Has Hambro struck gold with London Mining deal?

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.

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 vehicle into a more attractive proposition in the eyes of income-seeking investors.

Typically, mining stocks are attractive for their capital growth potential, but slowing global demand 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-end 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 and as Wealth Manager went to press, it stood at 15%.  The discount is currently 13.5%, and the trust trades at 570p per share.

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

Given its status in the market, Hambro’s trust has perhaps grown to a size where it is 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.

Meeting objectives

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, speaking to Wealth Manager about the royalties arrangement, Hambro 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 says 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.