Final Results
BlackRock World Mining Trust plc LEI - LNFFPBEUZJBOSR6PW155
Annual Results Announcement (Article 4 Transparency Directive, DTR 4.1)
for the year ended 31 December 2018
PERFORMANCE RECORD
| 31 December 2018 |
31 December 2017 |
|
| Net assets (£’000)¹ | 685,595 | 804,647 |
| Net asset value per ordinary share (NAV) | 388.81p | 456.01p |
| Ordinary share price (mid-market) | 340.50p | 397.75p |
| EMIX Global Mining Index – net total return² | 532.67 | 567.79 |
| Discount to net asset value3 | 12.4% | 12.8% |
| --------------- | --------------- | |
| Performance | ||
| Net asset value per share (total return)4 | -11.5% | +24.0% |
| Ordinary share price (total return)4 | -10.7% | +24.2% |
| EMIX Global Mining Index – net total return² | -6.2% | +20.2% |
| ========= | ========= |
1 The change in net assets reflects market movements and the buyback of 125,000 ordinary shares into treasury during the year.
2 The Company’s performance reference index (the EMIX Global Mining Index) may be calculated on either a gross or a net return basis. Net return (NR) indices calculate the reinvestment of dividends net of withholding taxes using the tax rates applicable to non-resident institutional investors, and hence give a lower total return than indices where calculations are on a gross basis. As the Company is subject to the same withholding tax rates for the countries in which it invests, the NR basis is felt to be the most accurate, appropriate, consistent and fair comparison for the Company.
3 This is the difference between the share price and NAV per share with debt at par. Further details of the calculation of the discount are given in the Glossary on page 117 of the Annual Report and Financial Statements.
4 This measures the Company’s NAV and share price total return, which assumes dividends paid by the Company have been reinvested. Further details of the calculation of performance with dividends reinvested are given in the Glossary on pages 118 and 119 of the Annual Report and Financial Statements.
| Year ended 31 December 2018 |
Year ended 31 December 2017 |
Change % |
|
| Revenue | |||
| Net revenue profit after taxation (£’000) | 32,013 | 28,093 | +14.0 |
| Revenue return per ordinary share | 18.15p | 15.92p | +14.0 |
| --------------- | --------------- | --------------- | |
| Dividend per ordinary share | |||
| – 1st interim | 3.00p | 3.00p | – |
| – 2nd interim | 3.00p | 3.00p | – |
| – 3rd interim | 3.00p | 3.00p | – |
| – Final | 9.00p | 6.60p | +36.4 |
| --------------- | --------------- | --------------- | |
| Total dividends paid and payable | 18.00p | 15.60p | +15.4 |
| ========= | ========= | ========= |
CHAIRMAN’S STATEMENT
INTRODUCTION AND 25TH ANNIVERSARY
I am pleased to present the Annual Report to shareholders in this, the 25th anniversary year of the Company’s launch on 15 December 1993.
Looking back, it has been a remarkably successful journey for the Company, albeit with the fluctuations to be expected from investing in a cyclical sector. When the Company was established, the original vision conceived by Julian Baring was to create a ‘virtual’ mining company, able to adjust its exposure to mined commodities through portfolio allocations, at a speed which would simply not be possible in an industrial concern. This vison remains at the heart of what we do today notwithstanding the ever-changing environment in which the Company operates.
Indeed, it is gratifying to note that an investment at launch would have generated 182.72p of dividend income for each pound invested and as at 31 December 2018 the NAV total return would have been 573.6%. This compares to a cumulative return of 395.5% in the FTSE 100 Index over the same period.
OVERVIEW AND PERFORMANCE
The year under review has been more challenging than the last for both broader equity markets and the mining sector. After solid earnings growth and a strong start to the year, equities were hit at the end of the period by increased uncertainty on a number of fronts. This primarily surrounded increased trade tensions between the US and China, but also included weakening economic data out of China. A stronger US dollar has also impacted emerging markets and thus mined commodity prices.
Against this backdrop, over the twelve months to 31 December 2018, the Company’s net asset value per share (NAV) fell by 11.5% and the share price by 10.7%. By way of reference the EMIX Global Mining Index (net total return), fell by 6.2% over the same period, the FTSE All-Share Index decreased by 9.5% (all percentages calculated in sterling terms with dividends reinvested) and the Consumer Price Index (CPI) increased by 2.1% over the year.
Additional information on commodity markets and key contributors to, and detractors from, portfolio performance are set out in the Investment Managers’ Report.
Since the year end and up until the close of business on 26 February 2019, the Company’s NAV per share has increased by 9.1%.
REVENUE RETURN AND DIVIDENDS
This was another strong year of revenue growth for the Company with a revenue return per share of 18.15p compared with 15.92p for the previous year, representing an increase of 14.0%. The focus of the Company is to give shareholders exposure to the resources sector and deliver a superior total return through the cycle. Given that income is an increasingly important component of the return through time, it is essential that the Company employs as many tools as possible to maximise the potential of the assets. On average, over half of the revenue comes from dividends and this is supplemented by returns using options, taking advantage of volatility and arbitraging the differential in the cost of debt between the Company and that paid by other resource companies. In addition, the Company also benefits from stable royalty payments over certain mined metals and this is covered in more detail in the Investment Manager’s Report.
During the year, three quarterly interim dividends of 3.00p per share were paid on 29 June 2018, 21 September 2018 and 21 December 2018. The Directors are recommending the payment of a final quarterly dividend of 9.00p per share for the year ended 31 December 2018. This, together with the quarterly interim dividends, makes a total of 18.00p per share (2017: 15.60p per share) representing an increase of 15.4% on the payments made in the previous financial year and was again fully covered by income. The final dividend will be paid on 10 May 2019 to shareholders on the Company’s register on 22 March 2019, the ex-dividend date being 21 March 2019.
It remains the Board’s intention to seek to distribute substantially all of the Company’s available income. Dividend distributions from mining companies in our portfolio look set, in the main, to grow in the current financial year as we expect them to continue to remain disciplined on capital investment plans.
DISCOUNT
The Directors recognise the importance to shareholders that the share price should not trade at a significant discount to the underlying NAV. Accordingly, the Board monitors this closely and will consider the repurchase of shares in normal market conditions when it believes it is in shareholders’ interests.
The discount of the Company’s share price to the underlying NAV per share finished the year under review at 12.4% on a cum income basis, having stood at 12.8% at the start of the year. The shares were trading at a discount of 13.3% as at the close of business on 26 February 2019. During the year the Company bought back 125,000 ordinary shares in the market. No shares have been purchased since the year end, up to and including the date of this report.
The Board is proposing that the Company’s existing authority to buy back up to 14.99% of the Company’s issued share capital, excluding treasury shares, be renewed at the forthcoming Annual General Meeting.
FRANKED INVESTMENT INCOME (FII) GROUP LITIGATION ORDER (GLO) V HMRC
We note the tax ruling relating to overseas dividends during the period. The litigation has been ongoing for many years and concerned the tax treatment of UK-resident companies (including investment funds) that received dividends from portfolio shareholdings in non-UK companies. It had previously been settled that the UK dividend tax regime that applied to portfolio dividends prior to 2009 was contrary to EU law, as UK dividends were not subject to tax whereas non-UK dividends were taxable.
It is not yet clear how the decision will be practically implemented but it is expected that HMRC will be responding in due course as to how it will resolve the cases of the GLO participants, including the Company. The tax potentially repayable to the Company is approximately £3.4 million but there is not yet certainty as to whether or when this amount will be recognised in the Company’s NAV.
Brazilian mine tragedy
Your Board has noted with deep regret the tragic events around the Vale tailings dam failure in Brazil and the consequential loss of life. We further recognise calls coming from many leaders within the resources sector who seek answers as to how the industry can improve tailings dam facilities and mitigate events like this from occurring again. We support the call for greater transparency in tailings management disclosure and will work with the industry towards this. The Board has asked our Investment Manager to undertake a comprehensive review of all our investments specifically with regard to tailings facility management.
25TH ANNIVERSARY
To commemorate the 25th anniversary of the Company’s launch in December, it was agreed by the Directors to produce a booklet, the purpose of which would be twofold: to explore and to illustrate how critical mining is to everyday life; and to look forward and try to anticipate what the next 25 years could bring for the mining sector.
A copy of the booklet can be requested from the BlackRock website at blackrock.co.uk/brwm and from the Company’s registered office c/o The Secretary, BlackRock World Mining Trust plc, 12 Throgmorton Avenue, London EC2N 2DL; email: cosec@blackrock.com.
In celebration of the 25th Anniversary, the Company has agreed to make an annual donation of US$15,000 over three years to the Julian Baring Scholarship Fund. The Julian Baring Scholarship Fund was created in the name of the Company’s first fund manager, Julian Baring. The advisers to the Fund, with the support of the industry, endow annual scholarships for talented, but financially disadvantaged, students to continue their studies and to pursue a career in the mining industry. The Fund has assisted more than 120 individuals since inception in mining related faculties.
ANNUAL GENERAL MEETING
The Annual General Meeting of the Company will be held at the offices of BlackRock at 12 Throgmorton Avenue, London EC2N 2DL on Thursday, 2 May 2019 at 11.30 a.m. Details of the business of the meeting are set out in the Notice of Meeting on pages 113 to 116 of the Annual Report and Financial Statements. The Portfolio Managers will make a presentation to shareholders on the Company’s progress and the outlook for the mining sector in the year ahead.
OUTLOOK
Investors are increasingly conscious that the current economic recovery is one of the longest on record, and are on high alert for any sign of a cyclical downturn. The fortunes of the sector will also continue to be inextricably bound to the outlook for the Chinese economy which has accounted for most of the growth in demand in recent decades. Whilst the current US administration’s long-term quarrel with China is as much about enforcing intellectual property rights and gaining access to Chinese consumer markets, the immediate battle is being fought through tariffs on traded goods. The high level of rhetoric on this front, together with a slowdown in China’s growth, have pushed sector valuations to a level where any thawing in relations and/or a successful attempt to reflate Chinese growth could prompt significant upside.
The underlying long-term supply/demand outlook in most metals remains positive and the mining companies themselves continue to be well-positioned to benefit from any growth, having repaid debt, cut costs and for the most part eschewed major capital investment in recent years.
The Portfolio Managers continue to focus on longer dated growth opportunities. They are also mindful of accelerating trends in technology, the most prominent being the shift to electric vehicles, which is creating opportunities for battery components such as lithium and cobalt, as well as fuelling additional demand for copper. Sustainability is also becoming a key focus, with recycling of mined commodities growing. The Portfolio Managers will continue to research these and other emerging trends and take advantage of opportunities as they arise in the coming year.
Finally, I would like to thank my fellow Board members for their excellent support this past year. Also, the Portfolio Managers have continued to work diligently, under difficult circumstances, yet still performing well in reshaping the portfolio for future growth.
IAN COCKERILL
Chairman
28 February 2019
INVESTMENT MANAGER’S REPORT
PORTFOLIO PERFORMANCE
2018 was a disappointing year for the mining sector and even more so given it is the 25th anniversary for the Company. The combination of worsening trade uncertainties and slowing growth unsettled investor sentiment causing valuations across equity markets to compress considerably. In addition, the threat of further Quantitative Tightening (QT) led to a stronger dollar which also added to the commodity headwinds. Mining shares finished the year down by 6.2% (Reference Index, net total return in GBP terms) despite ongoing investment discipline, large capital returns and multiple dividend increases. The falls have left valuations way below historic levels and, given the balance sheet strength and high levels of profitability, we remain confident that investors will soon recognise the opportunity.
The tough background, in contrast to our high conviction on value, meant that the Company delivered a poor year in terms of relative total return. Despite strong Mergers and Acquisitions (M&A) related gains and excellent performance from the large diversified mining companies, falls during the last quarter of the year managed to wipe out all of the good performance generated in the prior nine months. In addition, the decision to hold a small amount of gearing against equities magnified the share price moves in the final quarter.
Offsetting the volatility of the portfolio was the revenue generated during the year which amounted to 18.15p per share. This has translated into a 14.0% increase in earnings per share. The main drivers behind this were increases to ordinary dividends, another year of solid option premiums and stable royalty payments. The final dividend for the year is 9.00p, giving a total payment for the year as a whole of 18.00p which is up 15.4% on last year. The dividend is fully covered and, as a result, the Company has delivered a superior yield to that available in the broader sector. However, as mentioned earlier, the share price falls during the last few months of 2018 completely swamped the strong income returns leaving the NAV down by 11.5% on a net total return basis.
As can be seen in the chart on page 9 of the Annual Report and Financial Statements, the Company has delivered a decent mix of both capital and income returns to shareholders since the Initial Public Offering in December 1993. The income enhancement strategy, which was implemented in the second half of 2010, has allowed the Company to pay a consistently higher level of income back to shareholders.
Looking forward into 2019, it seems as though we are set for another year of solid income from the underlying assets as mining companies refrain from building new capacity and, having paid down the bulk of their debt, this allows them to continue to return surplus capital.
MINING SECTOR OVERVIEW
2018 started with a bang. Strong global growth across both developed and emerging markets seemed set to deliver a year of synchronous growth and in turn better than expected demand for commodities. Given that companies have been underinvesting in supply for the last five years, market conditions should have been tight causing commodity prices to rise. However, the global trade battle started by the US soon killed off the prospect of synchronous growth. These tensions soon exposed fragilities in emerging markets that were further tested as US interest rates rose on the back of QT, and ended up delivering one of the worst returns for emerging market equities since 2015. The weakness in emerging markets spilled over into commodity markets and valuations that were already low ended up compressing further.
In addition to the trade battles, the Federal Reserve (the Fed) continued to raise rates on the back of the strong economic data which had in part been magnified by the onshoring of US dollars that had been held offshore by US corporations to minimise domestic tax. As the year unfolded, expectations for rate increases amplified and this generated flows into the US dollar and in turn significant dollar strength especially against emerging market currencies. During the last quarter of the year expectations had grown to a massive four rate increases being priced in for 2019 and the US ten year bond was yielding 3.26%. However, as soon as it had peaked in November, the market went into reverse. Growth expectations softened, probabilities for rate increases crashed and the dollar weakened. All of the monetary policy volatility and gyrations in growth forecasts spilled over into equity markets sparking significant falls in share prices. In some ways investors seemingly panicked as the muscle memory of the financial crash in 2008 was obviously still fresh in their minds.
In China, the country continued to focus on improving the economy both by closing inefficient businesses and trying to allocate capital more effectively. Environmental goals seem to be at the heart of many of the changes taking place in steel, coal, aluminium, cement, chemicals, paper etc. The moves have been positive for suppliers of these goods as China’s dependence on imports has increased as domestic businesses have been closed. China also introduced a number of anti-scrap dumping laws which disrupted the global trade in various forms of scrap from metals to plastic and cardboard.
Elsewhere in the world, the picture was just as volatile. In Europe, the Brexit saga dragged on, whilst at the same time there was a power struggle in Germany and budget disputes in Italy. In Latin America there were regime changes in Brazil (which was positively received by markets), and in Mexico where concerns about a more populist agenda from the president-elect sent tremors through the market and caused a mini emerging market debt crash mid-year. Finally, in Australia there was another change of Prime Minister meaning the country has had seven different Prime Ministers in the last ten years! In summary, this was a highly eventful year with numerous macro issues that overshadowed the strong cash flows being generated by the companies.
Mining company strategy has remained resolute in the face of all the macro risks. Companies have resisted the temptation to plough surplus cash back into growth projects and at the same time have met promises to shareholders that surplus cash would be returned to them. The large diversified mining companies, having paid down debt, are now all buying back shares with the exception of Anglo American. The Company has significant exposure to companies in the ‘Buy Back Club’ such as Rio Tinto, BHP, Glencore, Vale, South32, Lundin Mining and Teck Resources and we hope the number of members will expand in 2019.
An area which has expanded this year is the focus on sustainable materials. It is our view that as the consumers look to source materials from suppliers/producers that have higher Environmental, Social and Governance standards, this will lead to a two-tier price in the market. As such, we have continued to grow exposure to mining companies that produce materials that will help advance these changes such as materials going into batteries or high quality and low impurity iron ore and nickel. Looking forward we can see this part of the portfolio growing substantially and there is now a separate section in the report going into more detail on this theme.
Last year we highlighted that themes are likely to drive long-term portfolio performance more than just commodity beta. The themes revolve around: resource replenishment; deleveraging; value; capital discipline; asset quality; growth; and finally the sustainable materials theme.
DELEVERAGING, CAPITAL DISCIPLINE AND RETURNS
Deleveraging of balance sheets and subsequent re-rating of share prices has been the dominant theme in the mining sector since 2016. Over the last three years the Company has generated significant absolute and relative returns from this dynamic via our large holdings in Vale, Glencore, BHP, Rio Tinto and Teck Resources. While there are some stocks whose share prices will still benefit from further deleveraging, the ‘deleveraging trade’ has now largely played out. What we find perplexing is that despite the significantly reduced financial risk across the sector, companies continue to trade well below historic average multiples.
With balance sheets strong, particularly amongst the large diversified mining companies, the focus in 2018 and going forward is increasing returns to shareholders. The dividend return potential of the majors is very significant and undervalued by the market in our view with the majors trading on double digit free cash flow yields. Throughout 2018 we have further increased our exposure to the diversified mining companies who are in the sweet spot to harvest and return the proceeds from investments made during the last cycle. Given the cyclicality of the sector, ensuring an adequate split between capital and income is key, with income an increasingly important component of total shareholder returns for the sector over time.
