If technology stocks have risen this year, value shares, on which the UK market depends, have languished. Rio Tinto’s share price is down 25% since January 31, while that of BlackRock World Mining Trust (LSE:BRWM), with a market value of £1.1bn, has fallen by a fifth.
The reason is the disappointing performance of metal prices in 2023, as the global economy sputters. Nevertheless, Olivia Markham and Evy Hambro, BRWM’s co-managers, are as optimistic as ever about the long term.
Hambro points out that total share price returns for the trust have been positive six of the past seven years. Since launching in late 1993, the shares have delivered total returns of more than 1,500%, more than half of which comes from dividends.
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The stock is now yielding more than 6.5%, though the upward progression has been somewhat erratic, with a significant cut in 2016. Still, Hambro says dividends in the industry are less at risk today than in the past due to lower debt from mining companies. .
“We are now looking at the best part of a decade of underinvestment in new offerings,” says Markham. “Capital spending peaked in 2012 and bottomed out at 50% of that level. Since then, the marginal recovery has been focused on supporting, not increasing, output.” This inhibits the growth of the supply. Meanwhile, “copper inventories are very low” and likely to run out later this year due to rising demand.
Our low-carbon future
Copper is “the metal of electrification”, but supply shortages are imminent, implying higher prices. The demand is driven by the transition to a low carbon economyan economy that is “much more metal intensive”.
“The transition to renewable energy is not possible without mining. [Global] demand for copper, nickel, cobalt and lithium will grow in double digits through the end of the decade,” explains Markham.
Hambro calculates that building enough wind turbines to generate the same electrical output as a natural gas turbine would require 100 times the amount of iron ore, 25 times the amount of concrete, and 10 times more specialty metals and minerals – and, if on land, an enormous amount. more space .
The combination of steadily rising demand and supply limited by underinvestment is positive for metal prices, but has yet to be reflected in share prices. At five times cash flow, the mining sector’s valuation is the lowest in 30 years, Hambro notes, while the industry’s yield is about the highest. Debt redemptions have reduced the industry’s net debt-to-cash flow to historic lows and to lows relative to other industries.
A new cycle
In past cycles, says Hambro, “mining companies too often took on massive debt in the up-cycle to build or buy output, only to see the cycle turn, demand and prices fall and cash flows collapse “. In this cycle, it seems they have learned their lesson.
BRWM’s diversification across geographies and metals makes it more attractive than individual companies, and it can easily switch holdings. Diversified mining companies accounted for 34% of the portfolio at the end of May, copper-oriented producers 22%, gold 16%, steel 6%, industrial minerals 8% and iron ore 2%. There is much more exposure to iron ore in the top holdings – Vale (debt and equity), BHP and Glencore, all of which are diversified miners and make up a quarter of the portfolio.
BRWM’s shares are attractive for the long term, but there are two factors that suggest patience. First, the stock is trading at a 2% discount to its net asset value (NAV), but has historically traded at a 15% discount on a regular basis. Second, the industry is still cyclical, so this year could continue to be difficult. It is a stock for 2024.