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BlackRock World Mining outperforms falling market

The continued slump in commodity markets weighed on the performance of BlackRock World Mining over the first half of 2015. the total return on net assets was -7.0% for the period and the return to shareholders was -2.8%. These figures are better than the return on the Euromoney Global mining Index however – this returned -9.1%. The interim dividend is being maintained at 7p per share.

Given the problems in the sector and BlackRock World Mining’s issues with some of its royalty investments, the Board has decided to make a statement about future dividends. we reproduce this below but on our reading it seems to say “wait and see”.

The Board is mindful of shareholders’ desire for clarity on the current dividend level and guidance in regard to the future. Based on estimates for the remainder of the year proving to be correct, the Company is prepared to use some of its retained revenue reserves to maintain the current dividend level in 2015. Future use of reserves will depend on the Board’s confidence in returning to a fully covered position in the near term. Given the widespread challenges facing the mining sector, the sustainability of dividends at the underlying
stock level is being closely monitored to determine your Company’s appropriate dividend payments for the future.

The statement says that holding large positions in Rio Tinto, Glencore and BHP Billiton, in an attempt to focus on companies that were cutting back aggressively on capital expenditure and overheads, whilst not owning Anglo American for example, has added considerable value during the last few years. In addition, the move to overweight the higher growth well-financed mid caps from the middle of 2013 has also contributed positively to performance. This was again the case in the first half of 2015. Also the juniors who have purchased assets being sold as ‘non core’ by the majors have significantly contributed to overall performance.

They reckon Uranium was the only major hard commodity to record an increase ion price over the first half of 2015 and that only by 2.8%. Despite the underperformance of nickel, BlackRock World Mining’s holding in Norilsk Nickel, the world’s largest nickel and palladium producer, was one of the top contributors to performance with the company continuing to deliver strong operational results and raising dividends, benefiting from the material depreciation of the rouble. The Company’s largest copper exposure, First Quantum, was one of the top contributors to performance, with the market responding positively to the company’s decision to raise C$1.25 billion in fresh equity to de-risk the balance sheet through the company’s heavy investment phase. A number of their growth orientated mid-cap copper producers such as Lundin and Hudbay also performed well during the six months as the market refocused on their earnings growth profile as they bring on new production over the next one to two years.

In precious metals, Northern Star Resources (1.7% of the portfolio) and Metals X (0.3% of the portfolio) both followed a similar strategy that has combined an opportunity to exploit currency weakness (as good prices remained fairly stable in US dollar terms but the dollar strengthened against most major currencies) with the plan to take advantage of M&A opportunities as major producers discard unwanted assets. Both have enjoyed a major rerating of their shares as they have successfully completed deals, taken out costs and added mine life to the assets. Mid cap. holdings like Randgold (1.7% of the portfolio), Eldorado Gold (1.2% of the portfolio) and Newcrest Mining (1.1% of the portfolio) did well. Randgold has continued to unlock value by further advancing the Kibali mine in the DRC, whilst Newcrest under its new management team has reset expectations which have been taken well by investors. Eldorado has had a very difficult year as a result of its exposure to Greece. Uncertainty about the development of its main  growth projects in Greece post the change in the political landscape, as well as the continuing debt woes, has meant these projects have been all but wiped out in the share price. However, the company continues to develop the mines and it is hoped that by the time they start production the situation in Greece might have improved from the current state of play.

BlackRock World Mining’s main exposure to silver producers, Fresnillo and Tahoe, fared better than most of the non precious miners and especially well given the significant year-on-year change in the price of silver, down by 17.3%. This was due to better than expected development progress on the companies key growth assets. In addition, Tahoe completed the takeover of Au Rico during the period. The geographic and asset diversification this brings to the company helped to rerate the shares post the completion of the deal.

Prices of the platinum group metals were the worst within the precious metal suite. Continued problems in South Africa with regards to power supply, union wages demands and increased political uncertainty on historic Black Economic Empowerment (‘BEE’) deals has caused the share prices of the main producers to collapse despite the weakness in the Rand. BlackRock World Mining has had no exposure to these companies for some time now and they say this looks set to remain the case given the weakness in demand for the metal.

There was a clear trend across the performance of the diversified mining companies during the six months which saw those with greater balance sheet strength outperforming those without. Unlike in previous periods where the performance of the diversified mining companies has been very similar to the index as a whole, significant dispersion has opened up over the last twelve months. As noted earlier, holding large positions in BHP Billiton, Rio Tinto and Glencore, whilst not owning Anglo American and minimal Vale, proved
beneficial over the last 12 months. For example, during the period, BHP Billiton outperformed the index by 5.6%, while Anglo American and Vale underperformed by -14.3% and -19.5% respectively. The distinguishing feature between these companies has been their declining
capital expenditure profile and resulting improvement in balance sheet position. BHP Billiton, Rio Tinto and Glencore responded quickest and hardest to cut costs, reduce capex and sell assets to preserve their balance sheets. They say that today, Anglo and Vale still find themselves committed to capital expenditure projects with net debt levels rising as they try to keep pace with the dividends offered by peers. With commodity prices declining further during the first half, the pressure on costs is expected only to intensify with companies
looking at various options to enhance shareholder value. The most notable of these is BHP Billiton’s decision to demerge a series of smaller non-core assets into a new company called South32. This transaction was completed during the period with each existing BHP Billiton shareholder receiving a 1-for-1 share in South32. Post demerger, BHP’s focused core portfolio of just 12 operated assets
(and 7 non-operated) offers scale, simplicity and diversification and is anticipated to result in even greater cost savings to the group.

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