As technology stocks have surged this year, value stocks, on which the UK market depends, have languished. Rio Tinto’s share price has fallen by 25% since 31 January, while that of the BlackRock World Mining Trust (LSE: BRWM), with a market value of £1.1bn, has slipped by a fifth.
The reason is the disappointing performance of metal prices in 2023 as the global economy has spluttered. Nevertheless, Olivia Markham and Evy Hambro, BRWM’s co-managers, are as bullish as ever for the long term.
Hambro points out the share-price total return for the trust has been positive for six of the last seven years. Since its launch at the end of 1993, the shares have produced a total return of more than 1,500%, with more than half from dividends.
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The shares now yield more than 6.5%, although upward progression has been somewhat erratic, with a significant cut in 2016. Still, Hambro says dividends in the sector are less at risk today than in the past owing to the lower debt burden of mining companies.
“We are now looking at the best part of a decade of underinvestment into new supply,” says Markham. “Capital spending peaked in 2012 and troughed at 50% of that level, since when the marginal recovery has been to sustain, not increase output.” This will constrain supply growth. Meanwhile, “inventories of copper are at very low levels” and are liable to run out later this year due to rising demand.
Our low-carbon future
Copper is “the metal of electrification”, but deficits in supply are looming, implying higher prices. Demand is being driven by the transition to a low-carbon economy, an economy that is “much more metals-intensive”.
“We can’t have the transition to renewable energy without the mining industry. [Global] demand for copper, nickel, cobalt and lithium is growing at double-digit percentage rates to the end of the decade,” explains Markham.
Hambro calculates that building enough wind turbines to generate the same electrical output as a natural gas turbine requires 100 times as much iron ore, 25 times as much concrete, and ten times more speciality metals and minerals – and, if on land, vastly more space.
The combination of steadily rising demand and supply constrained by underinvestment is positive for metal prices, but it’s yet to be reflected in share prices. The valuation of the mining sector, at five times cash flow, is the lowest for 30 years, Hambro notes, while the sector’s yield is about the highest. Debt repayments have reduced the sector’s net debt relative to cash flow to historic lows and a low point relative to other sectors.
A new cycle
In past cycles, says Hambro, “mining companies too often took on enormous amounts of debt in the up-cycle to build or buy output, only to see the cycle turn, demand and prices fall and cash flows collapse”. In this cycle, it seems they have learnt their lesson.
BRWM’s diversification across geographies and metals makes it more attractive than individual companies, and it can easily switch holdings. Diversified miners accounted for 34% of the portfolio at the end of May, copper-focused producers for 22%, gold 16%, steel 6%, industrial minerals 8%, and iron ore 2%. There is plenty more exposure to iron ore in the top holdings – Vale (debt and equity), BHP, and Glencore, all of which are diversified miners and make up a quarter of the portfolio.
BRWM’s shares are attractive for the long term, but there are two factors that suggest patience. Firstly, the shares trade at a 2% discount to net asset value (NAV) yet have regularly traded at a discount of 15% in the past. Secondly, the sector is still cyclical so this year could continue to be difficult. It’s a share for 2024.
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