We continue to commend the mining sector on its capital discipline and the focus on ‘value over volume’ despite its high level of free cash flow and balance sheet strength. Capex spending has been significantly reduced through the down cycle and while we have seen a modest increase in 2018 it remains low and, critically, any spend is rigorously reviewed to ensure it delivers value to shareholders. A good example of the change in approach to capital investment and managing risk was the sell-down of a 30% stake in QB2, a large copper development project owned by Teck Resources. Historically, mining companies have preferred to own projects 100%; however, through selling a 30% stake in the project to a strategic partner, Teck was able to reduce its balance sheet exposure, increase its after-tax internal rate of return, unlock hidden value in its share price, launch a share buy back and preserve its ability to return further capital to shareholders in the future.
GROWTH AND RESOURCE REPLENISHMENT
Capital discipline does not preclude companies from investing in growth and we are strong supporters of companies looking to grow, provided the investment translates into growth on a value per share basis. We have seen a modest pick-up in growth in 2018 with a focus on copper given the lack of supply growth in that market. The Company’s largest growth position is a 6.2% holding in securities issued by First Quantum Minerals, including both ordinary shares and bonds. First Quantum offers the strongest copper volume growth in the sector and it is on the cusp of a material re-rating as production at its US$6.3 billion Cobre Panama project in Panama is scheduled to start up in the first quarter of 2019.
Resource replenishment is another key area of focus in the portfolio, particularly among the gold companies, as gold mines typically have a relatively short life. We believe companies that have successfully invested in exploration through the cycle and that have sufficient asset quality to replenish reserves and resources, will be strong outperformers in this next phase of the cycle. Australian based gold producer Northern Star Resources has continued to be a strong contributor to performance for the Company, with the company investing substantially in exploration in recent years which has allowed them to consistently grow production, reserves and resource life on a per share basis since 2010. In August 2018 the company announced that it would acquire the Pogo underground mine in Alaska for US$260 million from Sumitomo, a highly accretive deal for Northern Star Resources that we expect to further boost production and resource life over time.
CHINA SUPPLY-SIDE AND ENVIRONMENTAL REFORM
A key theme in the market since 2016 has been China’s supply-side reform agenda, as well as its focus on improving environmental standards in the country. During the last cycle, China rapidly expanded its own domestic production in areas such as steel, aluminium and coal which subsequently resulted in overcapacity and had a deflationary impact on commodity prices. As part of President Xi’s wider reform agenda, there has been a significant amount of capacity shut in loss-making industries which has tightened targeted commodities far quicker than we would have expected. The clearest example of this is in the Chinese Steel industry which has seen capacity decline from 1.3 billion tonnes in 2015 to <1 billion tonnes in 2018. This has improved profitability for the steel industry, with China reducing exports and preferencing higher grade iron ore to maximise production from its remaining steel capacity. This, along with pollution control measures, has had a dramatic and, we believe, structural impact on the iron ore market, with prices for higher grade iron ore trading at a substantial premium to lower grade iron ore. While steel mill profitability is also a determinate of premiums, we expect high grade iron ore to trade at a higher level than that seen historically. This has been a key driver of Vale’s outperformance over the last two years. As discussed in last year’s Annual Report, we built a position in Vale, the world’s largest iron producer in 2016 as we became comfortable in the deleveraging of the business. During 2018 they have been a beneficiary of rising iron ore price premiums, as well as enjoying increased sales volumes as their new S11D iron ore mine ramped-up production. In addition to our equity holding, in early 2019 we increased our holding in Vale Debentures which are effectively a royalty over Vale’s high-grade iron ore mines in Brazil. This investment is covered in more detail later in the report.
China’s war on pollution and efforts to improve environmental standards continues to see lower quality product exit the market. This is important for commodities where China has a significant domestic production base such as in zinc, rare earths, bauxite and coal. For decades, China has been the world’s largest importer of waste but that is now set to change after Beijing banned 24 types of scrap from being processed in the country from 2018. In addition to plastics and paper, it also included category-7 copper scrap which further tightened the copper scrap market in 2018. As we look forward, we expect environmental measures to continue to be at the forefront of government policy which will increase the demand for electric vehicles, renewable energy and recycling. Commodities such as high-grade iron ore, high calorific value coking coal and the platinum group metals which help reduce carbon emissions are set to be beneficiaries.
LONGER-TERM INVESTMENTS
Since the bottom of the last down cycle, the Company has been building exposure to longer dated growth opportunities that have significant potential once the projects are derisked. We are pleased to report that a number of these delivered strong returns during the year. The Company’s holdings in Arizona Mining, Nevsun Resources and Avanco Resources were bought by other mining companies at substantial premiums, allowing the Company to lock-in significant gains by selling the positions. However, we have maintained exposure to the assets of Arizona and Avanco by building holdings in the companies that acquired them – South32 and OZ Minerals.
Outside of M&A, the Company has benefited from exploration success also. For example Ero Copper is an emerging copper producer in Brazil. The company purchased a strategic holding in a highly prospective copper district that had been exploited by previous owners. They have been able to refurbish the old mining operations and have used the cash generated from this to undertake extensive exploration drilling last year. This has uncovered significant amounts of economic mineralization which should allow the company to extend the life of the operations well beyond the original time frame assumed at acquisition and, in time, could easily become a high growth copper producer. Although the results are early stage, the shares were up over 20% during the year compared to the broader falls in the market. Another example is SolGold, an exciting copper exploration company in Ecuador. This is much earlier stage than Ero Copper but on the back of highly encouraging results two majors have built large positions on the share register which could easily accelerate returns for investors if the exploration drills continue to add to the resource potential.
Another success has been the derisking of Sheffield Resources’ Thunderbird minerals sands project in Western Australia. Despite the success of the company, the shares are yet to reflect the progress made. It is our expectation that the company will be able to build market confidence in the economics of the project and this should lead to a rerating of the shares in 2019.
SUSTAINABLE MATERIALS
Sustainability is becoming a key focus for the mining industry whether that be in recycling, lower carbon manufacture, or reducing global carbon emissions via renewable power generation and technology. Examples of this include Elysis, a joint venture between two holdings of the Company, Alcoa and Rio Tinto, which launched in May 2018. Elysis is developing the world’s first carbon-free aluminium smelting process and has partnered with Apple, showing consumer demand to reduce the environmental impact of metal production. Rio Tinto has made other steps in this area, launching Aluminium Stewardship Initiative-certified aluminium which is assessed against strict, independently audited criteria including production, emissions, waste, biodiversity and human rights.
The rise of the electrified vehicle has continued this year, led by a huge growth in sales of electric vehicles (EVs) in China. In the western world electric car sales have also increased, driven by the launch of the Tesla Model 3 in the US – the best-selling premium vehicle in the US for the full year by a factor of two. 2019 will see this vehicle, as well as numerous others like the Audi E-tron and Mercedes-Benz EQ C, launch internationally. A number of ‘battery material’ companies are benefiting from this trend. Umicore, a position that we increased in 2018, benefits through its cathode materials business, as well as seeing growth through its metal recycling business as consumers are becoming increasingly focused on sustainability.
The first half of the year saw the performance of lithium-related stocks being hit by concerns about the amount of new lithium production expected to enter the market in coming years. Whilst there are numerous expansion announcements and new projects planned, some of which we have exposure to via our holdings in Nemaska Lithium and Galaxy Resources, we note the broader industry has seen delays in historic projects due to the complexities of lithium mining. The lithium holdings hurt performance in 2018, particularly in the first half, whilst the debt holdings added to performance.
Most large producers, like Albemarle, sell lithium compounds under longer-term contracts where the pricing mechanism is opaque, based on quality, volume, contract length and strategic merit. The average Lithium Carbonate contract (FOB South America) was up 23% in 2018 versus 2017 and these contracts account for much more volume than the spot lithium price which was off sharply in 2018. In 2019 we expect to see increased differentiation in pricing amongst producers, similar to that seen in the iron ore or coking coal market. The Company’s holdings in Albemarle and Galaxy Resources are well placed to benefit from their strategic partnerships and high product quality.
Cobalt prices declined 27% in 2018, driven by increased supply produced from the Democratic Republic of the Congo, as well as concerns around substitution. This price action impacted the Company’s holdings of cobalt related stocks, Cobalt27 Capital and Katanga Mining. Additionally, November 2018 saw Katanga Mining (majority owned by Glencore) announce that it was stopping sales of cobalt after finding traces of uranium in the concentrate. The company will construct an Ion Exchange system to remove the uranium, which should allow shipments to continue in the second half of 2019.
BASE METALS
A striking feature of commodity markets in 2018 has been the differential performance of base metals versus bulk commodities. Base metals, having started the year strongly, saw a sharp decline during the second half as trade war concerns built and sentiment towards Chinese growth deteriorated. Conversely, bulk commodities – a largely physically traded market – remained solid, reflective of underlying stable current demand conditions. The disproportionate move in the metals, largely explained by speculative financial market players, we view as an opportunity in 2019 with the Company well positioned to capture this upside once trade war concerns ease and the effects of anticipated Chinese stimulus feeds into the real economy. Importantly for the companies, despite the heavy sell-off in the second half, the average price was generally higher year-on-year enabling companies to further reduce debt and increase dividends.
Selected commodity price changes during 2018
| Price 31/12/2018 |
% Change 12 month |
% Change Avg 2018 vs. 2017 |
|
| Precious Metals US$/oz | |||
| Palladium | 1,261 | +15.2 | +52.7 |
| Gold | 1,281.34 | -1.7 | +0.9 |
| Silver | 15.51 | -8.8 | -7.8 |
| Platinum | 794 | -14.4 | -7.2 |
| Base Metals US$/lb | |||
| Tin | 8.85 | -2.9 | +0.3 |
| Nickel | 4.81 | -16.5 | +25.9 |
| Aluminium | 0.84 | -17.4 | +7.2 |
| Copper | 2.70 | -17.5 | +5.9 |
| Lead | 0.91 | -19.2 | -3.1 |
| Zinc | 1.14 | -24.5 | +1.1 |
| Industrial Commodities | |||
| Uranium US$/lb | 28.50 | +20.4 | +11.3 |
| Thermal Coal US$/t Newcastle | 102.05 | +0.4 | +21.3 |
| Iron Ore – fines 63.5% Fe China Import US$/t | 71.5 | -3.4 | -1.3 |
| Coking Coal US$/t | 218.1 | -16.2% | +9.2 |
Sources: Datastream & Bloomberg.
The flagship base metal, copper, began the year strongly averaging US$3.15/lb during the first half, to subsequently see a 25% reversal June to September finishing the year down 17.5%. Our view at the time was that the sell-off was overdone, driven by financial players not underlying fundamentals, which reported declining inventories, rising premiums and strong Chinese copper imports. While the copper price has rallied off its September lows, we expect the price to move higher in 2019 as the market continues to tighten with copper displaying some of the strongest long-term fundamentals given the lack of new supply growth, declining production at existing assets and demand benefiting from the growth in EVs and renewables. The Company has 17.9% of the portfolio exposed to pure play copper producers (a combination of equity and debt), which overall added to performance in 2018. We have continued to grow our exposure to our preferred mid-cap growth companies, notably OZ Minerals who successfully acquired Avanco Resources during the year, as well as Ero Copper which continues to have exploration success in Brazil. The Company’s largest copper exposure, First Quantum Minerals, remains on track to ramp-up its large scale Cobre Panama project in Q1 of 2019, key to the re-rating of the company.
After two strong years of price performance, the zinc price fell circa 25% in 2018, a combination of macro headwinds and new supply hitting the market. While the physical market remains tight with inventories well below historic levels, expected mine restarts from Glencore, the ramp-up of Gamsberg and Century Tailings, as well as growth in Chinese domestic production, limits meaningful upside in the price. During 2018 we reduced our exposure to zinc companies exiting our position in Boliden and we also had two of our zinc exposed companies Nevsun Resources and Arizona Mining acquired.
Aluminium has been the most perplexing of the base metals in 2018. With Russian sanctions announced in April and the tightness in the alumina market following the temporary closure of the Alunorte alumina refinery, it has been surprising to see aluminium prices fall so much. With supply flat year-on-year, a direct outcome of China’s supply-side reform agenda, the weakness in price can only be explained by demand which saw growth at its lowest level since the global financial crisis.
BULK COMMODITIES
Despite concerns around trade and slowing economic activity in China, China’s steel industry enjoyed healthy profitability for the majority of the year supporting iron ore and metallurgical coal prices well above analyst expectations. The resilience came to an abrupt end in November 2018 when steel prices cratered resulting in a US$10/t fall in the iron price in just three days. Despite the year-end correction, with steel profitability high throughout the majority of the year, premiums for high grade iron ore and high quality coking coal remained at healthy levels. As we discussed in last year’s Annual Report, one of the most interesting features of the iron ore market has been the widening of the discount between lower quality (58% Fe grade) and higher quality (65% Fe grade) iron ore. As shown in the chart overleaf, this spread has continued to widen in 2018 driven by steel producers’ desire to maximise productivity, as well as stricter environmental controls.
With the major producers’ expansions now effectively done, we see a balanced market in iron ore. The latest project approvals from Rio Tinto, BHP & Fortescue Metals are purely replacement projects of depleting mines and we are actually seeing low grade iron ore exit the market. One of the most interesting features of iron ore is the high concentration of seaborne supply from just four producers. We are encouraged to see these major producers pursue a ‘value over volume’ strategy limiting growth to support price and preserve margins. Vale, the world’s largest iron ore producer, has been very explicit in its intentions to manage price, which they intend to defend below US$65/t. We welcome this action. This is a very different view from the market just two years’ ago when many commentators expected iron to remain below US$50/t indefinitely.
Improved profitability across the steel industry has also benefited metallurgical coal with average prices up by 12% year-on-year. Metallurgical coal is a unique market, with a large amount of production geographically concentrated in Australia and Canada. Weather events in Australia have resulted in a significant amount of price volatility in recent years. In 2018 disruptions in Queensland were not so much driven by weather; instead it was the rail dispute with Aurizon and a fire at North Goonyella. This price volatility is somewhat of a blessing and a curse, with producers’ cash flow benefiting from high current prices but the market unwilling to price it into share prices. The Company’s coking coal holdings, Teck Resources and Coronado Global Resources, are both examples of this where they trade at very depressed valuations relative to current earnings and dividends, which we expect to correct over time.
Thermal coal prices have continued to defy market expectations with the average coal price up by 21% year-on-year. Like iron ore and coking coal, product quality has been key in this market with strong demand and rising premiums for high quality thermal coal. The lack of investment into new coal supply has significantly tightened the thermal coal market and given environmental hurdles to approve new projects there is limited supply growth going forward. The Company’s thermal coal exposure is via its holding in Glencore which dominates the Asia Pacific high quality coal market. Following Glencore’s acquisition of Rio Tinto’s Coal and Allied assets in late 2017, they have enjoyed very strong free cash flow from the coal assets which they have earmarked for buying back shares in the market.
PRECIOUS METALS
The gold price has been remarkably stable in recent years, with 2018 no different, which saw the average gold price flat year-on-year. Since 2016 gold has been range-bound trading between US$1,200-1,350/oz with the US dollar, the end of Quantitative Easing and move to Quantitative Tightening and broad political and macro uncertainty the key drivers. In 2018 the overwhelming driver of the gold price was the US dollar; with gold bottoming at $1,179/oz in the summer as the trade weighted US dollar hit 96.7, the yield on US 10-year Treasuries reached 3.26% with the market pricing in four rate hikes for 2019. As fragilities began to emerge in the US economy and the Fed turned more dovish with the US economy close to the ‘neutral rate’, gold rose in Q4 2018 moving from US$1,200/oz at the beginning of October to finish the year just below $1,300/oz. The key question for the gold market in 2019 is whether or not we see the Fed pause on further rate hikes, with the market increasingly beginning to price in that expectation.
Given the flat gold price, it was a disappointing year for gold equities with the FTSE Gold Mines Index finishing the year down by 5.8% in GBP terms. The gold industry continues to face headwinds of declining production and reserves and, given the aggressive cost cutting in recent years, is now seeing costs and sustaining capital rise. The Company has deliberately focused on the high quality gold companies such as Newmont Mining, Newcrest Mining, Randgold Resources and Northern Star Resources, all of which have strong balance sheets, cost base and resource life. The most significant event in the gold industry in 2018 was the all-share merger of equals between Barrick Gold and Randgold Resources which completed at the end of 2019 with the goal of creating a new champion for long-term value creation in the gold industry.
Among the Company’s other precious metals exposure, Fresnillo, the world’s largest silver producer, was negatively impacted by a change of government in Mexico with the market de-rating the stock on concerns over the impact of a newly proposed mining legislation by the left-leaning President. The Company’s diamond exposure has continued to disappoint, with Mountain Province Diamonds disappointing the market on cost guidance as well as dividends, and Petra Diamonds falling short of expectations on production ramp-up at Cullinan and subsequent balance sheet deleveraging. Finally, having exited our platinum group metals (PGM) exposure a number of years ago, we initiated a position in Impala Platinum with the shares trading at more than a 90% discount to its all-time high share price and supply consolidation finally beginning to occur in South Africa. With the palladium price +15.2% (in USD terms) in 2018 and the PGM basket at close to all-time highs in Rand terms, this has proved to be a successful move with the stock up 50% since we initiated the position.
ROYALTIES AND ILLIQUID INVESTMENTS
The Company currently has one unquoted investment representing 2.4% of the portfolio as at the year end. This, and any future investments, will be managed in line with the guidelines set by the Board as outlined to shareholders in the Strategic Report.
