The mining industry tends to be highly susceptible to the shifting patterns of macroeconomics, changes in global trade and, in particular, fluctuations in the prices of commodities. It’s no surprise, then, that the share prices of the world’s miners have been squeezed from time to time by the arm-wrestling over trade between America and China. Their tit-for-tat tariffs pose a clear threat of higher costs to mining companies as they send their products to these two vast, key markets.
Yet the sector has its fans — devoted ones, too, who enthuse about the mining giants’ increasingly strong cashflows and balance sheets. And it is not only the miners that boast such support. If you are focused on the sector, you are not going to be friendless.
Take Blackrock World Mining Trust. Established in 1993, in broad terms this investment trust offers a way for shareholders to tap into a diverse collection of mining and metals assets and to benefit in terms of capital appreciation and a pretty generous dividend yield.
Where it differs from others is in its tendency to gear up its stakes in favoured companies by buying their debentures or paying royalties to receive a share of the revenues from specific mines. For example, it has acquired the rights to income from two iron ore deposits in Brazil operated by Vale, and has a similar arrangement with Oz Minerals, based in Australia.
Although it invests predominantly in listed stocks, the Blackrock trust also invests in private companies, fixed-income securities and in physical metals. Otherwise, and for obvious reasons, Blackrock World Mining Trust’s biggest exposure is to diversified miners, or those wide-reaching companies that refine commodities as well as excavate them. Companies such as BHP, Rio Tinto and Anglo American together accounted for almost 39 per cent of the portfolio at the end of September. And there is no shame in that — it is an approach that should generate resilient earnings.
The trust’s managers argue that they are also in a strong place to quickly shift the emphasis, and to that end they have increased their position in gold to the extent that gold producers accounted for 23.8 per cent of the portfolio on September 30, up from 13 per cent a year earlier.
The flexibility of this investment trust has not stood it in particularly good stead in terms of performance. While it has recently begun to trade ahead of the Emix Global Mining index, its reference benchmark, it has underperformed over one, three and five years, assessed on share price and changes in net asset value.
The trust remains convinced about the merits of the sector, many of whose member companies have stronger balance sheets, higher cash-generating abilities and, as a result, a greater propensity to pay very large dividends than investors have given them credit for. It is convinced that a revaluation of mining stocks is on the cards.
Nevertheless, the backdrop is not great. There have been tentative signs of peace between Washington and Beijing, but it is early days. Even if the global economy were to avoid a recession, it is certainly heading for a slowdown, which is likely to have implications for demand. Energy costs are on the way back up.
The shares, which closed 10p, or 2.9 per cent higher, at 354p yesterday, are at a discount to its net asset value per share of about 12 per cent, which it is hoped will narrow, based on its consistently improving dividend. The shares yield a rich 5.6 per cent, but have not managed to tempt this particular onlooker.
ADVICE Avoid
WHY Interesting and diverse portfolio, but performance has been patchy and the worldwide economic backdrop is unappealing
AA
The AA is convinced that it has taken the right route to its recovery, but the company’s shareholders don’t seem remotely sure that it’s going to get there. Despite signs that the roadside recovery and insurance group is meeting its targets on cashflows and trading profits, the AA’s shares have been stubbornly stuck in reverse, with little to suggest any change in direction.
The AA was founded in 1905 and has 3.19 million members. As well as offering a roadside breakdown service, it also sells motor insurance and household and holiday cover. Under the leadership of Simon Breakwell, 54, it has been undergoing a turnaround, designed to reinvent it as a more profitable, digitally led business that can increase its membership, which has been in decline for years, and sell more insurance, including through strategic deals with other businesses.
The group’s most recent results in late September contained plenty of positive elements. As well as improving revenues, profits and cashflows, the AA sold a respectable amount of additional motor and household cover and appeared to stabilise membership numbers. It seems confident that it can boost all these measures next year. Yet the shares, down 1p, or 2.3 per cent, at 43¼p yesterday, have lost more than a third of their value since the September update.
Investors can be forgiven for wanting more evidence. The business, labouring under debts of £2.7 billion, has much to deliver and has disappointed them before. Hedge funds have been betting heavily that the shares will fall, adding to the pressure on the price.
Is it right, though, that the shares should have lost 40 per cent since this column recommended buying them at 70½p in December before their recent progress — as well as initiatives such as a partnership deal with Admiral giving the AA access to 4.3 million customers — had been made? Almost certainly not.
The shares continue to trade at distressed levels, valued at only 3.15 times Citi’s forecast earnings for a likely dividend yield of 4.6 per cent. Shareholders might have to bide their time for the reward, but this is a clear buying opportunity.
ADVICE Buy
WHY Evident progress is being made that share price ignores
