It has been a bad week for BlackRock World Mining (BRMW). Last week the trust was forced to write off a significant investment worth $110 million, causing the share price to tumble.
The investment was a royalty bought from London Mining in 2012, linked to its Marampa iron ore mine in Sierra Leone. Though BlackRock did the necessary due diligence into London Mining what the company could not have foreseen was the ebola virus – which has brought all trading, transport and industry in the region to a standstill.
The royalty was linked to one single mine – the value of which had already received a bashing thanks to the depressed iron ore price, and the fact that giant miners such as BHP Billiton were producing much better quality iron ore from mines in Australia.
BlackRock’s team, led by Evy Hambro had made clever use of gearing on the trust to raise the cash to buy both the London Mining royalty and another from Avanco Resources on a mine in Brazil. The royalties were designed to boost the dividend payments – one of the key features that has attracted investors to the trust. While the share price has been volatile, the income from BRMW has steadily increased and reinvested dividends have helped to top up capital losses.
While the other royalty is not at risk, investors should now expect dividend growth to be challenging, says Morningstar analyst Jackie Beard. The trust will maintain the dividend for this year, and the board is expected to use reserves accrued in successful years to part fund the dividend in the future.
“The royalty from the Brazilian mine has been agreed at a cost of $12 million and makes up just a small portion of the fund. The London Mining royalty was a much more significant position and therefore a significant loss for investors,” she said.
Hambro and his team have come under fire for the loss – with some market commentators calling into question BlackRock’s due diligence processes, and whether this loss calls into question the viability of not just other natural resources funds run by the team, but BlackRock’s entire offering.
But Beard assures investors that while Morningstar analysts have downgraded BRMW, their conviction in the trust—and the management team--remains high.
“To award a Gold Rating a fund must be flawless,” she says. “Our conviction in Evy and the team remains high and we still believe they are arguably the best in their specialism. But we have to acknowledge this issue and its impact on our expectations from the fund.”
The SICAV version of the trust retains its Gold Rating, as the open end structure of the fund restricts it from using gearing, and therefore buying the royalties the trust owns.
