Hambro strikes deal with London Mining to boost BlackRock income

Evy Hambro is boosting the income credentials of his BlackRock World Mining trust by snapping up a 2% revenue-related royalty stream in London Mining (LOND.L).

The $110 million (£70 million) deal will see Hambro’s £1.2 billion investment company receive a share of the income from iron ore sales generated from London Mining’s Marampa licence, located in Sierra Leone. It will also turn his specialised trust into a more attractive proposition in the eyes of income-seeking investors.

Blackrock's widening discount

Typically, mining stocks are attractive for their capital growth potential, but slowing global growth and turmoil in the eurozone have hit the sector hard, with the HSBC Global Mining index down by 33.8% over 12 months. Hambro’s closed-ended fund has fared similarly, with its net asset value (NAV) per share falling by 32.3% over the same period. Its discount has also widened over this period, currently standing at around 15%.

It is debatable whether BlackRock World Mining’s double-digit discount will evaporate entirely following the deal, but shareholders in the trust certainly stand to gain.

Given its status in the market, Hambro’s trust has grown to a size where it will be arguably more difficult to deliver significant long-term performance from equity investment alone. This innovative diversification should secure a cost-free income stream after six years, since the trust has funded the royalty by borrowing at a rate far lower than its return on equity.

Working the gearing

While some investors might be holders of Hambro’s open-ended BlackRock Gold & General fund (the best-performing commodities fund available to investors over the past decade, earning it a place in Citywire Selection), Hambro has struck a canny deal with London Mining that capitalises on his trust’s ability to gear. This could see him net in the region of $700 million pre-tax on a 25-year view based on JP Morgan’s base-case forecasts for iron ore pricing.

Moreover, Hambro said he would not rule out additional deals. ‘Adding this royalty to the portfolio not only complements our existing commodity allocation but also meets the board’s objective of using income to attract new investors.’

Hambro said he is evaluating several similar opportunities, given that the drought in bank lending has put BlackRock in the driving seat when it comes to negotiating pricing.

Key numbers

At the beginning of the year, the board of BlackRock World Mining announced plans to use income as a tool to address its perennially wide discount and its strategy has paid off over the first half. Some bigger names in the closed-end sector have used share buybacks to little effect, but Hambro’s trust at one point saw its discount narrow to 8%.

Its latest venture has won plaudits from analysts and investors, who believe its impact will be meaningful over the longer term.

Charles Stanley analyst Stephen Peters said he would like to see the £1.1 billion trust agree several royalty deals. The current arrangement with London Mining accounts for roughly 6.4% of the trust’s NAV, and if this were bumped up to 20% and commodity prices rose, Hambro stands to benefit significantly, Peters said.

Where next for the iron ore price?

Moreover, the trust is exposed to little of the downside, such as commodity extraction cost inflation. However, it is reliant on London Mining expanding its iron ore production, as planned by BlackRock, and keeping a lid on political risks in volatile Sierra Leone.