Is a recovery in the works for BlackRock World Mining?

James Mackreides says BlackRock World Mining is ready to grow and take advantage of the industry's recovery after a disappointing year

In their yearly report, managers Evy Hambro and Olivia Markham describe the previous year as a "huge frustration" for BlackRock World Mining (LSE: BRWM). As its discount to NAV increased from 3.3 percent to 5.8 percent over the course of the year, the trust generated a total return of -12.7 percent and a net asset value (NAV) return of -10.7 percent.

This was not particularly related to the commodities fundamentals. The price of copper rose by 8%, while the prices of gold and silver rose by 27% and 21%, respectively. But this didn't result in mining stocks seeing any appreciable gains.

"Large mining companies that simply did not perform as they have historically" suffered the most severe losses. At the end of the year, Freeport-McMoRan, a copper miner, accounted for 43.4 percent of the portfolio. In 2024, the stock lost 93.4 percent on a total return basis. Even worse, despite gold's stellar performance last year, gold miners Newmont and Barrick suffered double-digit losses.

Abandoning mining.

It is easy to understand why investors have turned their backs on the mining behemoths. Last year, capital was sucked out of the Magnificent Seven group of tech firms. Commodity prices surged, but the mining industry's prospects appeared to be clouded by increased energy and operating costs, political unpredictability, and high interest rates.

Commodity prices like copper will most likely rise over the coming years due to the energy transition and the skyrocketing demand for data centers and AI chips. However, mining remains a very challenging industry, and it will only become more difficult as the number of easily accessible deposits declines.

But these very characteristics are what give the industry a long-term attractive appearance. "A recovery is likely to be supported by favorable demand trends, robust balance sheets, constrained supply growth, and low valuations," according to Hambro and Markham. And when investor confidence returns, BlackRock World Mining will be in a nearly unique position to manage the present uncertainty and turn a profit.

Is leveraged exposure a feature of BlackRock World Mining?

The trust has a good mix of assets. By the end of 2024, approximately 34% of the portfolio was invested in multinational corporations that manufacture a variety of commodities. Investing in copper accounted for just under 25% of the total, while investments in precious metals like gold and silver accounted for another 22%.

The investment trust structure has been fully utilized by the managers, though. At the end of the year, gearing was 12 percent, but it had previously reached 14 and a half percent. BRWM uses borrowing to increase returns. Additionally, it makes investments in unquoted securities, which make up 84% of the portfolio.

The trust is entitled to royalties from two mines run by the Brazilian behemoth Vale, thanks to these unlisted assets, which include Vale debentures (2.7% of the portfolio). The company has recouped its entire initial investment in royalties since acquiring these in 2019, and the return stream is anticipated to increase in the years to come.

The foundation for a robust dividend has been established by these alternative assets. In 2024, the trust announced total dividends of 23p per share, supported by revenue of 23p per share. Ten percent came from royalties, twenty percent from options trading, and one percent came from fixed income holdings, with dividends from investments accounting for just under 70 percent of total revenue.

Even though the trust's dividend was reduced by 31% last year as a result of holding companies' reduced payouts, it still produced an outstanding 7.2 percent. Additionally, the stock trades below NAV by almost ten percent.

As soon as the sector recovers, BlackRock World Mining will be in a strong position to profit from it. Investors can benefit from a robust, high single-digit yield supported by a diversified portfolio in the interim.