BlackRock World Mining Trust Plc - Portfolio Update

Commenting on the markets, Evy Hambro and Olivia Markham, representing the Investment Manager noted:

The Company’s NAV declined by 6.4% in June, underperforming its reference index, the MSCI ACWI Metals and Mining 30% Buffer 10/40 Index (net return), which fell by 4.4% (performance figures in GBP).

It was a difficult month for the mining sector, particularly relative to broader equity markets as the MSCI ACWI TR Index returned +1.4%. Most mined commodity prices posted declines through June, with iron ore (62% fe), copper and gold prices falling by 10.9%, 8.9% and 1.3% respectively.

Economic data from China was weak, with its manufacturing PMI below 50 indicating contraction, whilst average house prices recorded the largest year-on-year decline since 2015. Meanwhile, US dollar strength provided an additional headwind for commodities, with the DXY Index rising from 104.7 to 105.9. Interest rate expectations declined modestly, with the US 5-year yield falling from 4.5% to 4.3% which supported the performance of growth sectors such as technology over value sectors like mining.

Strategy and Outlook

Constrained mined commodity supply, an evolving demand picture, strong balance sheets and valuations below historic averages make us optimistic about the outlook for the sector.

Mining companies have focused on capital discipline in recent years, meaning they have opted to pay down debt, reduce costs and return capital to shareholders, rather than investing in production growth. This is limiting new supply coming online and there is unlikely to be a quick fix, given the time lags involved in investing in new mining projects. The cost of new projects has also risen significantly and recent M&A activity in the sector suggests that, like us, strategic buyers see an opportunity in existing assets in the listed market, currently trading well below replacement costs. Other issues restricting supply include cases of governments closing mines, permitting issues and a general lack of shovel-ready projects.

Meanwhile, the demand side of the equation appears to be evolving. The commodity super-cycle (2002 – 2011) was all about China’s extraordinary demand growth. Today, China remains the most important individual economy for mining, but we are expecting this importance to gradually decline through to the end of the decade. We expect global infrastructure spending to drive the next wave of demand, with low carbon transition-related infrastructure particularly meaningful. Offshore wind, for example, requires 5.4x more steel and 2.9x more copper per megawatt of power capacity when compared with gas (source: BHP analysis, Hatch, ArcelorMittal, August 2023). The other area gaining attention is the implications for materials from the build out of AI-related data centres, both for the centres themselves but also for the increased power infrastructure required.

23 July 2024

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