The share price of BlackRock World Mining Trust (LSE: BRWM) has risen by 170% since its pandemic low and by 70% since the end of 2019, supplemented by an annual dividend yield of 3.6%. Yet Olivia Markham, co-manager of the £1.2bn trust, is optimistic that there is further to go.“Compared with other cycles, which usually last around 36 months, we are about half way through, but not necessarily that far in terms of investor returns,” she says. “The backdrop for most commodities is healthy, valuations are attractive, company balance sheets are incredibly strong and management is focused on capital discipline.”
Still, old hands will remember how the shares fell by two-thirds in six months in 2008, after having multiplied six fold in the previous five years. They then soared by 220% to a peak over £8 in early 2010, before falling back below £2 in early 2016. They now trade at net asset value, close to 650p. When they fall out of favour, the discount has risen to 20%.
Miners have learned a lesson
The mining cycle is a cruel one in which rising demand eventually encourages investment in new supply. The price of mined commodities drops quickly with a disproportionate impact on mining profitability, given that many of the costs are fixed. Money borrowed to finance expansion or new mines can turn out to have been wasted, forcing the company to cut costs and retrench.
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However, Markham believes that the mining companies have learned their lesson, hence their collective caution about investment and strong balance sheets. This means that strong demand combined with constrained supply is pushing up metal prices. Yet “share valuations relative to cash flow are at the bottom of their 30 year range”, she says.
With China’s growth rate bottoming, the iron-ore price is rallying. Demand for steel is strong, making price rises likely. Coal prices have soared in the last year alongside oil and gas. Copper supply is still falling short of demand, thanks to environmental issues and declining ore grades at mines, especially in Chile, which accounts for 30% of global supply. The price has risen 60% in the last two years.
Copper, as well as nickel, cobalt, lithium and the rare earth metals are seeing strong growth in demand due to the push for net zero as well as in broader technology usage with expected compound growth rates of between 25% and 50%. This makes the bulls believe that “this time it’s different” in the metal cycle, with secular growth replacing demand volatility.
BRWM’s portfolio is concentrated with the top-ten holdings, led by Vale, BHP and Glencore, accounting for over half the portfolio. Precious metals accounted for 40% in 2020, but it’s now just 16% as Markham believes that industrial metals are a better way to play the pick-up in global economic growth.
Proceed with caution
Markham’s optimism may be justified. However, the investment restraint of the major mining companies could falter, as it has in the past, if a wave of optimism sweeps the sector and new companies spring up with funding to develop exciting opportunities.
Long-term growth might guarantee demand but technology, spurred by high prices, could drive greater resource efficiency, or even replace it entirely. For example, there is no guarantee that lithium-ion batteries, first developed in the late 1980s, will not be superseded.
Finally, political risk is ever present. As metal prices rise, governments are likely to raise royalty payments and levy higher taxes, especially where, as in Chile, a populist government is elected.
Holders should look for the chance to exit. Buyers should wait for the next down-cycle, when the shares are likely to trade at a significant discount.
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