Ben Yearsley: High-risk, but BlackRock could prove a gold mine
Saturday 12 May 2012
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
- 1 Scottish referendum: So how about the English now being given a chance to split from England?
- 2 Friends 20th anniversary: Alison Jackson photographs reunited cast
- 5 Free U2 album: How the most generous giveaway in music history turned into a PR disaster
Scottish independence referendum: A nation divided against itself
Scottish referendum results: Cross-party consensus collapses amid Tory-Labour spat on the 'English question'
Scottish independence: David Cameron is becoming the 'George Bush of Britain'
Russia freezes Ukraine into submission: Kiev admits country doesn't have enough fuel for winter
Archbishop of Canterbury admits doubts about existence of God
Portuguese academic says British are 'filthy, violent and drunk'
iJobs Money & Business
£400 - £450 Per Day: Clearwater People Solutions Ltd: **URGENT CONTRACT ROLE**...
Up to £100k or £450p/d: Saxton Leigh: My client is a leading commodities tradi...
£320 - £330 per day: Ashdown Group: The Ashdown Group have been engaged by a l...
To £75,000 + Pension + Benefits + Bonus: Saxton Leigh: My client is looking f...
Day In a Page
A six-bedroom terraced house with large south-facing roof terrace, cinema room and wine cellar
A new seven-bedroom home built in Queen Anne-style with swimming pool and parkland views in Mortimer
A listed, four-bedroom farmhouse in the rural hamlet of Rushall with detached barn, four acres of gardens and paddocks
A first-floor flat with two bedrooms, a spacious reception room and communal grounds in a leafy part of London
A three-bedroom flat with a spacious rootop terrace and balcony, accessed from a private gated courtyard
A Grade II-listed pile with six bedrooms, stables and 39 acres of grounds in Standlake
A two-bedroom flat with boutique hotel-style interiors, close to the foodie haunt of West End Lane
A two-bedroom flat in a beautiful old vicarage, with many original features, close to the city centre
A three-bedroom 16th-century home with an aga kitchen, private gardens and heated outdoor pool, in Hadleigh
A three-bedrom home in sought-after Queen's Gate Mews, with Italian marble-finished bathrooms
Surrounded by glorious countryside in the village of Udimore, sits this impressive four-kiln oast and barn conversion
A five-bedroom house in the picturesque village of Kettlewell, north Yorkshire
An 18th-century former coaching inn with original staircase, open fireplaces and beams throughout
A Grade II-listed Georgian town house with three bedrooms and a south-facing courtyard, near Arundel Castle
Feel on top of the world at this über chic penthouse on the 37th floor of one of Europe’s tallest blocks.
A Grade II-listed Victorian villa with six bedrooms and two further cottages, all with spectacular sea views
A grade II-listed, Georgian cottage with mature 50ft garden, perfect for summer entertaining
A magnificent Georgian pile with turrets, seven bedrooms, a heated pool and four acres of gardens
Fairoak Farm has five bedroom suites, gym, outdoor swimming pool and golf course
Chic two-bedroom river-fronted flat with a private lift that delivers you directly to your home
A spectacular seven-bedroom Tudor pile, once owned by Henry VIII, with 18 acres of land
A seven-bedroom Georgian property previously used as a picturesque wedding venue
A split-level flat in a church conversion with two en suite bedrooms and 1,200sq ft of living space
A three-bedroom bungalow situated behind an impressive stone wall, £645,000
Windsor Castle overlooks this three-bedroom Victorian cottage located on one of Windsor's smartest roads
Chapel House is a former vicarage with nine bedrooms in the beautiful Upper Wye Valley
A five-bedroom B&B and separate owner's accomodation with potential for conversion
Enjoy summer by the Thames in this two double-bedroom converted warehouse in Rotherhithe village
A one-bedroom, luxury apartment with private gym and concierge service in Moorgate
A four-bedroom house in Hermitage Gardens with three reception rooms and landscaped gardens
A seven-bedroom Grade II-listed property with a separate self-contained apartment
A five-bedroom Victorian house with three reception rooms and galleried landing, £695,000
A six-bedroom farmhouse with five acres of land in a former cloth-making village
A secluded seven-bedroom detached house with large private garden, £490,000
A three-bedroom cottage overlooking Sarratt village green with open fires and solid oak floors
A three-bedroom maisonette flat in a Grade I-listed, Georgian townhouse in a sought-after location
A one-bedroom apartment located within a private gated development, north of Turnham Green
Look forward to a brighter future at two-bedroom Sunny Cottages, ideal for Londoners looking to downsize