Ben Yearsley: High-risk, but BlackRock could prove a gold mine

The Analyst

The reining-in of bank lending over the last few years has led to some interesting opportunities in unexpected areas. Prior to the global financial crisis banks happily leant to all and sundry at low interest rates, leveraging balance sheets to ridiculouslevels. However, intent on rebuilding capital, banks are now taking the opposite attitude, refusing to lend on anything other than stringent terms to extremely well-capitalised companies for low-risk projects. This has affected all kinds of sectors, and innovative fund managers could be well placed to capitalise.

Take mining. Except for the largest companies it is too high risk for the newly cautious European banks. Starved of capital for expansion, smaller mining companies are looking elsewhere, and Evy Hambro, manager of the BlackRock World Mining Investment Trust, is one interested party. The advantage of an investment trust is that it has a "closed-ended" structure. This means it doesn't have inflows and outflows of investor money like a unit trust or open-ended investment company, so it allows the manager to explore more illiquid, higher-risk investments – such as mining company debt.

According to Mr Hambro, the trust can use modest gearing to borrow at about 2 per cent and then lend it out to commodity and mining companies at much higher rates: a classic "carry trade". He can frequently secure excellent terms with these more opportunistic debt securities and convertible bonds, which finance various activities such as the construction of gold mines. In one deal the trust receives a royalty on all future gold produced. In another, it is paid an annual 10 per cent coupon and received warrants to subscribe for the company's shares at a set price in the future. However, these opportunities remain at the periphery. The core of the trust is more conventionally invested in the ordinary shares of mining companies.

Mr Hambro diversifies the trust geographically as well as by commodity. Companies involved in the extraction of copper, iron ore and coal currently feature heavily, whilst nickel and zinc exposure is limited as Mr Hambro believes there is too much supply. He is also cautious on aluminium whose price he believes is susceptible to speculative trading. Copper is famously a good indicator of global economic activity, so it is interesting that inventories are down 40 per cent so far this year and now below critical levels. He explains China has been buying it all – to use rather than horde or speculate.

An accusation many mining companies face is they reinvest cash in more capital-intensive projects rather than return it via dividends. This riskier strategy presupposes higher commodity prices or diminishing costs in the future, neither of which are a given. BHP Billiton, for example, is generating immense cash flow but reinvesting a large proportion of it. Mr Hambro expects this to slow down freeing up cash for dividends. If this happens, it could lead to a re-rating of BHP's shares, as well as others in the sector who might follow suit.

Another area Mr Hambro favours is gold, and he is well known for his view that gold miners are materially undervalued. In 2011 central banks around the world made their largest net purchases of gold since 1964 and the bullion price was resilient. However, the shares of gold miners fell. In his view the catalyst to get them moving is a more positive attitude towards paying dividends.

From this point view it would not be surprising to see the trust's own dividend rise as the underlying companies gradually introduce or increase pay outs. The trust's management fee is also changing so it is primarily charged to capital rather than income. This should help to increase demand for the trust's shares. With a good-quality team at the helm who manage a massive, $40bn (£24.86bn) across all their funds, it could be an interesting addition to a high-risk portfolio.

Ben Yearsley is investment manager at Hargreaves Lansdown, the asset manager, financial adviser and stockbroker. For more details about the funds included in this column, visit www.h-l.co.uk/independent

Independent Partners; request a free guide on NISAs from Hargreaves Lansdown

Suggested Topics
News
people'It can last and it's terrifying'
News
people Emma Watson addresses celebrity nude photo leak
News
Katie Hopkins appearing on 'This Morning' after she purposefully put on 4 stone.
peopleKatie Hopkins breaks down in tears over weight gain challenge
Sport
Alexis Sanchez, Radamel Falcao, Diego Costa and Mario Balotelli
football
PROMOTED VIDEO
Sport
Danny Welbeck's Manchester United future is in doubt
footballGunners confirm signing from Manchester United
News
i100
Arts and Entertainment
Olivia Colman topped the list of the 30 most influential females in broadcasting
tv
Life and Style
techIf those brochure kitchens look a little too perfect to be true, well, that’s probably because they are
News
Kelly Brook
peopleA spokesperson said the support group was 'extremely disappointed'
Sport
Andy Murray celebrates a shot while playing Jo-Wilfried Tsonga
TennisWin sets up blockbuster US Open quarter-final against Djokovic
Arts and Entertainment
Hare’s a riddle: Kit Williams with the treasure linked to Masquerade
booksRiddling trilogy could net you $3m
Arts and Entertainment
Alex Kapranos of Franz Ferdinand performs live
music Pro-independence show to take place four days before vote
News
news Video - hailed as 'most original' since Benedict Cumberbatch's
Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Infrastructure Lead, (Trading, VCE, Converged, Hyper V)

