The mining trust that digs deep for investor returns

INVESTMENT trust BlackRock World Mining celebrates its 25th anniversary this month. Although there will be no party by way of celebration, the fund’s investment record is more than respectable.

Over the past quarter of a century, the trust has outperformed both the FTSE All-Share Index and the FTSE 100 Index with respective annual total returns of 8 per cent, 7.1 per cent and 6.8 per cent.

But for longstanding shareholders, it has been a rollercoaster journey with periods of strong performance followed by bouts of share price lethargy.

Over the past three years, the trust has outperformed the FTSE All-Share but over five and ten years, it has underperformed. This year to date, the share price is down 12 per cent.

The trust, managed by Evy Hambro, invests primarily in the shares of mining companies. But in striving to generate returns, it will also invest in physical commodities, related fixed income bonds, unlisted mining companies, complex financial instruments and royalties. Hambro has been with the trust since the start and has travelled the world hunting down investment opportunities. He believes the fund is now more private investor friendly. This is reflected in the fact that it pays shareholders quarterly dividends. The trust’s yield is currently above four per cent.

Although 60 per cent of the trust’s income comes from the dividends paid by the mining companies it invests in, this is topped up from other sources. Two big income-generating areas are fixed income bonds issued by mining companies and royalties from investments it made in businesses on the cusp of production.

Hambro says these alternative income sources help ‘smooth out the journey’ for shareholders and can prove profitable. For example, it is currently receiving a 7.25 per cent annual income from bonds issued by Canadian mining company First Quantum Minerals which mature in 2021. They were bought from money borrowed by the trust at a much lower interest rate – nearer two per cent. So provided the bonds are repaid in full, it will have been a shrewd investment.

Equally income-attractive has been an investment it made in Brazilian mining company Avanco Resources in 2012 – which has since been taken over by Australian mining company Oz Minerals.

The trust provided $12 million of non-returnable funds to Avanco to help develop its copper and gold mine. In return, it was promised a percentage of any revenue generated from metals mined. Currently, the trust is receiving quarterly income of $1 million (£785,000) from the royalty agreement and Hambro says the trust will be in profit on the deal by the first quarter of next year.

He adds: ‘The mine has another six to seven years of reserves which means the trust should continue to receive royalties until then. There is also a second mine that comes on stream in 2020 where the trust has the same royalty rights. It is proving a powerful generator of shareholder income.’

Hambro says he has met with Oz Minerals and it recognises the royalty arrangement.

Given its specialist nature, BlackRock World Mining should only represent a small part of any portfolio – no more than five per cent. Its share price is volatile although this is compensated for by the attractive regular income it produces.