Fund focus: BlackRock World Mining

The announcement in October that the BlackRock World Mining Trust had been forced to write off one of its largest investments came as a shock to private and professional investors alike.

Since then the trust's share price has plummeted over 20% and more than £100 million has been wiped off the value of its assets.

That the managers failed to foresee the problems with its holding in the London Mining Marampa royalty contract, which gave the trust the right to participate in the Sierra Leone mine's revenues in exchange for upfront capital, has undermined confidence.

The investment in the Marampa mine, an early stage development, became worthless after the collapse in the iron ore price, combined with the outbreak of Ebola in Sierra Leone, led to a financing crisis.

Due dilegence

Stephen Peters, head of investment trust company research at stockbroker Charles Stanley, says: "On the one hand, I don't think BlackRock World Mining should be criticised for using the investment trust structure to its fullest extent to invest in these royalty contracts but I do think it is fair to ask about the depth of due diligence regarding London Mining and the terms and conditions of the Marampa contract."

Charles Cade, head of investment companies research at Numis Securities, has been very unhappy with the managers' lack of transparency. He says "My main disappointment is that they didn't disclose the amount of risk involved with this investment and didn't report what was happening earlier when problems did develop."

The size of the investment has also come in for criticism. Simon Elliott, head of the investment trust research team at Winterflood Securities, says "With the benefit of hindsight, the portfolio's 6% exposure to this mine was a quantum too large."

But most observers are still relatively positive about the trust. Elliott says: "A key attraction going forward is the yield. The managers have said they will maintain the dividend this year. Future dividend growth won't be helped by the loss of the royalty contract but the trust's revenues are diversified.

"Nearly two thirds comes from mining companies' dividends and another 10% or so comes from option premiums. Even if the dividend is rebased the yield will still be around 5%."

While Cade fees the credibility of the trust's investment team has taken a knock, he says: "I do not question their ability. I think they were very unlucky and have learnt their lesson. Mining is an interesting area and if you want a good team you will get it with this trust.

"However, I am slightly concerned about the emphasis on income and whether it will put constraints on what they can do. I do not want to see greater use of options to enhance the income, for example, because it would mean they were giving away more of the [potential capital] upside."

Market conditions 

How the capital loss the trust has suffered will be recouped remains to be seen. Elliott says: "I don't think they will bet the ranch on anything. It will be a slow process of beating the index."

Cade thinks it will depend on market conditions. "Mining stocks are on fairly distressed valuations at present but at some stage they will be rerated. As well as owning the mining majors like Rio Tinto, the trust also has quite a lot in mid-cap shares which should help it to outperform."

The $64,000 question is when the commodity market will recover. Many people believe this will not happen until there is an improvement in the Chinese economy.

However, Tony Yarrow, chairman of Wise Investments and manager of Money Observer's hypothetical income growth portfolio, thinks we are near the bottom of the commodity cycle. As a result, he has actually increased his holding in BlackRock World Mining.

As well as being one of our Rated Funds, the trust is also included in our own higher-risk, medium and longer-term capital growth model portfolios. Furthermore, it was also the second most-bought trust on our sister website Interactive Investor in October.

Bearing in mind the risk profile and timescale of these two portfolios, Money Observer does not believe now is the time to sell this holding. We think the commodity cycle will recover and there is potential for significant gains over the next five to 10 years.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.