The fortunes of the mining sector are often associated with economic growth. But on the BlackRock World Mining Trust plc, co-manager Evy Hambro explains why we believe the inherent strength of mining companies has been widely underestimated.
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The mining sector has not escaped the widespread sell-off in markets. The sector has long been associated with the fortunes of the global economy and the coronavirus lockdowns constitute a real threat to economic growth. However, we believe the mining sector may be more resilient than current share prices suggest.
Mining shares have already discounted a meaningful economic impact from the coronavirus and have continued to fall in the recent market sell-off. But unlike retail or some other hard-hit sectors, we believe this impact for the mining sector may be relatively short-lived.
In contrast to other major sectors, mining entered the crisis in relatively good shape. The leading diversified companies have dramatically improved their balance sheets in recent years and today hold less debt and more cash. This means they are in a better position to weather disruption from Covid-19.
This has important implications: in general, they do not have to go back to financial markets or governments to ask for more money to stay afloat. That leaves them as masters of their own destinies and means they can continue paying dividends.
This may prove to be particularly important as other sectors, such as banks, come under pressure to cut dividends, creating greater scarcity. Pension funds and other major investors need to generate income and the mining sector might find greater favour as other sectors reduce their payouts.
These are shorter-term advantages specifically related to the Covid-19 crisis, but there are others: after seeing significant falls, mining companies are also benefiting from currency moves and the fall in oil prices. These factors have been beneficial to cost savings; freight costs have fallen, for example.
Equally, valuations look more compelling. While global growth will certainly be lower in 2020, we believe economic stimulus measures in China will disproportionately benefit the mined commodity sector. Equally, there are early signs that the Chinese economy is starting to bounce back as life gets back to normal. The Asian Development Bank predicts growth of 2.2% across Asian economies in 2020, rebounding to 6.2% in 20211.
The Trust also includes a weighting in gold companies. Gold has been a beneficiary of the recent turmoil in markets, as investors have worried about the impact of their stimulus measures on the value of currencies and financial assets. It has preserved its value over the long term, which is an attractive quality in today's uncertain environment. The opportunity cost of holding gold – because it pays no income – is also greatly diminished at times of lower interest rates. Around 40% of the portfolio is currently exposed to companies in precious metals, of which 90% is gold.
There are also broad thematic trends that will continue to drive investment, which – we believe – will endure long beyond the impact of Covid-19 on the economy. De-carbonisation is one of the most significant. The desire of societies to reduce their carbon impact is unabated and we have built a part of the BlackRock World Mining Trust that stands to benefit from this trend. This crisis may even accelerate the change; as carmakers restructure to cope with the crisis, they may be less willing to cut the areas, such as electric vehicles, which underpin their future growth. We have exposure to mining companies that produce many of the key metals for electric cars, such as lithium.
We would urge investors to set aside long-held notions about the mining sector. With investors increasingly looking for alternative and resilient income streams in the current environment, it holds considerable appeal. We believe the mining sector may be among the first to bounce back into a post-coronavirus economic recovery as the miners continue to generate robust free cash flow and return capital to shareholders through dividends and buybacks.
For more information on this Trust and how to access the opportunities presented by mining, please visit www.blackrock.com/uk/brwm .
Unless otherwise stated all data is sourced from BlackRock as at April 2020.
1 Asian Development Bank, April 2020
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Trust Specific Risks
Exchange rate risk: The return of your investment may increase or decrease as a result of currency fluctuations.
Emerging markets risk: Emerging market investments are usually associated with higher investment risk than developed market investments.
Therefore, the value of these investments may be unpredictable and subject to greater variation.
Gold/Mining funds risk: Mining shares typically experience above average volatility when compared to other investments. Trends which occur within the general equity market may not be mirrored within mining securities.
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