OZ MINERALS BRAZIL ROYALTY CONTRACT
In October 2013 the Company signed a non-binding memorandum of understanding with Avanco Resources for a contractual royalty covering its exploration licenses within the world-class mineral district of Carajas in Brazil. A binding royalty agreement was subsequently signed in July 2014 in which the Company provided US$12 million in return for a Net Smelter Return (net revenue after deductions for freight, smelter and refining charges) royalty payments comprising 2% on copper, 25% on gold and 2% on all other metals produced from their Antas North and Pedra Branca (Stage 1 and Stage 2) licenses. In addition, there will be a flat 2% royalty over all metals produced from any other discoveries within Avanco’s license area as at the time of the agreement.
We are delighted to report that in the first half of 2018, Avanco Resources was bid for by Australian based copper & gold producer OZ Minerals for A$418 million. The deal valued Avanco at A$0.17/sh, a 119% premium to its one month volume-weighted-average-price, generating meaningful alpha for the Company via its equity position and provides a strong foundation for further upside in the royalty. As at the end of December 2018, the royalty was valued at £18.5 million representing 2.4% of the portfolio. Since our initial US$12 million investment was made, we have received US$9.7 million in royalty payments with the royalty on track to achieve a less than three-year payback on the initial investment. We continue to be impressed with the performance of the investment and remain optimistic on further upside under OZ Minerals’ ownership.
At Antas, the mine continues to perform in line with expectations with OZ Minerals increasing resource drilling expenditure, as well as improving mine pit design following the mining and blasting difficulties at the end of 2017. The key focus for OZ Minerals is Pedra Branca where they are updating the feasibility study on the asset to look at a larger underground mine of 1.6mtpa with a decision to mine expected to be made in the second half of 2019. Once further details are provided to the market regarding the project, we will look to reassess the holding value of the royalty.
VALE DEBENTURES
Following the end of the reporting period, the Company increased the existing holding in Vale Debentures. The Debentures consist of a 1.8% net revenue royalty over Vale’s Northern System and Southeastern System iron ore assets in Brazil, as well as a 1.25% royalty over the Sossego copper mine. The iron ore assets are world-class given their grade, cost position, infrastructure and resource life which is well in excess of 50 years. Prior to this transaction, the Company had a 0.5% position in the Vale Debentures; following this transaction the Company’s total exposure is 4.1%.
In 2017 payments made by Vale under the Debentures amounted to US$155 million. This payment is expected to grow once royalty payments commence on the Southeastern System in 2023 and volumes from the newly commissioned iron ore project S11D continue to ramp-up. Vale’s Northern System is currently producing at 200Mt and is forecast to grow to 230Mt once S11D ramps up, while the Southeastern System is currently operating at ~70Mt and is expected to remain around this level. The Northern System has benefited from the rise in premiums for high grade iron ore in recent years with the Debentures directly exposed to this.
Following the increase in the Vale Debentures holding, the Company’s exposure to royalty securities has risen to 6.8%. Whilst the Vale Debentures are a royalty they are also a listed security on the local Brazilian Stock Exchange and therefore exposure to unquoted securities has not increased on the back of this deal. However, shareholders should be aware that historically there has been a low level of liquidity in the Debentures and price volatility is to be expected. We continue to actively look for opportunities to grow royalty exposure given it is a key differentiator of the Company and an effective mechanism to lock-in long-term income for the Company’s shareholders which further diversifies the Company’s revenues.
FIXED INCOME SECURITIES
The Company continues to have a meaningful part of the portfolio allocated to fixed income securities. These were 9.9% of the portfolio as at the end of 2018. This year saw market conditions continue to improve and this allowed companies to strengthen balance sheets by paying down debt. This was highlighted as a risk to this important source of income for the Company, especially when combined with rising interest rates which eat away at the arbitrage between the Company’s cost of debt versus the market rate on underlying mining companies’ bonds. During the year a number of bonds were either repaid or positions were sold as the running yields reduced and this cut the overall amount invested in this part of the portfolio. One new holding was added which met the value and income goals and we continue to look for new deals but with a very strict focus on return versus quality.
DERIVATIVES ACTIVITY
From time to time the Company enters into derivatives contracts involving the sale of ‘puts’ and ‘calls’. These are taken to revenue and are subject to strict Board guidelines which limit their magnitude to an aggregate 10% of the portfolio. During 2018 income generated from options was £6.1 million net of contracts repurchased. Unlike last year when most of the option premium was generated from writing puts, this year was more balanced given the intra year volatility in share prices. Healthy rates of implied volatility allowed the Company to harvest a greater than expected amount of revenue in 2018 which enhanced the total revenue for the year. As at the end of 2018 the Company had 1.7% of the net assets exposed to derivatives.
GEARING
At 31 December 2018 the Company had debt net of Group cash and cash equivalents amounting to £92.8 million, representing gearing of 13.5%. For the most part, this gearing has been drawn down against the higher yielding mining company corporate bonds and is predominantly denominated in the same currency as that of the bonds. Gearing, which can be drawn down or repaid at any time, is used in the portfolio to take tactical advantage of market volatility and opportunities, as well as enhance overall returns during the medium- to long-term. During 2018 some of this gearing was allocated to the equity part of the portfolio on the back of conviction that valuations were compressed. This led to a loss of relative value as share prices moved lower and in particular in the final quarter of the year.
OUTLOOK AND STRATEGY FOR 2018
The unexpected falls seen during 2018 have left share prices and valuations at very attractive levels. The portfolio of investments within the Company is positioned to take advantage of this opportunity despite the macro headwinds. It is our view that even with a flat to range bound commodity price scenario, a move towards a trade agreement with China and the market expectation of limited to no increase in US interest rates, should trigger a rerating of valuations. If this were to play out, we expect share prices to more than recover the losses seen during the year and at the same time companies look set to return more capital to shareholders during 2019. This might seem like a bold forecast given the falls seen during the last few months of 2018 but with so much negative news priced into the market we feel that it could well turn out to be a conservative forecast.
In terms of income, 2019 looks set be another solid year for the Company. Revenue from dividends is forecast to be modestly higher as mining companies favour returning surplus capital rather than reinvesting it back into volume growth. Implied volatility rates are at attractive levels which should preserve the ability to generate value from selling volatility back to the market. In the fixed income arbitrage sleeve, the Company has been able to reinvest proceeds from maturing bonds back into new holdings with higher coupons and the threat of higher interest rates has reduced. Lastly, the expanded exposure to royalties looks set to deliver growth in this area as well. The one factor to watch out for is a substantial move in sterling on the back of a better than expected Brexit outcome. This would hurt income for sterling investors due to the Company’s revenue being almost exclusively US dollar denominated.
In summary we remain excited about the potential for the portfolio to generate competitive returns compared to world markets and following the 25-year anniversary of the Company in December 2018 we look forward to enhancing the long-term total return track record of the Company.
EVY HAMBRO AND OLIVIA MARKHAM
BlackRock Investment Management (UK) Limited
28 February 2019
TEN LARGEST INVESTMENTS
| 1 2017 3rd BHP Diversified mining company Market value £96,265,000 Share of investments 12.3% The world’s largest diversified mining company by market capitalisation. The company is an important global player in a number of commodities including iron ore, copper, thermal and metallurgical coal, manganese, nickel, silver and diamonds. The company also has significant interests in oil, gas and liquefied natural gas. |
2 2017 1st Rio Tinto Diversified mining company Market value £78,320,000 Share of investments 10.0% One of the world’s leading mining companies. The company’s primary product is iron ore, but it also produces aluminium, copper, diamonds, gold, industrial minerals and energy products. |
3 2017 4th Vale#* Diversified mining company Market value £67,527,000 Share of investments 8.7% One of the largest mining companies in the world, with operations in 30 countries. Vale is the world’s largest producer of iron ore and iron ore pellets, and the world’s largest producer of nickel. The company also produces manganese ore, ferroalloys, metallurgical and thermal coal, copper, platinum group metals, gold, silver and cobalt. |
4 2017 2nd Glencore Diversified mining company Market value £61,734,000 Share of investments 7.9% A diversified miner with activities in mining, smelting, refining, processing and marketing of metals and minerals, energy products and agricultural products globally. Since mid-2015 the company has been focused on rapidly deleveraging its balance sheet, with net debt falling from US$26 billion (December 2015) to a targeted range of US$10-16 billion, to provide greater balance sheet strength and flexibility going forward. |
5 2017 5th First Quantum Minerals* Copper producer Market value £47,914,000 Share of investments 6.2% An established and rapidly growing copper mining company operating seven mines and developing five projects worldwide. The company is a significant copper producer and also produces nickel, gold and zinc. |
| 6 2017 6th Teck Resources Diversified mining company Market value £38,132,000 Share of investments 4.9% Is a world leader in metallurgical coal production, with an 8% share of the global seaborne coking coal market. The company is also the world’s third-largest zinc concentrate producer and one of the world’s largest zinc metal refiners. Teck is a major producer of copper and also produces gold, lead, molybdenum and various other metal products. Teck owns a 21.3% interest in the Fort Hills oil sands project, which entered commercial production in 2018. |
7 2017 7th Sociedad Minera Cerro Verde Copper producer Market value £25,282,000 Share of investments 3.2% Is a copper and molybdenum operation in Peru operated by Freeport-McMoRan Copper & Gold where they maintain a 53.6% ownership in the company. In 2013 construction activities commenced on the US$4.4 billion large-scale expansion of the asset which saw copper production more than double from 210Kt in 2015 to 560kt in 2017. The project successfully ramped-up during 2016 with significant cash flows and dividend payments expected going forward. |
8 2017 13th Mountain Province Diamonds* Silver & diamond producer Market value £21,868,000 Share of investments 2.8% A Canadian diamond mining company headquartered in Toronto. Mountain Province owns a 49% interest in the Gacho Kué Diamond Mine in Canada’s Northwest Territories, a joint venture with De Beers Canada, which is a subsidiary of Anglo American. The company holds the marketing rights for its 49% share of diamonds. |
9 2017 8th Newmont Mining Gold producer Market value £20,399,000 Share of investments 2.6% One of the largest gold producers in the world. The company has gold and copper operations on five continents, with active gold mines in Nevada, Australia, Ghana, Peru and Suriname. |
10 2017 14th OZ Minerals Brazil Royalty# ˜ Copper producer Market value £18,513,000 Share of investments 2.4% In July 2014 the Company signed a binding royalty agreement with Avanco Resources, a contractual royalty covering its exploration licenses within the world-class mineral district of Carajas in Brazil. The Company made an investment of US$12 million in return for a Net Smelter Return (net revenue after deductions for freight, smelter and refining charges) royalty payments comprising 2% on copper, 25% on gold and 2% on all other metals that will be produced from their Antas North and Pedra Branca licenses. In addition, there will be a flat 2% royalty over all metals produced from any other discoveries within Avanco’s licence area as at the time of the agreement. In March 2018, OZ Minerals announced an off-market takeover to acquire Avanco Resources which completed at the end of June. |
* Includes fixed income securities.
# Includes investments held at Directors’ valuation.
~ Mining royalty contract.
All percentages reflect the value of the holding as a percentage of total investments. Together, the ten largest investments represent 61.0% of total investments (ten largest investments as at 31 December 2017: 58.5%). Amounts in the table above are shown in pounds sterling.
INVESTMENTS AS AT 31 DECEMBER 2018
| Main geographic exposure |
Market value £’000 |
% of investments |
|
| Diversified | |||
| BHP | Global | 96,265 | 12.3 |
| Rio Tinto | Global | 78,320 | 10.0 |
| Vale#* | Global | 67,527 | 8.7 |
| Glencore | Global | 61,734 | 7.9 |
| Teck Resources | Global | 38,132 | 4.9 |
| Teck Resources Put Option 18/01/19 CA$ 28 | Global | (124) | – |
| Volcan II Convertible* | Peru | 17,065 | 2.2 |
| Lundin Mining | Global | 11,268 | 1.4 |
| South32 | Global | 11,110 | 1.4 |
| Anglo American Put Option 18/01/19 £17.2 | Global | (188) | – |
| -------------------- | -------------------- | ||
| 381,109 | 48.8 | ||
| -------------------- | -------------------- | ||
| Copper | |||
| First Quantum Minerals* | Global | 47,914 | 6.2 |
| Sociedad Minera Cerro Verde | Peru | 25,282 | 3.2 |
| OZ Minerals Brazil Royalty#~ | Brazil | 18,513 | 2.4 |
| OZ Minerals | Australia | 16,248 | 2.1 |
| Ero Copper | Brazil | 10,560 | 1.4 |
| SolGold | Ecuador | 5,283 | 0.7 |
| Ivanhoe Mines | DRC | 5,179 | 0.7 |
| KAZ Minerals | Kazakhstan | 5,163 | 0.7 |
| Nevada Copper | USA | 4,260 | 0.5 |
| Katanga Mining | DRC | 2,989 | 0.4 |
| Sierra Metals | Peru | 2,306 | 0.3 |
| Grupo Mexico | Peru | 1,495 | 0.2 |
| Metals X | Australia | 1,175 | 0.1 |
| -------------------- | -------------------- | ||
| 146,367 | 18.9 | ||
| -------------------- | -------------------- | ||
| Gold | |||
| Newmont Mining | Global | 20,399 | 2.6 |
| Northern Star Resources | Australia | 18,387 | 2.4 |
| Randgold Resources | Mali | 17,877 | 2.3 |
| Newcrest Mining | Australia | 14,440 | 1.8 |
| Franco-Nevada | Global | 10,980 | 1.4 |
| Agnico Eagle Mines | Canada | 10,484 | 1.3 |
| B2Gold | Canada | 5,706 | 0.7 |
| Centamin | Egypt | 5,440 | 0.7 |
| Pretium Resources | Canada | 4,816 | 0.6 |
| TMAC Resources# | Canada | 3,757 | 0.5 |
| Polyus | Russia | 3,753 | 0.5 |
| Alamos Gold | Mexico | 2,811 | 0.4 |
| Shanta Gold Convertible* | Tanzania | 2,179 | 0.3 |
| Oriole Resources | Turkey | 124 | – |
| Carawine Resources+ | Australia | 49 | – |
| -------------------- | -------------------- | ||
| 121,202 | 15.5 | ||
| -------------------- | -------------------- | ||
| Industrial Minerals | |||
| Nemaska Lithium*+ | Canada | 10,181 | 1.3 |
| Iluka Resources | Australia | 9,230 | 1.2 |
| Pilgangoora 12% 21/06/22* | Australia | 8,722 | 1.1 |
| Sheffield Resources# | Australia | 6,954 | 0.9 |
| Albemarle | Global | 6,051 | 0.8 |
| Umicore | Global | 5,598 | 0.7 |
| Galaxy Resources | Australia | 2,875 | 0.4 |
| Cobalt27 Capital | Global | 737 | 0.1 |
| Neo Lithium | Argentina | 690 | 0.1 |
| Bacanora Lithium | Mexico | 198 | – |
| -------------------- | -------------------- | ||
| 51,236 | 6.6 | ||
| -------------------- | -------------------- | ||
| Silver & Diamonds | |||
| Mountain Province Diamonds* | Canada | 21,868 | 2.8 |
| Wheaton Precious Metals | Global | 11,161 | 1.4 |
| Fresnillo | Mexico | 6,041 | 0.8 |
| Petra Diamonds* | South Africa | 5,414 | 0.7 |
| Industrias Penoles | Mexico | 4,772 | 0.6 |
| MAG Silver | Mexico | 727 | 0.1 |
| Cautivo Mining | Peru | 2 | – |
| -------------------- | -------------------- | ||
| 49,985 | 6.4 | ||
| -------------------- | -------------------- | ||
| Aluminium | |||
| Alcoa | USA | 5,214 | 0.7 |
| Metro Mining | Australia | 1,723 | 0.2 |
| -------------------- | -------------------- | ||
| 6,937 | 0.9 | ||
| -------------------- | -------------------- | ||
| Zinc | |||
| Titan Mining | USA | 3,814 | 0.5 |
| Trevali Mining | Global | 1,276 | 0.2 |
| Osisko Metals+ | Canada | 1,240 | 0.2 |
| -------------------- | -------------------- | ||
| 6,330 | 0.9 | ||
| -------------------- | -------------------- | ||
| Coal | |||
| Coronado Global Resources | Australia | 5,582 | 0.7 |
| -------------------- | -------------------- | ||
| 5,582 | 0.7 | ||
| -------------------- | -------------------- | ||
| Nickel | |||
| Nickel Mines | Indonesia | 2,839 | 0.4 |
| Bindura Nickel | Zimbabwe | 233 | – |
| -------------------- | -------------------- | ||
| 3,072 | 0.4 | ||
| -------------------- | -------------------- | ||
| Iron Ore | |||
| Equatorial Resources | DRC | 464 | 0.1 |
| -------------------- | -------------------- | ||
| 464 | 0.1 | ||
| -------------------- | -------------------- | ||
| Other | |||
| Impala Platinum | South Africa | 5,930 | 0.8 |
| -------------------- | -------------------- | ||
| 5,930 | 0.8 | ||
| -------------------- | -------------------- | ||
| Portfolio | 778,214 | 100.0 | |
| ============ | ============ | ||
| Comprising | |||
| – Investments | 778,526 | 100.0 | |
| – Written options | (312) | – | |
| -------------------- | -------------------- | ||
| 778,214 | 100.0 | ||
| ============ | ============ |
* Includes fixed income securities.
# Includes investments held at Directors’ valuation.
~ Mining royalty contract.
