The start of 2016 marked the low point in BlackRock World Mining (BRWM) before shares in the UK’s biggest listed mining fund staged a remarkable recovery from their five-year crash and doubled last year.
With that in mind could the latest instalment in bad news for its previously high dividend mark the trough in shareholder pay-outs?
Annual results last week brought a cut in the final dividend from 14p to 9p, which following an earlier reduction in the interim dividend slashed the total payment for the year to 13p, a 38% decline from the 21p distribution in the previous year.
However, the dividend was at least fully covered by earnings and there was good news from an unexpected quarter.
Although revenue from listed company dividends slumped 39% to £14.8 million, there was a £1.6 million contribution from the Avanco royalty after the Antas North copper mine in Brazil went into commercial production last year. As a result the royalty has been revalued from U$12 million to $25.2 million, adding nearly 6p per share to net asset value and increasing the position to 2.7% of the fund.
This is a welcome development given it was the collapse of the London Mining royalty in 2015 that damaged investor confidence and ended its high yield strategy.
Shareholders will have to make do with less income but will see the colour of the trust’s money more often. After the dividend cuts and the share price rebound, the stock yields just 3.5%, which is a quarter of its level around a year ago. However, the payments will double in frequency with the board confirming plans to move to quarterly dividends.
A target of at least 3p per share for the first three dividends of 2017 has been set with a final dividend that will mop up the remaining earnings the trust has received.
Iain Scouller, investment company analyst at Stifel, said: ‘We assume that the vast majority of BRWM's dividend income is denominated in US dollars and therefore the trust, which declares dividends in pence, should see a positive impact on its revenue account from sterling's devaluation.
‘In share price terms the mining sector has recovered strongly in 2016, with some improvement in commodity prices. Whilst there is likely to be some lag in any increase in dividend pay-outs at many of the mining companies, it does feel as though the sector is past the worst. The board also says they expect the trust to receive higher dividend income in 2017.’
Commenting on the results fund manager Evy Hambro also struck an optimistic tone but said the strong performance was unlikely to be repeated this year.
Over the 12 months to 31 December 2016, the net asset value per share rocketed 92.9% and the share price soared 100.6%. The trust’s Euromoney Global Mining benchmark rose 94% over the same period.
The slight lag on the NAV was due to the trust avoiding distressed gold mining equities in the first two months of the year which then rallied. Mining stocks witnessed a turnaround last year due to two factors; the beariness on China bottomed out in the early part of the year and the Chinese government’s stimulus package announced in the spring led to improved economic data and increase property prices. The second boost came from the strong financial discipline within mining companies, which cut costs, reduced debt and increase productivity.
‘After such a strong year it is hard to imagine 2017 being a repeat of 2016 given we are starting the year from a much higher base,’ he said. ‘Nonetheless, the outlook is promising. Corporate balance sheets seem to have passed the point of maximum leverage and should commodity prices remain around current levels they will rapidly deleverage.’
Hambro, who manages the trust with Olivia Markham, added that shareholders should benefit from pay-outs this year if ‘management teams can hold themselves back from either investing the cash back into new projects, or using it for corporate transactions’.
Hambro (pictured) also expects volatility in the sector to return to normal levels which means the trust will be paid less for the risk it takes but this will be offset by dividend growth. ‘In addition, we see room for other companies to return surplus cash by either paying special dividends or starting share buyback programmes,’ he said.
Despite the share price gains, the mining recovery is still at a nearly stage and Hambro said it would be a mistake for companies to jump into capex plans or restart mothballed production.
‘The outlook for the global economy feels better, but with China still navigating its way through its varied challenges, and the developed economies having to accommodate a new US president and Brexit, the outlook, although positive, is still fraught with uncertainty,’ said Hambro.
‘The last thing this sector needs after the pain of the last five years is the threat of new supply just as commodity markets are finally moving into balance. If it can get it right, however, the opportunities are compelling.’