After a strong year for the mining sector in 2022, supply and demand dynamics are likely to remain favourable in the year ahead, with gold acting as a ballast for the portfolio, says Olivia Markham, manager of the BlackRock World Mining Trust plc (LON:BRWM).
Mining was a rare bright spot in an otherwise gloomy year in financial markets. The energy transition has brought demand for mined commodities, at a time when low capital investment has left supply constrained. These patterns are likely to continue into 2023, with the energy transition picking up speed and companies maintaining spending discipline.
In the year ahead, we see little shift in the supply and demand dynamics that governed commodity markets in 2022. Increased global infrastructure spending1 is supporting demand, with significant commitments from the US, Europe2 and China,3 particularly on green energy infrastructure. The war in Ukraine has demonstrated the need for energy independence, which is galvanising global governments to take action.
The mining sector will continue to play a critical role in supplying materials for the energy transition. Lower-carbon technologies such as wind turbines, solar panels and electric vehicles are dependent on mined materials – including lithium for batteries, or copper for electric cars. These commodities are becoming increasingly precious as countries compete for scarce resources.
Yet, we still see management teams being careful on their capital spending commitments. The ‘commodity supercycle’ ran approximately from 2002 to 2011 and saw mining companies spending in excess on production growth towards the end of the period. The excesses of the previous commodities cycle are still fresh in the mind for many companies and they continue to increase supply only very gradually. In the longer-term, it may be that capital spending increases, but this is likely to take years to feed through into new supply. In the meantime, supply will remain constrained, supporting prices.
Mining companies are generally in robust financial health. This will be very important in the year ahead, when rising interest rates will test those companies with high debt levels. They are also generating significant cash, which – we believe – is likely to come through to shareholders as dividends. At a time when inflationary pressures are still rife, these high and growing cash flows are likely to be highly prized by investors. In our view, mining equities are an effective way to hedge portfolios against persistent inflationary pressures.
Gold
The BlackRock World Mining Trust currently has around 12.7% invested in gold.4 This is low relative to the trust’s history and a reflection of the strength of the outlook for mining. Nevertheless, we still see a strong argument for holding gold and gold equities for diversification benefits. Gold proved an important ballast for portfolio in 2022.
Diversification: Diversification and asset allocation may not fully protect you from market risk.
The Russia Ukraine crisis, higher energy costs, and rising interest rates put much greater uncertainty around global economic growth. Recession is forecast for most major economies in the year ahead. This is usually a compelling backdrop for gold, which has appeal for investors as a safe haven.
Persistent inflation is a risk. While inflationary pressures are easing, there is a long way to go until they dissipate completely and most central banks expect inflation to be structurally higher from here. Meanwhile, we could see interest rate expectations start to decline should global economic growth deteriorate severely. A real interest rate is a nominal interest rate minus the rate of inflation. This suggests to us that real interest rates are more likely to move lower rather than higher, which should be supportive for gold.
Against this backdrop, we are focusing the portfolio on those companies that are likely to be least vulnerable to any inflationary pressures – where costs are under control, for example, or that have significant pricing power. Encouragingly, we have seen a marked change in behaviour in the sector with companies returning this capital to shareholders in the form of dividend increases and share buybacks.
Across our holdings in gold equities and other mining companies, we continue to manage the portfolio with a quality bias. That means companies with stronger-than-average balance sheets and lower than average costs. We gravitate towards those companies we believe have the strongest management teams and those we think are managing ESG risks effectively. We believe this will be particularly important in the year ahead, where economic pressures and uncertainty are likely to remain.
For more information on the Blackrock World Mining Trust and how to access the opportunities presented by mining, please visit www.blackrock.com/uk/brwm
1 https://www.ice.org.uk/news-insight/news-and-blogs/ice-blogs/the-infrastructure-blog/key-themes-for-global-infrastructure-policy-2022/#:~:text=Infrastructure%20investment%20is%20still%20seen%20as%20key%20to%20growth%20and%20sustainable%20development ICE – 20 December 2022
2 https://www.bbc.co.uk/news/science-environment-62464546 BBC – 8 August 2022
3 https://www.unpri.org/pri-blog/the-net-zero-transition-in-china-progress-has-been-made-but-challenges-remain/10132.article#:~:text=China’s%20net%2Dzero%20transition%20pathway,of%20the%20country’s%20transition%20pathway UNPRI – 20 June 2022
4 https://www.blackrock.com/uk/solutions/investment-trusts/our-range/blackrock-world-mining-investment-trust/performance-holdings#holdings-breakdown:~:text=Sector%20allocation%20(as%20at%2031/12/2022 BlackRock – 31 December 2022
Risk warnings
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BlackRock World Mining Trust specific risks
BlackRock World Mining Trust plc
Counterparty Risk, Currency Risk, Emerging Markets, Gearing Risk, Gold / Mining Funds
Description of Fund Risks
Counterparty Risk
The insolvency of any institutions providing services such as safekeeping of assets or acting as counterparty to derivatives or other instruments, may expose the Fund to financial loss.
Currency Risk
The Fund invests in other currencies. Changes in exchange rates will therefore affect the value of the investment.
Emerging Markets
Emerging markets are generally more sensitive to economic and political conditions than developed markets. Other factors include greater ‘Liquidity Risk’, restrictions on investment or transfer of assets and failed/delayed delivery of securities or payments to the Fund.
Gearing Risk
Investment strategies, such as borrowing, used by the Trust can result in even larger losses suffered when the value of the underlying investments fall.
Gold / Mining Funds
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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For more information on the Blackrock World Mining Trust and how to access the opportunities presented by mining, please visit www.blackrock.com/uk/brwm