    £600 - £900 per day: Harrington Starr: Infrastructure Lead, (Trading infrastru...

    Planning Manager (Training, Learning and Development) - London

    £35000 - £38000 per annum + benefits: Ashdown Group: A highly successful, glob...

    Business Anaylst

    £60000 - £75000 per annum + BONUS + BENEFITS: Harrington Starr: Business Anal...

    SQL Implementation Consultant (VB,C#, SQL, Java, Eclipse, integ

    £40000 - £50000 per annum + benefits+bonus+package: Harrington Starr: SQL Impl...

    Day In a Page

    'I’ll tell you what I would not serve - lamb and potatoes': US ambassador hits out at stodgy British food served at diplomatic dinners

    'I’ll tell you what I would not serve - lamb and potatoes'

    US ambassador hits out at stodgy British food
    Radio Times female powerlist: A 'revolution' in TV gender roles

    A 'revolution' in TV gender roles

    Inside the Radio Times female powerlist
    Endgame: James Frey's literary treasure hunt

    James Frey's literary treasure hunt

    Riddling trilogy could net you $3m
    Fitbit: Because the tingle feels so good

    Fitbit: Because the tingle feels so good

    What David Sedaris learnt about the world from his fitness tracker
    Saudis risk new Muslim division with proposal to move Mohamed’s tomb

    Saudis risk new Muslim division with proposal to move Mohamed’s tomb

    Second-holiest site in Islam attracts millions of pilgrims each year
    Alexander Fury: The designer names to look for at fashion week this season

    The big names to look for this fashion week

    This week, designers begin to show their spring 2015 collections in New York
    Will Self: 'I like Orwell's writing as much as the next talented mediocrity'

    'I like Orwell's writing as much as the next talented mediocrity'

    Will Self takes aim at Orwell's rules for writing plain English
    Meet Afghanistan's middle-class paint-ballers

    Meet Afghanistan's middle-class paint-ballers

    Toy guns proving a popular diversion in a country flooded with the real thing
    Al Pacino wows Venice

    Al Pacino wows Venice

    Ham among the brilliance as actor premieres two films at festival
    Neil Lawson Baker interview: ‘I’ve gained so much from art. It’s only right to give something back’.

    Neil Lawson Baker interview

    ‘I’ve gained so much from art. It’s only right to give something back’.
    The other Mugabe who is lining up for the Zimbabwean presidency

    The other Mugabe who is lining up for the Zimbabwean presidency

    Wife of President Robert Mugabe appears to have her sights set on succeeding her husband
    The model of a gadget launch: Cultivate an atmosphere of mystery and excitement to sell stuff people didn't realise they needed

    The model for a gadget launch

    Cultivate an atmosphere of mystery and excitement to sell stuff people didn't realise they needed
    Alice Roberts: She's done pretty well, for a boffin without a beard

    She's done pretty well, for a boffin without a beard

    Alice Roberts talks about her new book on evolution - and why her early TV work drew flak from (mostly male) colleagues
    Get well soon, Joan Rivers - an inspiration, whether she likes it or not

    Get well soon, Joan Rivers

    She is awful. But she's also wonderful, not in spite of but because of the fact she's forever saying appalling things, argues Ellen E Jones
    Doctor Who Into the Dalek review: A classic sci-fi adventure with all the spectacle of a blockbuster

    A fresh take on an old foe

    Doctor Who Into the Dalek more than compensated for last week's nonsensical offering