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Numis slams BlackRock World Mining trust after share price drop

14 October 2014

BlackRock World Mining has been criticised for its handling of two failed investments in London Mining, which damaged its NAV and share price when they were recently written down to being worthless.

By Gary Jackson,

News Editor, FE Trustnet

Analysts at Numis Securities have strongly criticised the £841.2m BlackRock World Mining investment trust after almost 8 per cent was wiped from its net asset value and its shares plunged following two investments in London Mining going sour.

ALT_TAG Numis says the trust exposed its investors to too much risk and failed to inform them quickly enough when the investments in a revenue-related royalty for London Mining's Marampa iron ore mine in Sierra Leone and a convertible bond issued by the company were hit by problems.

BlackRock World Mining, which is managed by Evy Hambro and his team, switched to a new strategy in early 2012 and started to place greater emphasis on the fund’s dividend as part of its total return.

This is intended to increase investor demand and reduce the likelihood of the trust trading on a persistent discount.

In July 2012 the trust paid $100m for a 2 per cent revenue-related royalty calculated on any iron ore sales over the life of the Marampa iron ore mine.

This was one of the portfolio’s largest holdings, accounting for 6.5 per cent of assets at the end of June.

Last week, London Mining - which has been battered by a sharp drop in iron ore prices - crashed 96 per cent after it said “there will be little or no value remaining in the equity of the company and the other listed securities of the group” unless it secured a cash injection from a new investor.

BlackRock World Mining then announced to its shareholders that it believed the “most prudent approach” was to write down the value of the royalty and a London Mining convertible bond it owned to nil.

Previously, the royalty was valued at £47.8m and the bond £4.6m, including accrued income.

FE Analytics shows shares in the trust dropped 15.54 per cent between 8 October - the day when the announcement was made - and the close of play on 9 September, although they have recovered slightly since.

Performance of trust vs sector and index since 8 October

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Source: FE Analytics

In a strongly word note, Numis’ Charles Cade and Ewan Lovett-Turner say the impact of the London Mining investment is “damaging” for the trust in several ways.

The analysts note that Hambro held a conference call on the morning of 8 October after the trust announced its full provision for the Marampa Royalty and then released an updated top 10 portfolio, which quantified the impact on the revenue for 2014.


However, Numis criticises the trust for the way it handled a 31 per cent writedown of the value of the royalty on 31 August, which came after London Mining’s half-year results suggested a slower than expected ramp-up and reduced its implied liability from the royalty.

“We are disappointed that the company provided no update to the market on the London Mining investment at the end of August when the first write down was made – it simply provided an updated top 10 valuation which meant that many people, ourselves included, failed to spot the change,” they wrote.

“We believe that a significant change in valuation of a major unlisted investment should be regarded as worthy of explaining to the market as a whole.”

In addition, Numis notes that the writedown “puts a hole in the future revenue”.

This year’s dividend is expected to be only 93 per cent covered by revenue and the remainder will come from the trust’s revenue reserves.

BlackRock World Mining’s board expects that the 2014 final dividend will be unchanged at 14p - the same level as 2013. But last year’s was fully covered by earnings.

Numis said: “Whilst it is encouraging that the dividend is likely to be maintained, the loss of revenue from the London Mining royalty has a significant impact on potential future revenue growth.”

“Indeed, we believe there is a threat that the prospects for capital growth could be impacted if the priority becomes to maintain the dividend – in H1 2014, just 63 per cent of the fund’s revenue came from mining equity dividends.”

The analysts’ criticism of the trust does not end there - they note that the trust’s investment policy is “to provide a diversified investment in mining and metal securities worldwide” but argue that recent events put “a fundamental question” over its future strategy.

“Investing a significant proportion of assets in a single mine royalty has exposed investors to a far greater level of risk than they may have anticipated,” Cade and Lovett-Turner said.

“We understood that revenue from the royalty could be impacted by project delays, but have been surprised that a financing shortfall could potentially wipe out the full value of the investment in such a short space of time.”

The final criticism says the London Mining event “damages the credibility of the team”.

Although BlackRock World Mining has a strong long-term track record, its NAV is down 43.1 per cent over the past three years - compared with a decline of just 33.4 per cent in the Euromoney Global Mining Index benchmark.

Numis points out that investors would have been better off holding Rio Tinto, which has gained 1.1 per cent over the same time.

“The impact of the royalty writedown not only damages the fund’s performance record, but also brings question marks over the stock selection and risk assessment of the management.”

Despite these criticisms, the analysts say “we would not write off the management team”.

They point out that past difficult periods in the trust’s history, such as when it lost 56 per cent during the financial crisis, have been followed by strong recoveries.

They also say the trust has been able to add significant value over rivals in the open-ended and index-tracking space thanks to its long-term investment approach.

“However, the pressure is now on, and we see a threat that the discount could widen if investors start to lose faith. The share price is down 16.6 per cent over the past week and the discount has widened from 1.9 per cent to 10.3 per cent,” they add.

FE Analytics shows BlackRock World Mining has made a total return of 440.04 per cent since launch in November 1993.

Since Hambro took over the portfolio in May 2009, it has outperformed both the IT Commodities & Natural Resources sector and the Euromoney Global Mining Index with a gain of 6.93 per cent.


Performance of trust vs sector and index since May 2009

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Source: FE Analytics

BlackRock World Mining has ongoing charges of 1.37 per cent, with no performance fee, and has gearing of 16 per cent.

It is currently trading on an 11.08 per cent discount, according to the Association of Investment Companies.

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Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.