In stark contrast to the sector’s bull run that helped Hambro grow BlackRock World Mining Trust’s share price by more than 100% over five years, the Chinese slowdown, destructive M&A and cost inflation have all had a detrimental impact on returns, with the £917m fund’s share price down by around -23% over three years.
Prospects for the trust might be about to change, however, and analysts are wondering whether the out of favour fund is a shrewd buy, particularly with Hambro and his team’s decision to chase income about to feed through to its returns.
Royalties boost
Last year, Hambro and his co-manager Catherine Raw decided to snap up a 2% revenue-related royalty stream in London Mining, with the team handing over $110m to strike the deal but expecting to make in the region of $700m for the trust, pre-tax, on a 25-year basis.
Hambro and Raw later sought board approval to double their royalties allowance from 10% to 20%, and last month took advantage of their updated mandate by reaching a non-binding $12m agreement with Brazil’s Avanco Resources for a 25% royalty payment on the firm’s gold production and 2% on its production of other metals such as copper.
Income slant
As with the London Mining deal, buying into royalties not only allows the managers to benefit from the moves in commodity prices minus cost inflation, but it also gives their resources portfolio, which investors have historically looked to for growth, an attractive income slant.
While acknowledging that the resources sector has endured some difficulties over recent years, the investment trust team at Winterflood expect Hambro’s fortunes to reverse.
It pointed out there have been a number of senior appointments within the mining sector that should improve capital discipline and shareholder returns.
Moreover, while the trust’s traditional focus has been on the mining majors, the team believes Hambro and Raw have differentiated the trust through its investments in royalties, and through these deals have lifted the trust’s yield to its current 4.4% level.
Narrowing discount
Investors are also starting to pick up on this, and renewed positivity surrounding the trust has seen its discount narrow from just shy of 14% at around the time its deal with London Mining was agreed, to roughly 8% at Friday’s close.
Going forward, the Wins team said there is room for further improvement and argued the fund may now look attractive to investors willing to take a “contrarian” stance.
They said: “The manager is positive on the sector’s prospects for dividend growth and, with royalty investments only now beginning to materially contribute to income, we believe there is scope for further increases in the fund’s dividend.”
Wins argued that the tightening in the trust’s re-rating to an 8% discount reflects the fundamental change in its investment process, and a widening of its potential shareholder base.
“If sentiment towards the resources sector improves and the dividend continues to increase we believe the fund could trade a premium to its net asset value,” the Wins team added. “For investors willing to take a contrarian view on an out of favour sector, we believe the fund is attractive. In the absence of any immediate recovery in valuations, the dividend yield means shareholders are paid to wait.”
