
'Companies now face the challenge of dealing with the debt they had taken on to fund investments during the good times,' he said. 'We expect there to a large dispersion in performance between those that have plans and those that either do not or are unable to produce one as it is "too late" for them. Our intent is obviously to back the former and avoid the latter.'
The author of this article holds shares in BlackRock World Mining.
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by Daniel Grote on Sep 29, 2016 at 10:23