+ Includes warrant investments.
All investments are in equity shares unless otherwise stated.
The total number of investments as at 31 December 2018 (including options classified as liabilities on the balance sheet) was 65 (31 December 2017: 70).
As at 31 December 2018 the Company held equity interests in four companies comprising more than 3% of a company’s share capital as follows: Oriole Resources, Osisko Metals, Sheffield Resources and Titan Mining.
PORTFOLIO ANALYSIS AS AT 31 DECEMBER 2018
Commodity Exposure
| 2018 BlackRock World Mining Trust plc |
2017 BlackRock World Mining Trust plc# |
2018 EMIX Global Mining Index |
|
| Other | 0.8% | 0.0% | 1.7% |
| Iron Ore | 0.1% | 0.1% | 1.8% |
| Nickel | 0.4% | 0.0% | 2.4% |
| Coal | 0.7% | 0.0% | 6.1% |
| Zinc | 0.9% | 1.4% | 1.4% |
| Aluminium | 0.9% | 0.3% | 3.3% |
| Silver & Diamonds | 6.4% | 7.6% | 3.8% |
| Industrial Minerals | 6.6% | 7.0% | 1.3% |
| Gold | 15.5% | 15.4% | 23.3% |
| Copper | 18.9% | 20.3% | 7.0% |
| Diversified | 48.8% | 47.9% | 47.9% |
# Represents exposure at 31 December 2017.
Geographical Exposure*
| 2018 | 2017 | |
| Global | 60.0% | 62.7% |
| Latin America | 12.4% | 11.2% |
| Australia | 10.9% | 10.3% |
| Canada | 7.4% | 5.4% |
| Africa (ex SA) | 4.5% | 7.1% |
| Other | 3.3%** | 2.6%*** |
| South Africa | 1.5% | 0.7% |
* Based on the principal commodity exposure and place of operation of each investment.
** Consists of Indonesia, Kazakhstan, Russia, Turkey and USA.
*** Consists of India, Kazakhstan, Philippines, Russia, Turkey and USA.
STRATEGIC REPORT
The Directors present the Strategic Report of the Company for the year ended 31 December 2018. The aim of the Strategic Report is to provide shareholders with the information to assess how the Directors have performed their duty to promote the success of the Company during the year under review.
PRINCIPAL ACTIVITY
The Company carries on business as an investment trust and has a premium listing on the London Stock Exchange. Its principal activity is portfolio investment and that of its subsidiary, BlackRock World Mining Investment Company Limited (together the Group), is investment dealing. Investment trusts are pooled investment vehicles which allow exposure to a diversified range of assets through a single investment, thus spreading investment risk.
OBJECTIVE
The Company’s objective is to maximise total returns to shareholders through a worldwide portfolio of mining and metal securities. The Board recognises the importance of dividends to shareholders in achieving that objective, in addition to capital returns.
STRATEGY, BUSINESS MODEL AND INVESTMENT POLICY
Strategy
The Company invests in accordance with the objective given above. The Board is collectively responsible to shareholders for the long-term success of the Company and is its governing body. There is a clear division of responsibility between the Board and BlackRock Fund Managers Limited (the Manager). Matters reserved for the Board include setting the Company’s strategy, including its investment objective and policy, setting limits on gearing (both bank borrowings and the effect of derivatives), capital structure, governance and appointing and monitoring of the performance of service providers, including the Manager.
Business model
The Company’s business model follows that of an externally managed investment trust. Therefore the Company does not have any employees and outsources its activities to third party service providers including the Manager who is the principal service provider. In accordance with the Alternative Investment Fund Managers’ Directive (AIFMD) the Company is an Alternative Investment Fund (AIF). BlackRock Fund Managers Limited is the Company’s Alternative Investment Fund Manager.
The management of the investment portfolio and the administration of the Company have been contractually delegated to the Manager who in turn (with the permission of the Company) has delegated certain investment management and other ancillary services to BlackRock Investment Management (UK) Limited (the Investment Manager). The Manager, operating under guidelines determined by the Board, has direct responsibility for the decisions relating to the day-to-day running of the Company and is accountable to the Board for the investment, financial and operating performance of the Company.
The Manager delegates fund accounting services to the Investment Manager, which in turn sub-delegates these services to The Bank of New York Mellon (International) Limited. The Company sub-delegates registration services to the Registrar, Computershare Investor Services PLC. Other service providers include the Depositary, The Bank of New York Mellon (International) Limited. Details of the contractual terms with these service providers are set out in the Directors’ Report on page 38 of the Annual Report and Financial Statements.
Investment policy
The Company’s investment policy is to provide a diversified investment in mining and metal securities worldwide. While the policy is to invest principally in quoted securities, the Company’s investment policy includes investing in royalties derived from the production of metals and minerals as well as physical metals. Up to 10% of gross assets may be held in physical metals.
In order to achieve its objective, it is intended that the Group will normally be fully invested, which means at least 90% of the gross assets of the Company and its subsidiary will be invested in stocks, shares, royalties and physical metals. However, if such investments are deemed to be overvalued, or if the Manager finds it difficult to identify attractively priced opportunities for investment, then up to 25% of the Group’s assets may be held in cash or cash equivalents. Risk is spread by investing in a number of holdings, many of which themselves are diversified businesses.
The Group may occasionally utilise derivative instruments such as options, futures and contracts for difference, if it is deemed that these will, at a particular time or for a particular period, enhance the performance of the Group in the pursuit of its objectives. The Company is also permitted to enter into stock lending arrangements.
As approved by shareholders in August 2013, the Group may invest in any single holding of quoted or unquoted investments that would represent up to 20% of gross assets at the time of acquisition. Although investments are principally in companies listed on recognised stock exchanges, the Company may invest up to 20% of the Group’s gross assets in investments other than quoted securities. Such investments include unquoted royalties, equities or bonds. In order to afford the Company the flexibility of obtaining exposure to metal and mining related royalties, it is possible that, in order to diversify risk, all or part of such exposure may be obtained directly or indirectly through a holding company, a fund or another investment or special purpose vehicle, which may be quoted or unquoted. The Board will seek the prior approval of shareholders to any unquoted investment in a single company, fund or special purpose vehicle or any single royalty which represents more than 10% of the Group’s assets at the time of acquisition.
In March 2015 the Board refined the guidelines associated with the Company’s royalty strategy and proposed to maintain the 20% maximum exposure to royalties but the royalty/unquoted portfolio should itself deliver diversification across operator, country and commodity. To this end, new investments into individual royalties/unquoted investments should not exceed circa 3% of gross assets at the time of investment. Total exposure to any single operator, including other issued securities such as debt and/or equity, where greater than 30% of that operator’s revenues come from the mine over which the royalty lies, must also not be greater than 3% at the time of investment. In addition, the guidelines require that the Investment Manager must, at the time of investment, manage total exposure to a single operator, via reducing exposure to listed securities if they are also held in the portfolio, in a timely manner where royalties/unquoted investments are revalued upwards. In the jurisdictions where statutory royalties are possible (in countries where mineral rights are privately owned) these will be preferred and in respect of contractual royalties (a contractual obligation entered into by the operator and typically unsecured) the valuation must take into account the higher credit risk involved. Board approval will continue to be required for all royalty/unquoted investments.
While the Company may hold shares in other listed investment companies (including investment trusts), the Company will not invest more than 15% of the Group’s gross assets in other UK listed investment companies.
The Group’s financial statements are maintained in sterling. Although many investments are denominated and quoted in currencies other than sterling, the Board does not intend to employ a hedging strategy against fluctuations in exchange rates.
No material change will be made to the investment policy without shareholder approval.
GEARING
The Investment Manager believes that tactical use of gearing can add value from time to time. This gearing is typically in the form of an overdraft or short-term loan facility, which can be repaid at any time or matched by cash. The level and benefit of gearing is discussed and agreed with the Board regularly. The Company may borrow up to 25% of the Group’s net assets. The maximum level of gearing used during the year was 16.5% and, at the financial reporting date, net gearing (calculated as borrowings less cash and cash equivalents as a percentage of net assets) stood at 13.5% of shareholders’ funds (2017: 12.2%). For further details on borrowings refer to note 14 on page 83 of the Annual Report and Financial Statements.
PORTFOLIO ANALYSIS
As at 31 December 2018, the investment in the OZ Minerals Brazil Royalty was held at Directors’ valuation, representing a total of £18,513,000 (US$23,578,000) (2017: £18,943,000 (US$25,626,000)). Unquoted investments can prove to be more risky than listed investments.
Information regarding the Company’s investment exposures is contained within the ten largest investments, the investments listed and portfolio analysis above. Further information regarding investment risk and activity throughout the year can be found in the Investment Manager’s Report.
CONTINUATION VOTE
As agreed by shareholders in 1998, an ordinary resolution for the continuation of the Company is proposed at each Annual General Meeting. After two strong years there has been another period of market weakness in the mining sector. However, the unexpected falls during the year have left share prices and valuations at attractive levels. The industry also continues to focus on capital discipline leading to balance sheet strengthening, returns on capital and shareholder distributions, rather than increased capacity. The Directors therefore recommend that shareholders vote in support of the Company’s continuation.
PERFORMANCE
Details of the Company’s performance for the year are given in the Chairman’s Statement. The Investment Manager’s Report includes a review of the main developments during the year, together with information on investment activity within the Company’s portfolio.
RESULTS AND DIVIDENDS
The results for the Company are set out in the Consolidated Statement of Comprehensive Income. The total loss for the year, after taxation, was £91,087,000 (2017: profit of £158,863,000) of which £32,013,000 (2017: £28,093,000) is revenue profit.
It is the Board’s intention to distribute substantially all of the available income. The Directors recommend the payment of a final dividend as set out in the Chairman’s Statement. Dividend payments for the year ended 31 December 2018 amounted to £31,747,000 (2017: £27,527,000).
KEY PERFORMANCE INDICATORS
A number of key performance indicators (KPIs) are used to monitor and assess the Company’s success in achieving its objectives and to measure its progress and performance.
The principal KPIs are described below.
Performance
At each meeting, the Board reviews the performance of the portfolio, as well as the net asset value and share price for the Company and compares this against various companies and indices. The Company does not have a benchmark; however, the Board reviews performance in the context of the performance of the EMIX Global Mining Index, the FTSE All-Share Index and Consumer Price Index.
Share price discount to net asset value (NAV) per share
The Company publishes a NAV per share figure on a daily basis through the official newswire of the London Stock Exchange. This figure is calculated in accordance with the Association of Investment Companies (AIC) formula. At each Board meeting, the Board monitors the level of the Company’s discount to NAV and reviews the average discount/premium for the Company’s relevant sector.
In the year to 31 December 2018, the discount remained relatively flat falling from 12.8% on a cum income basis to 12.4%. The average discount for the year was 12.7%. During the year, the Company bought back 125,000 ordinary shares. The Board considers the use of share buy backs to enhance shareholder value. At its regular meetings, it also undertakes reviews of marketing/ investor relations and sales reports from the Manager and considers their effectiveness, as well as measures of investor sentiment.
Further details, setting out how the discount or premium at which the Company’s shares trade is calculated, are included in the Glossary on page 117 of the Annual Report and Financial Statements.
Ongoing charges
The ongoing charges are based on actual costs incurred in the year as being the best estimate of future costs. The Board reviews the Company’s ongoing charges and monitors expenses to ensure that the total costs incurred by shareholders in the running of the Company remain competitive when measured against peer group funds.
An analysis of the Company’s costs, including the management fee, Directors’ fees and general expenses, is submitted to each Board meeting. A definition setting out in detail how the ongoing charges ratio is calculated is included in the Glossary on page 118 and of the Annual Report and Financial Statements.
The table that follows sets out the key KPIs for the Company. These KPIs fall within the definition of ‘Alternative Performance Measures’ under guidance issued by the European Securities and Markets Authority (ESMA) and additional information explaining how these are calculated is set out in the Glossary on pages 117 to 119 of the Annual Report and Financial Statements.
| Year ended 31 December 2018 |
Year ended 31 December 2017 |
|
| Net asset value total return1 | -11.5% | +24.0% |
| Share price total return1 | -10.7% | +24.2% |
| Reference index total return (net) | -6.2% | +20.2% |
| Discount to net asset value2 | 12.4% | 12.8% |
| Revenue earnings per share | 18.15p | 15.92p |
| Total dividends per share | 18.00p | 15.60p |
| Ongoing charges3 | 0.93% | 1.00% |
| Ongoing charges on gross assets4 | 0.82% | 0.88% |
| ========== | ========== |
1 This measures the Company’s NAV and share price total return, which assumes dividends paid by the Company have been reinvested.
2 This is the difference between the share price and the NAV per share with debt at par.
3 Ongoing charges represent the management fee and all other operating expenses, excluding finance costs, transaction costs and taxation, as a % of average shareholders’ funds.
4 Ongoing charges based on gross assets represent the management fee and all other operating expenses, excluding finance costs, transaction costs and taxation, as a % of average gross assets. Gross assets are calculated based on net assets during the year before the deduction of the bank overdraft and loans. Ongoing charges based on gross assets are considered to be an appropriate performance measure as management fees are payable on gross assets only in the event of an increase in NAV on a quarter-on-quarter basis.
PRINCIPAL RISKS
The Company is exposed to a variety of risks and uncertainties. The Board has put in place a robust process to identify, assess and monitor the principal risks. A core element of this process is the Company’s risk register which identifies the risks facing the Company and assesses the likelihood and potential impact of each risk and the controls established for mitigation. A residual risk rating is then calculated for each risk based on the outcome of the assessment.
The risk register is regularly reviewed and the risks reassessed. The risk environment in which the Company operates is also monitored and regularly appraised. New risks are also added to the register as they are identified which ensures that the document continues to be an effective risk management tool.
The risk register, its method of preparation and the operation of key controls in the Manager’s and other third party service providers’ systems of internal control, are reviewed on a regular basis by the Audit & Management Engagement Committee. In order to gain a more comprehensive understanding of the Manager’s and other third party service providers’ risk management processes and how these apply to the Company’s business, BlackRock’s internal audit department provides an annual presentation to the Audit & Management Engagement Committee Chairman setting out the results of testing performed in relation to BlackRock’s internal control processes. The Audit & Management Engagement Committee periodically receives and reviews internal control reports from BlackRock and the Company’s custodian (The Bank of New York Mellon (International) Limited). The custodian is appointed by the Company’s Depositary and does not have a direct contractual relationship with the Company.
The Board has undertaken a robust assessment of the principal risks facing the Company, including those that would threaten its business model, future performance, solvency or liquidity. Those principal risks have been described in the table below, together with an explanation of how they are managed and mitigated. The Board will continue to assess these risks on an ongoing basis. In relation to the 2016 UK Corporate Governance Code, the Board is confident that the procedures that the Company has put in place are sufficient to ensure that the necessary monitoring of risks and controls has been carried out throughout the reporting period.
The principal risks and uncertainties faced by the Company during the financial year, together with the potential effects, controls and mitigating factors, are set out in the following table.
