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Panmure upgrades BlackRock World Mining to 'buy'
Broker's analyst says battered mining fund is over the worst and could yield more than 5% even after a cut to its dividend.
Panmure Gordon has upgraded BlackRock World Mining (BRWM ) to ‘buy’ from ‘hold’ believing the worst is over for the investment trust whose shares have rebounded 21% this year after a battering in a five-year long commodities crash.
At its full-year results earlier this month the country’s biggest mining fund held its total dividend for 2015 at 21p per share but warned the payment would fall this year following announcements of planned dividend cuts by mining giants BHP Billiton (BLT) and Rio Tinto (RIO).
Investment funds analyst Joe Maidman believes the trust will cut the dividend to 11.8p per share this year. This is based on his forecast that the fund will generate earnings per share of that amount in 2016, down 36% from last year, before recovering to 13.5p and 14.6p in 2017 and 2018.
Although he expects mining shares to remain volatile as companies continue to cut debts and slash production, Maidman told investors in a note published yesterday that ‘it feels like the worst news is out of the way and that the market has had a chance to rebase expectations’.
‘We believe BRWM can outperform given the portfolio’s focus on those companies with the strongest balance sheets and the diversified nature of its income account which should soften the impact of savage dividend cuts in the sector,’ he said.
While the trust’s income from dividends is expected to halve this year, Maidman said it would benefit from a 10% yield from its bond portfolio and increased revenues from writing share options and a royalty investment it has on Avanco Resources (AVB), an Australian listed gold and copper miner operating in Brazil.
The analyst estimated this would generate a 5.4% dividend yield, some way down from the double-digit yield the depressed share price offered recently, but more than the 3.5% yield he said it produced when it first shifted towards a controversial income-led policy several years ago.
Managed by Evy Hambro and Olivia Markham, BlackRock World Mining has been one of the best performing investment trusts this year, its share price rising over 21% to reach yesterday’s closing price of 219.25p. However, over five years it has generated total shareholder losses of 63%, which includes the payment of dividends, reducing its market value to £387 million.
The recent rally in the share price reflects growth in the underlying portfolio with its net asset value rising 19% this year according to Numis Securities data. Maidman commented that mining ‘fundamentals are significantly stronger than financial markets suggest’. According to Numis, the share price stands nearly 14% below NAV, compared to the average one-year discount of 11.4%.
Panmure is not alone in backing a recovery at BRWM. Numis slapped a ‘trading buy’ recommendation back in March 2011 and held on to its rating throughout the downturn. Canaccord Genuity has had a ‘hold’ rating for some time while investment trusts like British Empire (BTEM ) and Seneca Global Income and Growth (SIGT ) have bought stakes in recent months. Last month the stock was the eight most bought investment trust on Interactive Investor, the online stock broker.
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