In a recent update on his £1bn World Mining Trust, the fund manager said a theme coming out of reporting season so far was one of diversified miners delivering on the promises they made last year regarding widespread cost reduction.
Hambro cited Rio Tinto as an example, his largest position comprising 12.6% of the portfolio, which announced a 10% increase in earnings to $10.2bn and a 15% increase in full year dividend.
Equity markets will support commodity price
Over five years, the trust has delivered a share price return of 94.9% against the Euromoney Global Mining Index’s 48%. Over a shorter timeframe, performance (sector and fund) has tailed off, as expected but the trust has still beaten its benchmark, having lost 9.6% while the sector has lost 21.4%. Three and one month figures are finally showing a positive performance – at index and trust level.
The trust is currently trading at a discount to NAV of 1.1% with gearing at 13.4%.
Hambro, who also runs the £1.2bn BlackRock Gold and General unit trust, said equity markets provided a constructive backdrop with world markets rising by 4.8% over the month of February.
He said the reaction to Janet Yellen’s commitment to trimming asset purchase off the back of improving economic data offset the impact of political unrest in Ukraine.
Wage disputes saw South African strike action continue, hitting weekly platinum production by 70,000oz, providing support for the price to rise by 5.3% over the month.
He added that gold maintained its positive momentum, seeing a price rise of 6.7%, finishing the month at $1,326 per ounce.
Negative sentiment to gold easing
Negative sentiment seemed to be subsiding as gold ETFs reported positive inflows in February of around 6 tonnes for the first time in 13 months, having seen outflows of approximately 880 tonnes in 2013.
While South Africa’s rand strengthened over the month, year-to-date the currency has depreciated by 2.4% against the dollar, while gold producers in the country benefited from reduced operating costs and a higher gold price.
“The mining sector has significantly lagged the general equity market in recent years. However, a number of the downside risks for this sector have reduced, albeit not disappeared.
“The industry has made good progress in refocusing its strategy: operating costs have been aggressively targeted and investment in projects reassessed. Many commodities are trading close to or below their marginal cost of production, implying that price downside should be limited, in the absence of a collapse in demand,” Hambro said.
He said the improving global economic backdrop would be supportive of commodity prices with companies trading on “undemanding valuations” as well as sitting at a dividend yield premium to the broader equity market and with capex rolling off, he said management were guiding investors towards rising free cash flow.