| Principal Risk | Mitigation/Control |
| Counterparty The potential loss that the Company could incur if a counterparty is unable (or unwilling) to perform on its commitments. |
Due diligence is undertaken before contracts are entered into and exposures are diversified across a number of counterparties. The Depositary is now liable for restitution for the loss of financial instruments held in custody unless able to demonstrate the loss was a result of an event beyond its reasonable control. |
| Investment performance The returns achieved are reliant primarily upon the performance of the portfolio. The Board is responsible for: · setting the investment strategy to fulfil the Company’s objective; and · monitoring the performance of the Investment Manager and the implementation of the investment strategy. An inappropriate investment policy may lead to: · underperformance compared to the reference indices; · a reduction or permanent loss of capital; and · dissatisfied shareholders and reputational damage. |
To manage this risk the Board: · regularly reviews the Company’s investment mandate and long-term strategy; · has set investment restrictions and guidelines which the Investment Manager monitors and regularly reports on; · receives from the Investment Manager a regular explanation of stock selection decisions, portfolio exposure, gearing, and any changes in gearing, and the rationale for the composition of the investment portfolio; · monitors and maintains an adequate spread of investments in order to minimise the risks associated with particular countries or factors specific to particular sectors, based on the diversification requirements inherent in the investment policy; · receives and reviews regular reports showing an analysis of the Company’s performance against the EMIX Global Mining Index and other similar indices, including the performance of major companies in the sector; and · has been assured that the Investment Manager has training and development programmes in place for its employees and its recruitment and remuneration packages are developed in order to retain key staff. |
| Legal & Regulatory Compliance The Company has been approved by HM Revenue & Customs as an investment trust, subject to continuing to meet the relevant eligibility conditions, and operates as an investment trust in accordance with Chapter 4 of Part 24 of the Corporation Tax Act 2010. As such, the Company is exempt from capital gains tax on the profits realised from the sale of its investments. Any breach of the relevant eligibility conditions could lead to the Company losing investment trust status and being subject to corporation tax on capital gains realised within the Company’s portfolio. Any serious breach could result in the Company and/or the Directors being fined or the subject of criminal proceedings, or the suspension of the Company’s shares which would in turn lead to a breach of the Corporation Tax Act 2010. Amongst other relevant laws, the Company is required to comply with the provisions of the Companies Act 2006, the Alternative Investment Fund Managers’ Directive, the UK Listing Rules, Disclosure Guidance and Transparency Rules, the Market Abuse Regulations, the Bribery Act 2010, Criminal Finances Act 2017 and General Data Protection Regulation 2018. |
The Investment Manager monitors investment movements, the level and type of forecast income and expenditure and the amount of proposed dividends to ensure that the provisions of Chapter 4 of Part 24 of the Corporation Tax Act 2010 are not breached. The results are reported to the Board at each meeting. Compliance with the accounting rules affecting investment trusts are also carefully and regularly monitored. The Company Secretary, the Manager and the Company’s professional advisers provide regular reports to the Board in respect of compliance with all applicable rules and regulations. The Board and the Manager also monitor changes in government policy and legislation which may have an impact on the Company. Following authorisation under the Alternative Investment Fund Managers’ Directive (AIFMD), the Company and its Alternative Investment Fund Manager (AIFM) are subject to the risks that the requirements of the Directive are not correctly complied with. The Board and the AIFM monitor changes in government policy and legislation which may have an impact on the Company. The Market Abuse Regulation came into force across the European Union on 3 July 2016. The Board has taken steps to ensure that individual Directors (and their Persons Closely Associated) are aware of their obligations under the regulation and has updated internal processes, where necessary, to ensure the risk of non-compliance is effectively mitigated. |
| Market Market risk arises from volatility in the prices of the Company’s investments. It represents the potential loss the Company might suffer through realising investments in the face of negative market movements. Changes in general economic and market conditions, such as currency exchange rates, interest rates, rates of inflation, industry conditions, tax laws, political events and trends, including the impact of the UK leaving the EU, can also substantially and adversely affect the securities and, as a consequence, the Company’s prospects and share price. The Brexit risk is currently considered to be elevated due to continuing uncertainty about the political and regulatory outlook. |
The Board considers the diversification of the portfolio, asset allocation, stock selection and levels of gearing on a regular basis and has set investment restrictions and guidelines which are monitored and reported on by the Investment Manager. The Board monitors the implementation and results of the investment process with the Investment Manager. While it is not possible to predict fully the impact Brexit will have on the Company and our markets, the Board and Manager continue to monitor external events to ensure that we are prepared for any short-term risks that could be faced in an immediate aftermath of a deal not being reached between the UK and European Union. |
| Operational In common with most other investment trust companies, the Company has no employees. The Company therefore relies on the services provided by third parties and is dependent on the control systems of the Manager and The Bank of New York Mellon (International) Limited (who act as both Depositary, Custodian and Fund Accountant and who maintain the Company’s assets, dealing procedures and accounting records). The security of the Company’s assets, dealing procedures, accounting records and adherence to regulatory and legal requirements depend on the effective operation of the systems of these third party service providers. Failure by any service provider to carry out its obligations to the Company could have a material adverse effect on the Company’s performance. Disruption to the accounting, payment systems or custody records (including cyber security risk) could prevent the accurate reporting and monitoring of the Company’s financial position. |
Due diligence is undertaken before contracts are entered into with third party service providers. Thereafter, the performance of the provider is subject to regular review and reported to the Board. Third party service providers, BlackRock and The Bank of New York Mellon, produce internal control reports to provide assurance regarding the effective operation of internal controls as reported on by their reporting accountants. These reports are provided to the Audit & Management Engagement Committee. The Company’s assets are subject to a strict liability regime and, in the event of a loss of assets, the Depositary must return assets of an identical type or the corresponding amount, unless able to demonstrate the loss was a result of an event beyond its reasonable control. The Board reviews the overall performance of the Manager, Investment Manager and all other third party service providers on a regular basis and compliance with the Investment Management Agreement annually. The Board also considers the business continuity arrangements of the Company’s key service providers. |
| Financial The Company’s investment activities expose it to a variety of financial risks which include market risk, counterparty credit risk, liquidity risk and the valuation of financial instruments. |
Details of these risks are disclosed in note 18 on pages 85 to 102 of the Annual Report and Financial Statements, together with a summary of the policies for managing these risks. |
| Marketing Marketing efforts are inadequate or do not comply with relevant regulatory requirements. There is a failure to communicate adequately with shareholders or identify potential new shareholders resulting in reduced demand for the Company’s shares and a widening of the discount. |
The Board reviews marketing strategy and initiatives and the Manager is required to provide regular updates on progress. BlackRock has a dedicated investment trust sales team visiting both existing and potential clients on a regular basis. Data on client meetings and issues raised are provided to the Board on a regular basis. All investment trust marketing documents are subject to appropriate review and authorisation. |
| Securities lending The Company may engage in securities lending. Engaging in securities lending will have a credit risk exposure to the counterparties to any securities lending contract. The Company’s investments can be lent to counterparties over a period of time. A default by the counterparty, combined with a fall in the value of the collateral below that of the value of the securities lent, may result in a reduction in the value of the Company. |
The Company intends to ensure that all securities lending is fully collateralised but, to the extent that any securities lending is not fully collateralised (for example due to timing issues arising from payment lags), the Company will have a credit risk exposure to the counterparties to the securities lending contracts. Further details on securities lending are disclosed on page 82 and pages 90 to 93 of the Annual Report and Financial Statements. |
VIABILITY STATEMENT
In accordance with provision C.2.2 of the 2016 UK Corporate Governance Code, the Directors have assessed the prospects of the Company for a period of three years. This is generally the investment holding period investors consider while investing in the natural resources companies sector. In its assessment of the viability of the Company the Directors have noted that:
· the Company invests predominantly in highly liquid, large listed companies so its assets are readily realisable and provide a level of cash receipts in the form of interest and dividends;
· the Company invests in mining companies with long life assets;
· the Company’s forecasts for revenues, expenses and liabilities are relatively stable and it has largely fixed overheads which comprise a very small percentage of net assets (0.93%); and
· the business model should remain attractive for much longer than three years, unless there is a significant deterioration in commodity markets or further regulatory change.
The Company will undertake its annual continuation vote at the forthcoming Annual General Meeting and the Board has reviewed the potential impact that this may have on the Company’s viability. The Board is confident that the continuation vote will be passed and have prepared the viability statement under this assumption.
The Directors have also reviewed:
· the Company’s principal risks and uncertainties as set out above;
· the potential impact of a fall in commodity equity markets on the value of the Company’s investment portfolio and underlying dividend income;
· the ongoing relevance of the Company’s investment objective, business model and investment policy; and
· the level of demand for the Company’s shares.
The Directors reviewed the assumptions and considerations underpinning the Company’s existing going concern assertion which are based on:
· processes for monitoring costs;
· key financial ratios;
· evaluation of risk management controls;
· compliance with the investment objective;
· portfolio risk profile;
· share price discount to NAV;
· gearing; and
· counterparty exposure and liquidity risk.
Based on the results of their analysis, the Directors have concluded that there is a reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they fall due over the period of their assessment.
FUTURE PROSPECTS
The Board’s main focus is to maximise total returns over the longer term through investment in mining and metal assets. The outlook for the Company is discussed in both the Chairman’s Statement and the Investment Manager’s Report.
EMPLOYEES, SOCIAL, COMMUNITY AND HUMAN RIGHTS ISSUES
As an investment trust with no employees, the Company has no direct social or community responsibilities or impact on the environment. However, the Company believes that it is in shareholders’ interests to consider human rights issues and environmental, social and governance factors when selecting and retaining investments. Details of the Company’s policy on socially responsible investment are set out on page 51 of the Annual Report and Financial Statements.
MODERN SLAVERY ACT
As an investment vehicle the Company does not provide goods or services in the normal course of business and does not have customers. Accordingly, the Directors consider that the Company is not required to make any slavery or human trafficking statement under the Modern Slavery Act 2015. In any event, the Board considers the Company’s supply chains, dealing predominantly with professional advisers and service providers in the financial services industry, to be low risk in relation to this matter.
DIRECTORS, GENDER REPRESENTATION AND EMPLOYEES
The Directors of the Company on 31 December 2018, all of whom held office throughout the year, are set out in the Directors’ Biographies on pages 28 and 29 of the Annual Report and Financial Statements. The Board consists of four male Directors and two female Directors. The Company does not have any employees; therefore there are no disclosures to be made in that respect.
The information set out on pages 8 to 25 of the Annual Report and Financial Statements forms part of this Strategic Report. The Strategic Report was approved by the Board at its meeting on 28 February 2019.
By order of the Board
CAROLINE DRISCOLL
For and on behalf of
BlackRock Investment Management (UK) Limited
Company Secretary
28 February 2019
TRANSACTIONS WITH THE MANAGER AND THE INVESTMENT MANAGER
BlackRock Fund Managers Limited (BFM) provides management and administration services to the Company under a contract which is terminable on six months’ notice. BFM has (with the Company’s consent) delegated certain portfolio and risk management services, and other ancillary services to BlackRock Investment Management (UK) Limited (BIM (UK)). Further details of the investment management contract are disclosed in the Directors’ Report on pages 37 and 38 of the Annual Report and Financial Statements.
The investment management fee due for the year ended 31 December 2018 amounted to £6,041,000 (2017: £6,274,000). At the year end, £1,359,000 (2017: £3,515,000) was outstanding in respect of management fees.
In addition to the above services, BlackRock has provided the Group with marketing services. The total fees paid or payable for these services for the year ended 31 December 2018 amounted to £139,000 excluding VAT (2017: £93,000 excluding VAT). Marketing fees of £69,000 were outstanding as at 31 December 2018 (2017: £93,000).
RELATED PARTY TRANSACTIONS
The Board consists of six non-executive Directors all of whom are considered to be independent by the Board. None of the Directors has a service contract with the Company. The Chairman receives an annual fee of £45,000, the Chairman of the Audit & Management Engagement Committee/Senior Independent Director receives an annual fee of £37,500, and each other Director receives an annual fee of £30,000. All six members of the Board hold shares in the Company. Mr Buchan holds 29,000 ordinary shares, Mr Cheyne 24,000 ordinary shares, Mr Cockerill 65,789 ordinary shares, Mr Edey 20,000 ordinary shares, Ms Mosely 7,400 ordinary shares and Ms Lewis 2,429 ordinary shares. The amount of Directors’ fees outstanding at 31 December 2018 was £16,875 (2017: £16,875).
STATEMENT OF DIRECTORS’ RESPONSIBILITIES IN RESPECT OF THE ANNUAL REPORT AND FINANCIAL STATEMENTS
The Directors are responsible for preparing the Annual Report and Financial Statements in accordance with applicable law and regulations. Company law requires the Directors to prepare financial statements for each financial year. Under that law, the Directors are required to prepare the financial statements under IFRS as adopted by the European Union.
Under Company law, the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and Company and of the profit or loss of the Group for that period. In preparing those financial statements, the Directors are required to:
· present fairly the financial position, financial performance and cash flows of the Group and Company;
· select suitable accounting policies in accordance with IAS 8: Accounting Policies, Changes in Accounting Estimates and Errors and then apply them consistently;
· present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information;
· make judgements and estimates that are reasonable and prudent;
· state whether the financial statements have been prepared in accordance with IFRS as adopted by the European Union, subject to any material departures disclosed and explained in the financial statements;
· provide additional disclosures when compliance with the specific requirements in IFRS as adopted by the European Union is insufficient to enable users to understand the impact of particular transactions, other events and conditions on the Group’s and Company’s financial position and financial performance; and
· prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Group and Company will continue in business.
The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Group’s and Company’s transactions and disclose with reasonable accuracy at any time the financial position of the Group and Company and enable them to ensure that the financial statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.
The Directors are also responsible for preparing the Strategic Report, Directors’ Report, the Directors’ Remuneration Report, the Corporate Governance Statement and the Report of the Audit & Management Engagement Committee in accordance with the Companies Act 2006 and applicable regulations, including the requirements of the Listing Rules and the Disclosure Guidance and Transparency Rules. The Directors have delegated responsibility to the Manager for the maintenance and integrity of the Company’s corporate and financial information included on the BlackRock website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
Each of the Directors, whose names are listed on pages 28 and 29 of the Annual Report and Financial Statements, confirm to the best of their knowledge that:
· the financial statements, which have been prepared in accordance with IFRS as adopted by the European Union, give a true and fair view of the assets, liabilities, financial position and net return of the Group and Company; and
· the Strategic Report contained in the Annual Report and Financial Statements includes a fair review of the development and performance of the business and the position of the Group and Company, together with a description of the principal risks and uncertainties that it faces.
The 2016 UK Corporate Governance Code also requires Directors to ensure that the Annual Report and Financial Statements are fair, balanced and understandable. In order to reach a conclusion on this matter, the Board has requested that the Audit & Management Engagement Committee advise on whether it considers that the Annual Report and Financial Statements fulfil these requirements. The process by which the Committee has reached these conclusions is set out in the Audit & Management Engagement Committee’s Report on pages 53 to 56 of the Annual Report and Financial Statements. As a result, the Board has concluded that the Annual Report and Financial Statements for the year ended 31 December 2018, taken as a whole, are fair, balanced and understandable and provide the information necessary for shareholders to assess the Group’s and Company’s position, performance, business model and strategy.
For and on behalf of the Board
IAN COCKERILL
Chairman
28 February 2019
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 DECEMBER 2018
Notes |
Revenue 2018 £’000 |
Revenue 2017 £’000 |
Capital 2018 £’000 |
Capital 2017 £’000 |
Total 2018 £’000 |
Total 2017 £’000 |
|
| Income from investments held at fair value through profit or loss | 3 | 32,049 | 28,017 | - | - | 32,049 | 28,017 |
| Other income | 3 | 6,145 | 6,152 | – | – | 6,145 | 6,152 |
| ------------ | ------------ | ------------ | ------------ | ------------ | ------------ | ||
| Total revenue | 38,194 | 34,169 | – | – | 38,194 | 34,169 | |
| ------------ | ------------ | ------------ | ------------ | ------------ | ------------ | ||
| Net (loss)/profit on investments held at fair value through profit or loss | – | – | (112,935) | 127,963 | (112,935) | 127,963 | |
| Net (loss)/profit on foreign exchange | – | – | (4,754) | 8,414 | (4,754) | 8,414 | |
| ------------ | ------------ | ------------ | ------------ | ------------ | ------------ | ||
| Total | 38,194 | 34,169 | (117,689) | 136,377 | (79,495) | 170,546 | |
| ------------ | ------------ | ------------ | ------------ | ------------ | ------------ | ||
| Expenses | |||||||
| Investment management fees | 4 | (1,454) | (1,500) | (4,587) | (4,774) | (6,041) | (6,274) |
| Other operating expenses | 5 | (1,025) | (979) | (14) | (4) | (1,039) | (983) |
| ------------ | ------------ | ------------ | ------------ | ------------ | ------------ | ||
| Total operating expenses | (2,479) | (2,479) | (4,601) | (4,778) | (7,080) | (7,257) | |
| ======= | ======= | ======= | ======= | ======= | ======= | ||
| Net profit/(loss) on ordinary activities before finance costs and taxation | 35,715 | 31,690 | (122,290) | 131,599 | (86,575) | 163,289 | |
| Finance costs | 6 | (798) | (512) | (2,369) | (1,535) | (3,167) | (2,047) |
| ------------ | ------------ | ------------ | ------------ | ------------ | ------------ | ||
| Net profit/(loss) on ordinary activities before taxation | 34,917 | 31,178 | (124,659) | 130,064 | (89,742) | 161,242 | |
| Taxation | (2,904) | (3,085) | 1,559 | 706 | (1,345) | (2,379) | |
| ======= | ======= | ======= | ======= | ======= | ======= | ||
| Profit/(loss) for the year | 32,013 | 28,093 | (123,100) | 130,770 | (91,087) | 158,863 | |
| ======= | ======= | ======= | ======= | ======= | ======= | ||
| Earnings/(loss) per ordinary share (pence) | 8 | 18.15 | 15.92 | (69.78) | 74.11 | (51.63) | 90.03 |
| ======= | ======= | ======= | ======= | ======= | ======= |
The total column of this statement represents the Group’s Statement of Comprehensive Income, prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union (EU). The supplementary revenue and capital columns are both prepared under guidance published by the Association of Investment Companies (AIC). All items in the above statement derive from continuing operations. No operations were acquired or discontinued during the year. All income is attributable to the equity holders of the Group.
The Group does not have any other comprehensive income/(loss). The net profit/(loss) for the year disclosed above represents the Group’s total comprehensive income/(loss).
CONSOLIDATED AND PARENT COMPANY STATEMENTS OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 DECEMBER 2018
Group |
Notes |
Called up share capital £’000 |
Share premium account £’000 |
Capital redemption reserve £’000 |
Special reserve £’000 |
Capital reserves £’000 |
Revenue reserve £’000 |
Total £’000 |
| For the year ended 31 December 2018 | ||||||||
| At 31 December 2017 | 9,651 | 127,155 | 22,779 | 114,589 | 496,401 | 34,072 | 804,647 | |
| Total comprehensive income: | ||||||||
| Net (loss)/profit for the year | – | – | – | – | (123,100) | 32,013 | (91,087) | |
| Transactions with owners, recorded directly to equity: | ||||||||
| Ordinary shares purchased into treasury | 9,10 | – | – | – | (439) | – | – | (439) |
| Share purchase costs | 10 | – | – | – | (3) | – | – | (3) |
| Dividends paid* | 7 | – | – | – | – | – | (27,523) | (27,523) |
| ------------ | ------------ | ------------ | ------------ | ------------ | ------------ | ------------ | ||
| At 31 December 2018 | 9,651 | 127,155 | 22,779 | 114,147 | 373,301 | 38,562 | 685,595 | |
| ======= | ======= | ======= | ======= | ======= | ======= | ======= | ||
| For the year ended 31 December 2017 | ||||||||
| At 31 December 2016 | 9,651 | 127,155 | 22,779 | 114,589 | 365,631 | 37,741 | 677,546 | |
| Total comprehensive income: | ||||||||
| Net profit for the year | – | – | – | – | 130,770 | 28,093 | 158,863 | |
| Transactions with owners, recorded directly to equity: | ||||||||
| Dividends paid** | 7 | – | – | – | – | – | (31,762) | (31,762) |
| ------------ | ------------ | ------------ | ------------ | ------------ | ------------ | ------------ | ||
| At 31 December 2017 | 9,651 | 127,155 | 22,779 | 114,589 | 496,401 | 34,072 | 804,647 | |
| ======= | ======= | ======= | ======= | ======= | ======= | ======= |
* The final dividend of 6.60p per share for the year ended 31 December 2017, declared on 26 February 2018 and paid on 10 May 2018; 1st interim dividend of 3.00p per share for the year ended 31 December 2018, declared on 25 April 2018 and paid on 29 June 2018; 2nd interim dividend of 3.00p per share for the year ended 31 December 2018, declared on 17 August 2018 and paid on 21 September 2018; and 3rd interim dividend of 3.00p per share for the year ended 31 December 2018, declared on 8 November 2018 and paid on 21 December 2018.
