The rise in the gold price ought to be very good news for gold miners. In theory, every dollar on the gold price goes straight to profits as mining costs are fixed. Gold-mining shares used to be regarded as a leveraged play on the gold price, amplifying the rise in the metal. In practice, it hasn’t worked out like that. The gold price has risen over 20% this year and 32% over one year to around $2,500 an ounce. The price is 40% higher than the peak reached 12 years ago. Yet the FTSE Gold Mining index stands nearly 30% below the level reached in late 2011.
Is the BlackRock World Mining Trust a good buy?
This doesn’t necessarily mean that gold-mining shares are a bargain. Miners are beset by rising costs, falling ore grades and government taxation and regulation, which means that their break-even gold prices rise steadily. For example, in the early 1990s South Africa was the world’s leading gold producer, accounting for 30% of global output. But today it is not even in the top ten. Output increased 12% in 2023, but that was 40% below the volume in 2010 and 90% below the level seen in 1970.
Still, investors in global mining are at last making money. The £1bn BlackRock Gold and General Fund, managed by Evy Hambro and Tom Holl, has made investors no money since it launched in 2011, but it is up 17.5% in 2024. About 55% of the fund is invested in Canada, 31% in the US and 10% in Australia, showing a strong preference for safe and stable countries. Half of the fund is invested in large-caps with a market value above $10bn and 43% in mid-caps with values of $1bn-$10bn. Almost 90% is invested in gold miners and 10% in silver. The top ten holdings account for 59% of the portfolio and the top three, Newmont, Agnico Eagle Mines and Barrick Gold Corp, for almost a quarter.
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The fund is almost a mirror image of the $4bn BlackRock World Gold Fund, launched in 1994, but has considerably lower costs – 1.15% per annum versus 2.06%. That the World Gold Fund has returned an annualised 7.7% since its inception shows how abruptly the fortunes of gold miners changed in 2011; until then, the fund had multiplied sevenfold on a quadrupling of the gold price. If the gold price keeps climbing and the upward trajectory is deemed sustainable rather than the prelude to a nasty bear market, gold-mining shares should continue to perform, and even outperform the gold price.
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A safer option might be the £1.2bn BlackRock World Mining Trust (LSE: BRWM), also managed by Evy Hambro, but with Olivia Markham as co-manager. Almost 25% of its assets are invested in gold miners although there will also be gold production in the 35% invested in “diversified” miners. The proportion invested in gold varies depending on the managers’ view of the outlook, so the trust, which trades at around net asset value (NAV), should provide a smoother ride than a pure gold fund. At present, 24% of the fund is invested in copper, whose price rose strongly earlier this year, but has since fallen back. The trust is down 8% over one year and has returned just 4% over three, but 68% over five. So it is hardly riding the crest of a wave. The shares yield 6% to pay for the wait until the next boom.
Hambro says that “constrained mined commodity supply, an evolving demand picture, strong balance sheets and valuations below historic averages make us optimistic about the outlook for the sector on a long-term view”. Cynics would point out that he is always optimistic. But his observation that “mining companies have focused on capital discipline in recent years, meaning they have opted to pay down debt, reduce costs and return capital to shareholders, rather than investing in production growth” is inarguable. The massive boom in demand driven by China between 2002 and 2011 is over, but other drivers of demand, such as infrastructure spending and renewable energy, are replacing it. Gold bulls will prefer BlackRock’s Gold & General fund, but World Mining is a compelling alternative.
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