** The final dividend of 9.00p per share for the year ended 31 December 2016, declared on 23 February 2017 and paid on 12 May 2017; 1st interim dividend of 3.00p per share for the year ended 31 December 2017, declared on 4 May 2017 and paid on 30 June 2017; 2nd interim dividend of 3.00p per share for the year ended 31 December 2017, declared on 10 August 2017 and paid on 15 September 2017; and 3rd interim dividend of 3.00p per share for the year ended 31 December 2017, declared on 10 November 2017 and paid on 22 December 2017.
Company |
Notes |
Called up share capital £’000 |
Share premium account £’000 |
Capital redemption reserve £’000 |
Special reserve £’000 |
Capital reserves £’000 |
Revenue reserve £’000 |
Total £’000 |
| For the year ended 31 December 2018 | ||||||||
| At 31 December 2017 | 9,651 | 127,155 | 22,779 | 114,589 | 503,885 | 26,588 | 804,647 | |
| Total comprehensive income: | ||||||||
| Net (loss)/profit for the year | – | – | – | – | (123,399) | 32,312 | (91,087) | |
| Transactions with owners, recorded directly to equity: | ||||||||
| Ordinary shares purchased into treasury | 9,10 | – | – | – | (439) | – | – | (439) |
| Share purchase costs | 10 | – | – | – | (3) | – | – | (3) |
| Dividends paid* | 7 | – | – | – | – | – | (27,523) | (27,523) |
| ------------ | ------------ | ------------ | ------------ | ------------ | ------------ | ------------ | ||
| At 31 December 2018 | 9,651 | 127,155 | 22,779 | 114,147 | 380,486 | 31,377 | 685,595 | |
| ======= | ======= | ======= | ======= | ======= | ======= | ======= | ||
| For the year ended 31 December 2017 | ||||||||
| At 31 December 2016 | 9,651 | 127,155 | 22,779 | 114,589 | 373,115 | 30,257 | 677,546 | |
| Total comprehensive income: | ||||||||
| Net profit for the year | – | – | – | – | 130,770 | 28,093 | 158,863 | |
| Transactions with owners, recorded directly to equity: | ||||||||
| Dividends paid** | 7 | – | – | – | – | – | (31,762) | (31,762) |
| ------------ | ------------ | ------------ | ------------ | ------------ | ------------ | ------------ | ||
| At 31 December 2017 | 9,651 | 127,155 | 22,779 | 114,589 | 503,885 | 26,588 | 804,647 | |
| ======= | ======= | ======= | ======= | ======= | ======= | ======= |
* The final dividend of 6.60p per share for the year ended 31 December 2017, declared on 26 February 2018 and paid on 10 May 2018; 1st interim dividend of 3.00p per share for the year ended 31 December 2018, declared on 25 April 2018 and paid on 29 June 2018; 2nd interim dividend of 3.00p per share for the year ended 31 December 2018, declared on 17 August 2018 and paid on 21 September 2018; and 3rd interim dividend of 3.00p per share for the year ended 31 December 2018, declared on 8 November 2018 and paid on 21 December 2018.
** The final dividend of 9.00p per share for the year ended 31 December 2016, declared on 23 February 2017 and paid on 12 May 2017; 1st interim dividend of 3.00p per share for the year ended 31 December 2017, declared on 4 May 2017 and paid on 30 June 2017; 2nd interim dividend of 3.00p per share for the year ended 31 December 2017, declared on 10 August 2017 and paid on 15 September 2017; and 3rd interim dividend of 3.00p per share for the year ended 31 December 2017, declared on 10 November 2017 and paid on 22 December 2017.
CONSOLIDATED AND PARENT COMPANY STATEMENTS OF FINANCIAL POSITION AS AT 31 DECEMBER 2018
| Notes | 31 December 2018 | 31 December 2017 | |||
| Group £’000 |
Company £’000 |
Group £’000 |
Company £’000 |
||
| Non current assets | |||||
| Investments held at fair value through profit or loss | 778,526 | 784,300 | 906,479 | 915,464 | |
| ------------ | ------------ | ------------ | ------------ | ||
| Current assets | |||||
| Other receivables | 2,326 | 2,326 | 2,567 | 2,567 | |
| Cash collateral held with brokers | 650 | 650 | 1,983 | 1,983 | |
| Cash and cash equivalents | 35,501 | 30,793 | 693 | 693 | |
| ------------ | ------------ | ------------ | ------------ | ||
| 38,477 | 33,769 | 5,243 | 5,243 | ||
| ------------ | ------------ | ------------ | ------------ | ||
| Total assets | 817,003 | 818,069 | 911,722 | 920,707 | |
| ------------ | ------------ | ------------ | ------------ | ||
| Current liabilities | |||||
| Other payables | (16,725) | (17,791) | (4,873) | (5,939) | |
| Derivative financial liabilities held at fair value through profit or loss | (312) | (312) | (604) | (604) | |
| Bank overdraft | – | – | (12,249) | (20,168) | |
| Bank loans | (114,221) | (114,221) | (88,708) | (88,708) | |
| ------------ | ------------ | ------------ | ------------ | ||
| (131,258) | (132,324) | (106,434) | (115,419) | ||
| ------------ | ------------ | ------------ | ------------ | ||
| Total assets less current liabilities | 685,745 | 685,745 | 805,288 | 805,288 | |
| ------------ | ------------ | ------------ | ------------ | ||
| Non current liabilities | |||||
| Deferred taxation liability | (150) | (150) | (641) | (641) | |
| ------------ | ------------ | ------------ | ------------ | ||
| Net assets | 685,595 | 685,595 | 804,647 | 804,647 | |
| ======= | ======= | ======= | ======= | ||
| Equity attributable to equity holders | |||||
| Called up share capital | 9 | 9,651 | 9,651 | 9,651 | 9,651 |
| Share premium account | 10 | 127,155 | 127,155 | 127,155 | 127,155 |
| Capital redemption reserve | 10 | 22,779 | 22,779 | 22,779 | 22,779 |
| Special reserve | 10 | 114,147 | 114,147 | 114,589 | 114,589 |
| Capital reserves | |||||
| At 1 January | 496,401 | 503,885 | 365,631 | 373,115 | |
| Net (loss)/profit for the year | (123,100) | (123,399) | 130,770 | 130,770 | |
| ------------ | ------------ | ------------ | ------------ | ||
| 10 | 373,301 | 380,486 | 496,401 | 503,885 | |
| ------------ | ------------ | ------------ | ------------ | ||
| Revenue reserve | |||||
| At 1 January | 34,072 | 26,588 | 37,741 | 30,257 | |
| Net profit for the year | 32,013 | 32,312 | 28,093 | 28,093 | |
| Dividends paid | (27,523) | (27,523) | (31,762) | (31,762) | |
| ------------ | ------------ | ------------ | ------------ | ||
| 10 | 38,562 | 31,377 | 34,072 | 26,588 | |
| ------------ | ------------ | ------------ | ------------ | ||
| Total equity | 685,595 | 685,595 | 804,647 | 804,647 | |
| ======= | ======= | ======= | ======= | ||
| Net asset value per ordinary share (pence) | 8 | 388.81 | 388.81 | 456.01 | 456.01 |
| ======= | ======= | ======= | ======= | ||
CONSOLIDATED AND PARENT COMPANY CASH FLOW STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018
| 31 December 2018 | 31 December 2017 | |||
| Group £’000 |
Company £’000 |
Group £’000 |
Company £’000 |
|
| Operating activities | ||||
| Net (loss)/profit before taxation | (89,742) | (89,742) | 161,242 | 161,242 |
| Add back finance costs | 3,167 | 3,167 | 2,047 | 2,047 |
| Net loss/(profit) on investments held at fair value through profit or loss (including transaction costs) | 113,315 | 113,234 | (127,963) | (127,963) |
| Net loss/(profit) on foreign exchange | 4,754 | 4,754 | (8,414) | (8,414) |
| Sales of investments held at fair value through profit or loss | 235,980 | 235,980 | 232,049 | 232,049 |
| Purchases of investments held at fair value through profit or loss | (221,634) | (218,342) | (250,649) | (250,649) |
| (Increase)/decrease in other receivables | (119) | (119) | 2,946 | 2,946 |
| (Decrease)/increase in other payables | (1,889) | (1,889) | 2,029 | 2,029 |
| Decrease/(increase) in amounts due from brokers | 360 | 360 | (360) | (360) |
| Increase in amounts due to brokers | 13,639 | 13,639 | 74 | 74 |
| Net movement in cash collateral held with brokers | 1,333 | 1,333 | 429 | 429 |
| ---------------- | ---------------- | ---------------- | ---------------- | |
| Net cash inflow from operating activities before taxation | 59,164 | 62,375 | 13,430 | 13,430 |
| ---------------- | ---------------- | ---------------- | ---------------- | |
| Taxation paid | (969) | (969) | (1,215) | (1,215) |
| Taxation on investment income included within gross income | (765) | (765) | (852) | (852) |
| ---------------- | ---------------- | ---------------- | ---------------- | |
| Net cash inflow from operating activities | 57,430 | 60,641 | 11,363 | 11,363 |
| ---------------- | ---------------- | ---------------- | ---------------- | |
| Financing activities | ||||
| Drawdown of loans | 20,000 | 20,000 | 11,900 | 11,900 |
| Interest paid | (3,167) | (3,167) | (2,047) | (2,047) |
| Shares purchased into treasury | (439) | (439) | – | – |
| Share purchase costs paid | (3) | (3) | – | – |
| Dividends paid | (27,523) | (27,523) | (31,762) | (31,762) |
| ---------------- | ---------------- | ---------------- | ---------------- | |
| Net cash outflow from financing activities | (11,132) | (11,132) | (21,909) | (21,909) |
| ---------------- | ---------------- | ---------------- | ---------------- | |
| Increase/(decrease) in cash and cash equivalents | 46,298 | 49,509 | (10,546) | (10,546) |
| Cash and cash equivalents at start of the year | (11,556) | (19,475) | (1,256) | (9,175) |
| Effect of foreign exchange rate changes | 759 | 759 | 246 | 246 |
| ---------------- | ---------------- | ---------------- | ---------------- | |
| Cash and cash equivalents at end of year | 35,501 | 30,793 | (11,556) | (19,475) |
| ========= | ========= | ========= | ========= | |
| Comprised of: | ||||
| Cash and cash equivalents | 35,501 | 30,793 | 693 | 693 |
| Bank overdraft | – | – | (12,249) | (20,168) |
| ========= | ========= | ========= | ========= | |
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018
1. PRINCIPAL ACTIVITY
The principal activity of the Company is that of an investment trust company within the meaning of section 1158 of the Corporation Tax Act 2010. The Company was incorporated on 28 October 1993, and this is the 25th Annual Report.
The principal activity of the subsidiary, BlackRock World Mining Investment Company Limited, is investment dealing.
2. ACCOUNTING POLICIES
The principal accounting policies adopted by the Group and Company are set out below.
(a) Basis of preparation
The Group and Parent Company financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union and as applied in accordance with the provisions of the Companies Act 2006. The Company has taken advantage of the exemption provided under section 408 of the Companies Act 2006 not to publish its individual Statement of Comprehensive Income and related notes. All of the Group’s operations are of a continuing nature.
Insofar as the Statement of Recommended Practice (SORP) for investment trust companies and venture capital trusts issued by the Association of Investment Companies (AIC), revised in November 2014 and updated in January 2017, is compatible with IFRS, the financial statements have been prepared in accordance with guidance set out in the SORP.
Substantially all of the assets of the Group consist of securities that are readily realisable and, accordingly, the Directors believe that the Group has adequate resources to continue in operational existence for the foreseeable future. Consequently, the Directors have determined that it is appropriate for the financial statements to be prepared on a going concern basis.
The Group’s financial statements are presented in sterling, which is the functional currency of the Group and of the primary economic environment in which the Group operates. All values are rounded to the nearest thousand pounds (£’000) except where otherwise indicated.
A number of new standards, amendments to standards and interpretations are effective for the annual periods beginning on or after 1 January 2019 and have not been adopted early in preparing these financial statements (major changes and new standards issued are detailed below) as these are not expected to have any effect on the measurement of the amounts recognised in the financial statements of the Company.
IFRS standards that have been recently adopted:
IFRS 9 – Financial Instruments (2014) replaces IAS 39 and deals with a package of improvements including principally a revised model for classification and measurement of financial instruments, a forward looking expected loss impairment model and a revised framework for hedge accounting. In terms of classification and measurement the revised standard is principles based depending on the business model and nature of cash flows. Under this approach, instruments are measured at either amortised cost or fair value. Under IFRS 9 equity and derivative investments will be held at fair value because they fail the ‘solely payments of principal and interest’ test and debt investments will be held at fair value if the business model is to manage them on a fair value basis. The scope of the fair value option is reduced within IFRS 9. The standard is effective from 1 January 2018. The standard did not have any impact on the Company as all its investments are held at fair value through profit or loss.
IFRS 15 – Revenue from Contracts with Customers (effective 1 January 2018) specifies how and when an entity should recognise revenue and enhances the nature of revenue disclosures. Given the nature of the Company’s revenue streams from financial instruments, the provisions of this standard did not have any impact.
IFRS standards that have yet to be adopted:
IFRS 16 – Leases (effective 1 January 2019) specifies accounting for leases and removes the distinction between operating and finance leases. This standard is not applicable to the Company as it has no leases.
IFRIC 23 – Uncertainty over Income Tax Treatments seeks to provide clarity on how to account for uncertainty over income tax treatments and specifies that an entity must consider whether it is probable that the relevant tax authority will accept each tax treatment or group of tax treatments, that it plans to use in its income tax filing. The interpretation also requires companies to reassess the judgements and estimates applied if facts and circumstances change. The interpretation is effective for annual reporting periods beginning on or after 1 January 2019. The interpretation would require the Company to recognise uncertain tax positions which are more than probable within its financial statements.
(b) Basis of consolidation
The Group’s financial statements are made up to 31 December each year and consolidate the financial statements of the Company and its wholly owned subsidiary, which is registered and operates in England and Wales, BlackRock World Mining Investment Company Limited.
Subsidiaries are consolidated from the date of their acquisition, being the date on which the Company obtains control, and continue to be consolidated until the date that such control ceases. The financial statements of subsidiaries used in the preparation of the consolidated financial statements are based on consistent accounting policies. All intra–group balances and transactions, including unrealised profits arising therefrom, are eliminated.
(c) Presentation of the Statement of Comprehensive Income
In order to reflect the activities of an investment trust company and in accordance with guidance issued by the AIC, supplementary information which analyses the Consolidated Statement of Comprehensive Income between items of a revenue and a capital nature has been presented alongside the Consolidated Statement of Comprehensive Income.
(d) Segmental reporting
The Directors are of the opinion that the Group is engaged in a single segment of business being investment business.
(e) Income
Dividends receivable on equity shares are recognised as revenue for the year on an ex–dividend basis. Where no ex–dividend date is available, dividends receivable on or before the year end are treated as revenue for the year. Provision is made for any dividends not expected to be received. Special dividends, if any, are treated as a capital or a revenue receipt depending on the facts or circumstances of each particular case. The return on a debt security is recognised on a time apportionment basis so as to reflect the effective yield on the debt security. Interest income and deposit interest is accounted for on an accruals basis.
Options may be purchased or written over securities held in the portfolio for generating or protecting capital returns, or for generating or maintaining revenue returns. Where the purpose of the option is the generation of income, the premium is treated as a revenue item. Where the purpose of the option is the maintenance of capital, the premium is treated as a capital item.
Option premium income is recognised as revenue evenly over the life of the option contract and included in the revenue column of the Consolidated Statement of Comprehensive Income unless the option has been written for the maintenance and enhancement of the Group’s investment portfolio and represents an incidental part of a larger capital transaction, in which case any premia arising are allocated to the capital column of the Consolidated Statement of Comprehensive Income.
Royalty income from contractual rights is measured at the fair value of the consideration received or receivable where the Investment Manager can reliably estimate the amount, pursuant to the terms of the agreement. Royalty income from contractual rights received comprise of a return of income and a return of capital based on the underlying cost of the contract and, accordingly, the return of income element is taken to the revenue account and the return of capital element is taken to the capital account. These amounts are disclosed in the Consolidated Statement of Comprehensive Income within income from investments and gains/losses on investments held at fair value through profit or loss, respectively.
The useful life of the contractual rights will be determined by reference to the contractual arrangements, the planned mine life on commencement of mining and the underlying cost of the contractual rights will be revalued on a systematic basis using the units of production method over the life of the contractual rights which is estimated using available estimated proved and probable reserves specifically associated with the mine. The Investment Manager relies on public disclosures for information on proven and probable reserves from the operators of the mine. Amortisation rates are adjusted on a prospective basis for all changes to estimates of the life of contractual rights and iron ore reserves. These are disclosed in the Consolidated Statement of Comprehensive Income within gains/losses on investments held at fair value through profit or loss.
Where the Group has elected to receive its dividends in the form of additional shares rather than in cash, the cash equivalent of the dividend is recognised as income. Any excess in the value of the shares received over the amount of the cash dividend is recognised in capital.
Underwriting commission receivable is taken into account on an accruals basis.
(f) Expenses
All expenses, including finance costs, are accounted for on an accruals basis. Expenses have been charged wholly to the revenue column of the Consolidated Statement of Comprehensive Income, except as follows:
-
expenses which are incidental to the acquisition or sale of an investment are charged to the capital column of the Consolidated Statement of Comprehensive Income. Details of transaction costs on the purchases and sales of investments are disclosed within note 10 to the financial statements on page 81 of the Annual Report and Financial Statements;
-
expenses are treated as capital where a connection with the maintenance or enhancement of the value of the investments can be demonstrated;
-
the investment management fee and finance costs have been allocated 75% to the capital column and 25% to the revenue column of the Consolidated Statement of Comprehensive Income in line with the Board’s expectations of the long-term split of returns, in the form of capital gains and income, respectively, from the investment portfolio.
(g) Taxation
The tax expense represents the sum of the tax currently payable and deferred tax. The tax currently payable is based on the taxable profit for the year. Taxable profit differs from net profit as reported in the Consolidated Statement of Comprehensive Income because it excludes items of income or expenses that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Group’s liability for current tax is calculated using tax rates that were applicable at the balance sheet date.Where expenses are allocated between capital and revenue, any tax relief in respect of the expenses is allocated between capital and revenue returns on the marginal basis using the Company’s effective rate of corporation tax for the accounting period.
Deferred taxation is recognised in respect of all temporary differences that have originated but not reversed at the financial reporting date, where transactions or events that result in an obligation to pay more tax in the future or right to pay less tax in the future have occurred at the financial reporting date. This is subject to deferred taxation assets only being recognised if it is considered more likely than not that there will be suitable profits from which the future reversal of the temporary differences can be deducted. Deferred taxation assets and liabilities are measured at the rates applicable to the legal jurisdictions in which they arise.
(h) Investments held at fair value through profit or loss
The Company’s investments, including contractual rights, designated upon initial recognition as held at fair value through profit or loss in accordance with IFRS 9 – ‘Financial Instruments’, are managed and evaluated on a fair value basis in accordance with its investment strategy.All investments, including contractual rights, are initially and subsequently measured at fair value through profit or loss. Purchases of investments are recognised on a trade date basis. Contractual rights are recognised on the completion date, where a purchase of the rights is under a contract, and are initially measured at fair value excluding transaction costs. Sales of investments are recognised at the trade date of the disposal.
The fair value of the financial investments is based on their quoted bid price at the financial reporting date, without deduction for the estimated future selling costs. This policy applies to all current and non-current asset investments held by the Group.
The gains and losses from changes in fair value of contractual rights are taken to the Consolidated Statement of Comprehensive Income and arise as a result of the revaluation of the underlying cost of the contractual rights, changes in commodity prices and changes in estimates of proven and probable reserves specifically associated with the mine.
Under IFRS, the investment in the subsidiary in the Company’s Statement of Financial Position is fair valued which is deemed to be the net asset value of the subsidiary. Changes in the value of investments held at fair value through profit or loss and gains and losses on disposal are recognised in the Consolidated Statement of Comprehensive Income as net profits or losses on investments held at fair value through profit or loss. Also included within the heading are transaction costs in relation to the purchase or sale of investments.
For all financial instruments not traded in an active market, the fair value is determined by using various valuation techniques. Valuation techniques include market approach (i.e., using recent arm’s length market transactions adjusted as necessary and reference to the current market value of another instrument that is substantially the same) and the income approach (i.e., discounted cash flow analysis and option pricing models making use of available and supportable market data as possible). Where no reliable fair value can be estimated for such instruments, they are carried at cost subject to any provision for impairment.
(i) Options
Options are held at fair value based on the bid/offer prices of the options written to which the Group is exposed. The value of the option is subsequently marked-to-market to reflect the fair value of the option based on traded prices. Where the premium is taken to revenue, an appropriate amount is shown as capital return such that the total return reflects the overall change in the fair value of the option. When an option is exercised the gain or loss is accounted for as a capital gain or loss. Any cost on closing out an option is transferred to revenue along with any remaining unamortised premium.(j) Other receivables and other payables
Other receivables and other payables do not carry any interest and are short–term in nature and are accordingly stated at their nominal value.(k) Dividends payable
Under IFRS, final dividends should not be accrued in the financial statements unless they have been approved by shareholders before the financial reporting date. Interim dividends should not be accrued in the financial statements unless they have been paid.Dividends payable to equity shareholders are recognised in the Consolidated and Parent Company Statements of Changes in Equity.
(l) Foreign currency translation
Transactions involving foreign currencies are converted at the rate ruling at the date of the transaction. Foreign currency monetary assets and liabilities and non-monetary assets held at fair value are translated into sterling at the rate ruling on the financial reporting date. Foreign exchange differences arising on translation are recognised in the Consolidated Statement of Comprehensive Income as a revenue or capital item depending on the income or expense to which they relate. For investment transactions and investments held at the year end, denominated in a foreign currency, the resulting gains or losses are included in the profit/(loss) on investments held at fair value through profit or loss in the Consolidated Statement of Comprehensive Income.(m) Cash and cash equivalents
Cash comprises cash in hand, bank overdrafts and on demand deposits. Cash equivalents are short–term, highly liquid investments that are readily convertible to known amounts of cash and that are subject to an insignificant risk of changes in value. Bank overdrafts are shown separately on the Consolidated and Parent Company Statements of Financial Position.(n) Bank borrowings
Bank overdrafts and loans are recorded as the proceeds received. Finance charges, including any premium payable on settlement or redemption and direct issue costs, are accounted for on an accruals basis in the Consolidated Statement of Comprehensive Income using the effective interest rate method and are added to the carrying amount of the instrument to the extent that they are not settled in the period in which they arise.(o) Offsetting
Financial assets and financial liabilities are offset and the net amount reported in the Consolidated and Parent Company Statements of Financial Position if there is a currently enforceable legal right to offset the recognised amounts and there is an intention to settle on a net basis, or to realise the asset and settle the liability simultaneously.(p) Critical accounting estimates and judgements
The Group makes estimates and assumptions concerning the future. The resulting accounting estimates and assumptions will, by definition, seldom equal the related actual results. Estimates and judgements are regularly evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are addressed below.Fair value of unquoted financial instruments
When the fair values of financial assets and financial liabilities recorded in the Consolidated and Parent Company Statements of Financial Position cannot be derived from active markets, their fair value is determined using a variety of valuation techniques that include the use of valuation models.(a) The fair value of the OZ Minerals Brazil contractual rights was assessed by an independent valuer with a recognised and relevant professional qualification. The inputs to these models are taken from observable markets where possible, but where this is not feasible, estimation is required in establishing fair values. The estimates include considerations of production profiles, commodity prices, cash flows and discount rates. Changes in assumptions about these factors could affect the reported fair value of financial instruments in the Consolidated and Parent Company Statements of Financial Position and the level where the instruments are disclosed in the fair value hierarchy. To assess the significance of a particular input to the entire measurement, the external valuer performs sensitivity analysis.
(b) The investment in the subsidiary company was valued based on the net assets of the subsidiary company, which is considered appropriate based on the nature and volume of transactions in the subsidiary company.
The key assumptions used to determine the fair value of the unquoted financial instruments and sensitivity analyses are provided in note 11.
3. INCOME
| 2018 £’000 |
2017 £’000 |
|
| Investment income: | ||
| UK listed dividends | 10,806 | 9,071 |
| Overseas listed dividends | 12,245 | 10,495 |
| Overseas listed special dividends | 396 | 628 |
| Income from contractual rights (OZ Minerals Royalty) | 2,294 | 2,438 |
| Fixed income | 6,308 | 5,385 |
| ------------- | ------------- | |
| 32,049 | 28,017 | |
| ------------- | ------------- | |
| Other income: | ||
| Option premium income | 6,129 | 6,093 |
| Deposit interest | 36 | 5 |
| Underwriting commission | 188 | 35 |
| Securities lending income | 172 | 19 |
| Loss on investment dealing | (380) | – |
| ------------- | ------------- | |
| 6,145 | 6,152 | |
| ------------- | ------------- | |
| Total income | 38,194 | 34,169 |
| ======= | ======= |
During the year, the Group received cash option premiums totalling £5,874,000 (2017: £6,140,000) for writing options for the purposes of revenue generation. Option premiums of £6,129,000 (2017: £6,093,000) were amortised to revenue. At 31 December 2018, there were two (2017: three) open positions with an associated liability of £312,000 (2017: £604,000).
Dividends and interest received in cash during the year amounted to £23,675,000 and £6,060,000 respectively (2017: £21,538,000 and £5,964,000).
No special dividends have been recognised in capital (2017: nil).
4. INVESTMENT MANAGEMENT FEES
| 2018 | 2017 | |||||
| Revenue £’000 |
Capital £’000 |
Total £’000 |
Revenue £’000 |
Capital £’000 |
Total £’000 |
|
| Investment management fee | 1,454 | 4,587 | 6,041 | 1,500 | 4,774 | 6,274 |
| ------------- | ------------- | ------------- | ------------- | ------------- | ------------- | |
| Total | 1,454 | 4,587 | 6,041 | 1,500 | 4,774 | 6,274 |
| ======= | ======= | ======= | ======= | ======= | ======= | |
The management fee (which includes all services provided by BlackRock) is 0.8% of the Company’s net assets. However, in the event that the NAV per share increases on a quarter–on–quarter basis, the fee will then be paid on gross assets for the quarter. During the year £5,830,000 (2017: £5,707,000) of the investment management fee was generated from net assets and £211,000 (2017: £567,000) from the gearing effect on gross assets due to the quarter–on–quarter increase in the NAV per share during the year as below:
Quarter end |
Cum income NAV per share (pence) |
Quarterly increase/ (decrease) % |
Gearing effect on management fees (£) |
| 31 December 2017 | 456.01 | ||
| 31 March 2018 | 413.33 | -9.4 | – |
| 30 June 2018 | 445.79 | +7.9 | 211,000 |
| 30 September 2018 | 426.19 | -4.4 | – |
| 31 December 2018 | 388.81 | -8.8 | – |
| ======= | ======= | ======= |
The average of the net assets under management during the year ended 31 December 2018 was £755,993,000 (2017: £727,890,000). The fee is allocated 25% to the revenue column and 75% to the capital column of the Consolidated Statement of Comprehensive Income.
5. OTHER OPERATING EXPENSES
| 2018 £’000 |
2017 £’000 |
|
| Allocated to revenue | ||
| Custody fee | 127 | 115 |
| Auditors’ remuneration: | ||
| – audit services | 33 | 31 |
| – non–audit services1 | 7 | 6 |
| Registrar’s fee | 87 | 78 |
| Directors’ emoluments2 | 221 | 217 |
| AIC fees | 20 | 20 |
| Broker fees | 25 | 25 |
| Depositary fees | 88 | 82 |
| FCA fee | 18 | 16 |
| Directors’ insurance | 22 | 25 |
| Marketing fees | 139 | 93 |
| Stock exchange fees | 19 | 15 |
| Legal and professional fees | 67 | 17 |
| Bank facility fees3 | 72 | 154 |
| Other administrative costs | 80 | 85 |
| ------------- | ------------- | |
| 1,025 | 979 | |
| ------------- | ------------- | |
| Allocated to capital | ||
| Custody transaction charges | 14 | 4 |
| ------------- | ------------- | |
| 1,039 | 983 | |
| ------------- | ------------- | |
| The Company’s ongoing charges, calculated as a percentage of average net assets and using expenses, excluding finance costs, transaction costs and taxation were4: | 0.93% | 1.00% |
| ------------- | ------------- | |
| The Company’s ongoing charges, calculated as a percentage of average gross assets and using expenses, excluding finance costs, transaction costs and taxation were5: | 0.82% | 0.88% |
| ======= | ======= |
1 Fees paid to the auditors for non–audit services of £6,580 excluding VAT (2017: £6,390) relate to the review of the half yearly financial statements.
2 Details of the Directors’ emoluments are given in the Directors’ Remuneration Report on page 46 of the Annual Report and Financial Statements. Emoluments include taxable benefits for reimbursement of expenses.
3 There is a 4 basis point facility fee chargeable on the full facility amount whether drawn or undrawn.
4 Ongoing charges based on net assets represent the management fee and all other operating expenses, excluding finance costs, transaction charges and taxation, as a % of average net assets.
5 Ongoing charges based on gross assets represent the management fee and all other operating expenses, excluding finance costs, transaction costs and taxation, as a % of average gross assets. Gross assets are calculated based on net assets during the year before deduction of the bank overdraft and loans.
For the year ended 31 December 2018, expenses of £14,000 (2017: £4,000) were charged to the capital column of the Consolidated Statement of Comprehensive Income. These relate to costs charged by the custodian on sale and purchase trades.
6. FINANCE COSTS
| 2018 | 2017 | |||||
| Revenue £’000 |
Capital £’000 |
Total £’000 |
Revenue £’000 |
Capital £’000 |
Total £’000 |
|
| Interest on bank loans | 779 | 2,312 | 3,091 | 495 | 1,484 | 1,979 |
| Interest on bank overdraft | 19 | 57 | 76 | 17 | 51 | 68 |
| ------------- | ------------- | ------------- | ------------- | ------------- | ------------- | |
| Total | 798 | 2,369 | 3,167 | 512 | 1,535 | 2,047 |
| ======= | ======= | ======= | ======= | ======= | ======= | |
Finance costs are charged 25% to the revenue column and 75% to the capital column of the Consolidated Statement of Comprehensive Income.
7. DIVIDENDS
Record date |
Payment date |
2018 £’000 |
2017 £’000 |
|
| Final dividend of 6.60p per share for the year ended 31 December 2017 (2016: 9.00p) | 23 March 2018 | 10 May 2018 | 11,646 | 15,881 |
| 1st interim dividend of 3.00p per share for the year ended 31 December 2018 (2017: 3.00p) | 1 June 2018 | 29 June 2018 | 5,294 | 5,294 |
| 2nd interim dividend of 3.00p per share for the year ended 31 December 2018 (2017: 3.00p) | 24 August 2018 | 21 September 2018 | 5,293 | 5,293 |
| 3rd interim dividend of 3.00p per share for the year ended 31 December 2018 (2017: 3.00p) | 23 November 2018 | 21 December 2018 | 5,290 | 5,294 |
| -------------- | -------------- | |||
| 27,523 | 31,762 | |||
| ======== | ======== |
The total dividends payable in respect of the year ended 31 December 2018 which form the basis of section 1158 of the Corporation Tax Act 2010 and section 833 of the Companies Act 2006, and the amounts proposed, meet the relevant requirements as set out in this legislation.
Dividends paid, proposed or declared on equity shares: |
2018 £’000 |
2017 £’000 |
| 1st interim dividend of 3.00p per share for the year ended 31 December 2018 (2017: 3.00p) | 5,294 | 5,294 |
| 2nd interim dividend of 3.00p per share for the year ended 31 December 2018 (2017: 3.00p) | 5,293 | 5,293 |
| 3rd interim dividend of 3.00p per share for the year ended 31 December 2018 (2017: 3.00p) | 5,290 | 5,294 |
| Final interim dividend of 9.00p per share for the year ended 31 December 2018 (2017: final dividend 6.60p)* | 15,870 | 11,646 |
| ------------------ | ------------------ | |
| 31,747 | 27,527 | |
| ========== | ========== |
* Based on 176,330,242 (2017: 176,455,242) ordinary shares in issue on 28 February 2019.
8. CONSOLIDATED EARNINGS AND NET ASSET VALUE PER ORDINARY SHARE
| 2018 | 2017 | |
| Net revenue profit attributable to ordinary shareholders (£’000) | 32,013 | 28,093 |
| Net capital (loss)/profit attributable to ordinary shareholders (£’000) | (123,100) | 130,770 |
| ------------------ | ------------------ | |
| Total (loss)/profit attributable to ordinary shareholders (£’000) | (91,087) | 158,863 |
| ------------------ | ------------------ | |
| Equity shareholders' funds (£’000) | 685,595 | 804,647 |
| ------------------ | ------------------ | |
| The weighted average number of ordinary shares in issue during the year, on which the earnings per ordinary share was calculated was: | 176,426,789 | 176,455,242 |
| The actual number of ordinary shares in issue at the year end, on which the net asset value per ordinary share was calculated was: | 176,330,242 | 176,455,242 |
| ------------------ | ------------------ | |
| Earnings/(loss) per share | ||
| Revenue earnings per share (pence) | 18.15 | 15.92 |
| Capital (loss)/profit per share (pence) | (69.78) | 74.11 |
| ------------------ | ------------------ | |
| Total (loss)/profit per share (pence) | (51.63) | 90.03 |
| ========== | ========== |
| As at 31 December 2018 |
As at 31 December 2017 |
|
| Net asset value per ordinary share (pence) | 388.81 | 456.01 |
| -------------- | -------------- | |
| Ordinary share price (pence) | 340.50 | 397.75 |
| ======== | ======== |
There were no dilutive securities at the year end.
9. CALLED UP SHARE CAPITAL
| Number of Ordinary shares |
Treasury shares |
Total shares |
Nominal value £’000 |
|
| Allotted, called up and fully paid share capital comprised: | ||||
| Ordinary shares of 5p each | ||||
| At 31 December 2017 | 176,455,242 | 16,556,600 | 193,011,842 | 9,651 |
| Shares purchased into treasury | (125,000) | 125,000 | – | – |
| ----------------- | ----------------- | ----------------- | ----------------- | |
| At 31 December 2018 | 176,330,242 | 16,681,600 | 193,011,842 | 9,651 |
| ========== | ========== | ========== | ========== |
During the year 125,000 shares were bought back and transferred to treasury for a total consideration of £442,000 (2017: no ordinary shares were issued, purchased or cancelled). No shares have been purchased since the year end, up to and including the date of this report.
10. RESERVES
Group |
Share premium account £’000 |
Capital redemption reserve £’000 |
Distributable reserves | |||
Special reserve £’000 |
Capital reserve – arising on investments sold £’000 |
Capital reserve – arising on revaluation of investments held £’000 |
Revenue reserve £’000 |
|||
| At 31 December 2017 | 127,155 | 22,779 | 114,589 | 321,764 | 174,637 | 34,072 |
| Movement during the year: | ||||||
| Total comprehensive income: | ||||||
| Net capital loss for the year | – | – | – | (69,637) | (53,463) | – |
| Net revenue profit for the year | – | – | – | – | – | 32,013 |
| Transactions with owners recorded directly to equity: | ||||||
| Ordinary shares purchased into | ||||||
| treasury | – | – | (439) | – | – | – |
| Share purchase costs | – | – | (3) | – | – | – |
| Dividends paid | – | – | – | – | – | (27,523) |
| -------------- | -------------- | -------------- | -------------- | -------------- | -------------- | |
| At 31 December 2018 | 127,155 | 22,779 | 114,147 | 252,127 | 121,174 | 38,562 |
| ======== | ======== | ======== | ======== | ======== | ======== | |
| Distributable reserves | ||||||
Company |
Share premium account £’000 |
Capital redemption reserve £’000 |
Special reserve £’000 |
Capital reserve – arising on investments sold £’000 |
Capital reserve – arising on revaluation of investments held £’000 |
Revenue Reserve £’000 |
| At 31 December 2017 | 127,155 | 22,779 | 114,589 | 321,763 | 182,122 | 26,588 |
| Movement during the year: | ||||||
| Total comprehensive income: | ||||||
| Net capital loss for the year | – | – | – | (69,637) | (53,762) | – |
| Net revenue profit for the year | – | – | – | – | – | 32,312 |
| Transactions with owners recorded directly to equity: | ||||||
| Ordinary shares purchased into | ||||||
| treasury | – | – | (439) | – | – | – |
| Share purchase costs | – | – | (3) | – | – | – |
| Dividends paid | – | – | – | – | – | (27,523) |
| -------------- | -------------- | -------------- | -------------- | -------------- | -------------- | |
| At 31 December 2018 | 127,155 | 22,779 | 114,147 | 252,126 | 128,360 | 31,377 |
| ======== | ======== | ======== | ======== | ======== | ======== | |
The share premium account and capital redemption reserve are not distributable profits under the Companies Act 2006. The special reserve and capital reserve may be used as distributable profits for all purposes and, in particular, the repurchase by the Company of its ordinary shares and for payments as dividends. In accordance with the Company’s Articles of Association, net capital returns may be distributed by way of dividend.
11. RISK MANAGEMENT POLICIES AND PROCEDURES
Valuation of financial instruments
Financial assets and financial liabilities are either carried in the Consolidated and Parent Company Statements of Financial Position at their fair value (investment and derivatives) or at an amount which is a reasonable approximation of fair value (due from brokers, dividends and interest receivable, due to brokers, accruals, cash at bank and bank overdrafts). IFRS 13 requires the Group to classify fair value measurements using a fair value hierarchy that reflects the significance of inputs used in making the measurements. The valuation techniques used by the Group are explained in the accounting policies note 2(h) to the Financial Statements.
Categorisation within the hierarchy has been determined on the basis of the lowest level input that is significant to the fair value measurement of the relevant asset.
The fair value hierarchy has the following levels:
Level 1 – Quoted market price for identical instruments in active markets
A financial instrument is regarded as quoted in an active market if quoted prices are readily and regularly available from an exchange, dealer, broker, industry group, pricing service, or regulatory agency, and those prices represent actual and regularly occurring market transactions on an arm’s length basis. The Group does not adjust the quoted price for these instruments.
Level 2 – Valuation techniques using observable inputs
This category includes instruments valued using quoted prices for similar instruments in markets that are considered less than active, or other valuation techniques where all significant inputs are directly or indirectly observable from market data.
Valuation techniques used for non-standardised financial instruments such as options, currency swaps and other over-the-counter derivatives include the use of comparable recent arm’s length transactions, reference to other instruments that are substantially the same, discounted cash flow analysis, option pricing models and other valuation techniques commonly used by market participants making the maximum use of market inputs and relying as little as possible on entity specific inputs.
Level 3 – Valuation techniques using significant unobservable inputs
This category includes all instruments where the valuation technique includes inputs not based on market data and these inputs could have a significant impact on the instrument’s valuation.
This category also includes instruments that are valued based on quoted prices for similar instruments where significant entity determined adjustments or assumptions are required to reflect differences between the instruments and instruments for which there is no active market. The determination of what constitutes ‘observable’ inputs requires significant judgement by the Investment Manager. The Investment Manager considers observable data to be that market data that is readily available, regularly distributed or updated, reliable and verifiable, not proprietary, and provided by independent sources that are actively involved in the relevant market.
The level in the fair value hierarchy within which the fair value measurement is categorised in its entirety is determined on the basis of the lowest level input that is significant to the fair value measurement. If a fair value measurement uses observable inputs that require significant adjustment based on unobservable inputs, that measurement is a Level 3 measurement.
Assessing the significance of a particular input to the fair value measurement in its entirety requires judgement, considering factors specific to the asset or liability.
Over-the-counter derivative option contracts have been classified as Level 2 investments as their valuation has been based on market observable inputs represented by the underlying quoted securities to which these contracts expose the Group.
Valuation process and techniques for Level 3 valuations
The Directors engage a mining consultant, an independent valuer with a recognised and relevant professional qualification, to conduct a periodic valuation of the contractual rights and the fair value of the contractual rights is assessed with reference to relevant factors. At the reporting date the income streams from contractual rights have been valued on the net present value of the pre-tax cash flows discounted at a rate the external valuer considers reflects the risk associated with the project. The valuation model uses discounted cash flow analysis which incorporates both observable and non-observable data. Observable inputs include assumptions regarding current rates of interest and commodity prices. Unobservable inputs include assumptions regarding production profiles, price realisations, cost of capital and discount rates. In determining the discount rate to be applied, the external valuer considers the country and sovereign risk associated with the project, together with the time horizon to the commencement of production and the success or failure of projects of a similar nature. To assess the significance of a particular input to the entire measurement, the external valuer performs a sensitivity analysis. The external valuer has undertaken an analysis of the impact of using alternative discount rates on the fair value of contractual rights.
This investment in contractual rights is reviewed regularly to ensure that the initial classification remains correct given the asset’s characteristics and the Group’s investment policies. The contractual rights are initially recognised using the transaction price as the best evidence of fair value at acquisition and are subsequently measured at fair value, taking into consideration the relevant IFRS 13 requirements. In arriving at their estimates of market values, the valuers have used their market knowledge and professional judgement. The Group classifies the fair value of this investment as Level 3.
Valuations are the responsibility of the Directors of the Company. In arriving at a final valuation, the Directors consider the independent valuer’s report, the significant assumptions used in the fair valuation and the review process undertaken by BlackRock’s Pricing Committee. The valuation of unquoted investments is performed on a quarterly basis by the Portfolio Managers and reviewed by the Pricing Committee of the Investment Manager. On a quarterly basis the Portfolio Managers will review the valuation of the contractual rights and inputs for significant changes. A valuation of contractual rights is performed annually by an external valuer, SRK Consulting (UK) Limited, and reviewed by the Pricing Committee of the Investment Manager. The valuations are also subject to quality assurance procedures performed within the Pricing Committee. On a semi-annual basis, after the checks above have been performed, the Investment Manager presents the valuation results to the Directors. This includes a discussion of the major assumptions used in the valuations. There were no changes in valuation techniques during the year.
Fair values of financial assets and financial liabilities
The table below sets out fair value measurements using the IFRS 13 fair value hierarchy.
| Financial assets/(liabilities) at fair value through profit or loss at 31 December 2018 – Group |
Level 1 £’000 |
Level 2 £’000 |
Level 3 £’000 |
Total £’000 |
| Assets: | ||||
| Equity | 676,645 | 6,101 | – | 682,746 |
| Fixed income securities | 74,017 | 3,250 | – | 77,267 |
| Investment in contractual rights | – | – | 18,513 | 18,513 |
| -------------- | -------------- | -------------- | -------------- | |
| 750,662 | 9,351 | 18,513 | 778,526 | |
| Liabilities: | ||||
| Derivative financial instruments – written options | – | (312) | – | (312) |
| -------------- | -------------- | -------------- | -------------- | |
| 750,662 | 9,039 | 18,513 | 778,214 | |
| ======== | ======== | ======== | ======== |
| Financial assets/(liabilities) at fair value through profit or loss at 31 December 2017 – Group |
Level 1 £’000 |
Level 2 £’000 |
Level 3 £’000 |
Total £’000 |
| Assets: | ||||
| Equity | 817,259 | 2,605 | – | 819,864 |
| Fixed income securities | 64,991 | 2,681 | – | 67,672 |
| Investment in contractual rights | – | – | 18,943 | 18,943 |
| -------------- | -------------- | -------------- | -------------- | |
| 882,250 | 5,286 | 18,943 | 906,479 | |
| Liabilities: | ||||
| Derivative financial instruments – written options | – | (604) | – | (604) |
| -------------- | -------------- | -------------- | -------------- | |
| 882,250 | 4,682 | 18,943 | 905,875 | |
| ======== | ======== | ======== | ======== |
| Financial assets/(liabilities) at fair value through profit or loss at 31 December 2018 – Company |
Level 1 £’000 |
Level 2 £’000 |
Level 3 £’000 |
Total £’000 |
| Assets: | ||||
| Equity | 673,733 | 6,101 | 8,686 | 688,520 |
| Fixed income securities | 74,017 | 3,250 | – | 77,267 |
| Investment in contractual rights | – | – | 18,513 | 18,513 |
| Liabilities: | -------------- | -------------- | -------------- | -------------- |
| 747,750 | 9,351 | 27,199 | 784,300 | |
| Liabilities: | ||||
| Derivative financial instruments – written options | – | (312) | – | (312) |
| -------------- | -------------- | -------------- | -------------- | |
| 747,750 | 9,039 | 27,199 | 783,988 | |
| ======== | ======== | ======== | ======== |
| Financial assets/(liabilities) at fair value through profit or loss at 31 December 2017 – Company |
Level 1 £’000 |
Level 2 £’000 |
Level 3 £’000 |
Total £’000 |
| Assets: | ||||
| Equity | 817,259 | 2,605 | 8,985 | 828,849 |
| Fixed income securities | 64,991 | 2,681 | – | 67,672 |
| Investment in contractual rights | – | – | 18,943 | 18,943 |
| -------------- | -------------- | -------------- | -------------- | |
| 882,250 | 5,286 | 27,928 | 915,464 | |
| Liabilities: | ||||
| Derivative financial instruments – written options | – | (604) | – | (604) |
| -------------- | -------------- | -------------- | -------------- | |
| 882,250 | 4,682 | 27,928 | 914,860 | |
| ======== | ======== | ======== | ======== |
A reconciliation of fair value measurement in Level 3 is set out below.
| Level 3 Financial assets at fair value through profit or loss at 31 December – Group |
2018 £’000 |
2017 £’000 |
| Opening fair value | 18,943 | 33,550 |
| Preference shares converted to equity and transferred to Level 1 | – | (13,482) |
| Disposals – Preference shares previously in Level 3 redeemed for cash | – | (6,396) |
| Total profit or loss included in net (loss)/profit on investments in the Consolidated Statement | ||
| of Comprehensive Income: | ||
| – assets disposed during the year | – | 6,245 |
| – assets held at the end of the year | (430) | (974) |
| -------------- | -------------- | |
| Closing balance | 18,513 | 18,943 |
| ======== | ======== |
| Level 3 Financial assets at fair value through profit or loss at 31 December – Company |
2018 £’000 |
2017 £’000 |
| Opening fair value | 27,928 | 42,535 |
| Preference shares converted to equity and transferred to Level 1 | – | (13,482) |
| Disposals – Preference shares previously in Level 3 redeemed for cash | – | (6,396) |
| Total profit or loss included in net (loss)/profit on investments in the Parent Company Statement of Comprehensive Income: | ||
| – assets disposed during the year | – | 6,245 |
| – assets held at the end of the year | (729) | (974) |
| -------------- | -------------- | |
| Closing balance | 27,199 | 27,928 |
| ======== | ======== |
Level 3 valuation process and techniques used are explained in the accounting policies in note 2(h). A more detailed description of the techniques is found on page 73 of the Annual Report and Financial Statements under ‘Valuation process and techniques’.
Quantitative information of significant unobservable inputs – Level 3 – Group and Company
Description |
2018 £’000 |
2017 £’000 |
Valuation Technique |
Unobservable Input |
| Discount rate – weighted average cost of capital |
||||
| OZ Minerals Brazil Royalty | 18,513 | 18,943 | Discounted cash flows |
Average gold and copper prices |
| -------------- | -------------- | -------------- | -------------- | |
| Investment in subsidiary company | 8,686 | 8,985 | Net assets | Net assets |
| ======== | ======== | ======== | ======== |
Sensitivity analysis to significant changes in unobservable inputs within Level 3 hierarchy
The significant unobservable inputs used in the fair value measurement categorised within Level 3 of the fair value hierarchy, together with an estimated quantitative sensitivity analysis, as at 31 December 2018 are as shown below. The rationale for the explanation of the illiquidity discount is given in the Investment Manager’s Report.
Description |
Input |
Estimated sensitivity used* |
Impact on fair value |
| OZ Minerals Brazil Royalty | Discount rate – weighted average cost of capital | 2018 – 1% | 2018 – £2.3m |
| 2017 – 1% | 2017 – £1.4m | ||
| Average gold and copper prices | 2018 – 10% | 2018 – £3.5m | |
| 2017 – 10% | 2017 – £3.7m | ||
| ========== | =========== |
* The sensitivity analysis refers to a percentage amount added or deducted from the input and the effect this has on the fair value.
The sensitivity impact on fair value is calculated based on the sensitivity estimates set out by the independent valuer in its report on the valuation of contractual rights. Significant increases/(decreases) in estimated commodity prices and discount rates in isolation would result in a significantly higher/(lower) fair value measurement. Generally, a change in the assumption made for the estimated value is accompanied by a directionally similar change in the commodity prices and discount rates.
12. CONTINGENT LIABILITIES
There were no contingent liabilities at 31 December 2018 (2017: nil).
13. PUBLICATION OF NON STATUTORY ACCOUNTS
The financial information contained in this announcement does not constitute statutory accounts as defined in the Companies Act 2006. The Annual Report and Financial Statements for the year ended 31 December 2018 will be filed with the Registrar of Companies after the Annual General Meeting.
The figures set out above have been reported upon by the auditor, whose report for the year ended 31 December 2018 contains no qualification or statement under section 498(2) or (3) of the Companies Act 2006.
The comparative figures are extracts from the audited financial statements of BlackRock World Mining Trust plc and its subsidiary for the year ended 31 December 2017, which have been filed with the Registrar of Companies. The report of the auditor on those financial statements contained no qualification or statement under section 498 of the Companies Act 2006.
14. ANNUAL REPORT AND FINANCIAL STATEMENTS
Copies of the Annual Report and Financial Statements will be published shortly and will be available from the registered office, c/o The Secretary, BlackRock World Mining Trust plc, 12 Throgmorton Avenue, London EC2N 2DL.
15. ANNUAL GENERAL MEETING
The Annual General Meeting of the Company will be held at 12 Throgmorton Avenue, London EC2N 2DL on Thursday, 2 May 2019 at 11.30 a.m.
ENDS
The Annual Report and Financial Statements will also be available on the BlackRock website at www.blackrock.co.uk/brwm. Neither the contents of the website nor the contents of any website accessible from hyperlinks on the website (or any other website) is incorporated into, or forms part of, this announcement.
For further information, please contact:
Simon White, Managing Director, Closed End Funds, BlackRock Investment Management (UK) Limited – Tel: 020 7743 5284
Evy Hambro, Fund Manager, BlackRock Investment Management (UK) Limited – Tel: 020 7743 4511
Emma Phillips, Media & Communications, BlackRock Investment Management (UK) Limited – Tel: 020 7743 2922
Press Enquiries:
Lucy Horne, Lansons Communications – Tel: 020 7294 3689
E-mail: lucyh@lansons.com
28 February 2019
12 Throgmorton Avenue
London EC2N 2DL
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