355. Why mining still matters in an increasingly volatile world

24 April 2025 (pre-recorded 16 April 2025)

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[INTRODUCTION]

Staci West (SW): Welcome back to the Investing on the go podcast brought to you by FundCalibre. This week we dive into the global mining sector, exploring the major trends shaping the future of commodities — from energy transition to shifting geopolitics.

Chris Salih (CS): I’m Chris Salih, and today we’re joined by Evy Hambro and Olivia Markham, who co-manage the Elite Rated BlackRock World Mining Trust, Evy and Olivia, thank you very much for joining us today.

Evy Hambro (EH): Thanks so much, Chris. Lovely to be back again.

Olivia Markham (OM): Good to see you Chris.

[INTERVIEW]

CS: Thank you. Let’s start with the big question across the board. It’s almost two weeks since Liberation Day. Everything is changing every day. So we are recording this on the 16th of April. I guess the open-ended question really is your thoughts on it and has it had any material impact on the construction of the portfolio in this new sort of climate?

EH: Yeah, I mean, I think I’ll say a couple of comments on this one. So, you know, I think the first thing to say with regards to what’s going on in Washington is that it’s anybody who tells you what’s gonna happen I wouldn’t necessarily believe them because I don’t think anybody knows at all. So we’re dealing with a news flow that is having impacts on markets. It’s creating higher levels of volatility. And it seems to be a couple of steps forward, couple of steps back, and sometimes one step forward and three steps back and three steps forward and one step back and so on. So I think trying to kind of adjust the portfolio to take advantage of that in the short term would be unwise. Because I don’t think there’s any information advantage or insights that you can have.

I think a more general thing is obviously this is creating disturbance to trading in terms of economic trading. So, you know, if you were gonna be buying cars now with tariffs attached, then they’re gonna cost more. If you wanna buy materials and there’s a tariff, you’re probably gonna try and buy it from a country where you don’t have to pay the tariff. So trade routes will be moved around, but the overall net impact is this is disruptive to to economic activity. It puts friction into the system, which is an additional cost.

And the question is how much of that flows out as in terms of an impact on inflation and what does that therefore mean for interest rates and equity risk premiums and so on. And then the kind of the other element that comes from this is what does this do to geopolitics? Where does, if you are aggressively focused on tariffs towards China, does China then lean into being closer to try to be closer to Europe et cetera. So how long these things take to kind of settle down the scale that they finally end up at. And the tensions that they create will be important.

But when it comes back to our portfolio, you know, we’ve been carrying a bit less risk which is a sensible thing to do given the uncertainty around tariffs. We’ve had a higher weighting towards gold and we’ve had that for quite a long time now, not just a few weeks, you know, a year or two. And so that’s been a positive for the portfolio. So we hope we’ve navigated it as well as we can.

CS: Okay. I wanna talk about one of the things you mentioned recently, which was that you felt one of the biggest challenges you’d seen in the past year was sort of the breakdown in the relationship between commodity prices and the share price of the companies that have produced them. Could you just explain that to the listeners and then perhaps is that the case across everything or is it certain areas of the commodity market?

OM: Yeah, Chris, I mean, we definitely saw last year, particularly as we moved into the last quarter, that there was really was a disconnect between the commodity prices and the share prices of the companies exposed to those commodities. I think this is probably most notable in gold. So if you have a look last year, you know, the gold price performed very strongly but a number of the gold equities actually finished the year down. And that disconnect, you know, part of it can be explained by things such as, you know, higher cost, not as much cashflow generation. But we really saw it as an opportunity and we use that opportunity which has turned out to be quite you know, fortuitous this year by actually adding back to some of those gold equities because of the disconnect and how they would normally trade with that underlying commodity price.

We saw some similar things happen in copper too, actually. You know, as we moved to that back end of the year some of the copper equities, you know, really started to perform a bit poorly relative to the copper price. And I think this kind of, to me, part of this has come back to concerns around noise of tariffs and what that could do to global growth. So I think as we kind of we’re navigating through this period, we are seeing disconnects between equities and a bit of equity de-rating relative to the underlying commodity prices. But over time, these do again and so we’re kind of, we’re selectively looking at opportunities there.

CS: Okay. I mean, you mentioned gold and copper. I mean, there are the two I wanna touch on in the next couple of questions. Gold and gold equities, obviously they’re account for about a quarter of the portfolio that sort of the end of the last annual report. I’m guessing that might have changed. Now there obviously is that disconnect. Do you look for any specific catalyst that might rerate the equities in the past 12 months? Or is there anything specific or do you just look purely at the price and go, you know, this is too attractive to turn down at this current level?

EH: That’s a good question. I think the journey on this has been quite interesting. You know, as Olivia just said, you know, sometimes you do get these these periods of time where the underlying performance of the commodity completely disconnects to the performance of the company producing that commodity. And you see it in the oil space and so on and so forth. And it’s a function of interest rates, equity risk, premium, et cetera that drive that. I think when it comes to the gold space, you know, we have seen significant divergence.

So we’ve seen a very, very strong gold price which has, you know, continually moved to higher levels. And the first part of that journey, you know, the gold companies were not converting those higher prices into higher margins. And as a result the gold companies were, you know, were significantly underperforming the price of gold at that point in time. And through to that point in time we had an underweight position towards the gold equity space because we were positive on the outlook on gold, but gold shares just were not delivering. As time went on, the gold price got to a level where it kind of broke through to a point where most gold companies should be able to capture that. So it had risen faster than the inflationary impacts and so on. And therefore the margin conversion was, or margin capture was gonna be higher in anticipation of that happening.

Given our positivity on gold, we started to build our gold ex gold equity exposure up and moved to a significantly overweight position in gold equities and principally through gold royalty names. And then through more broader exposure into the gold producers that position has continued. And, as you said, you know, we are a lot higher today than the 25% number than you talked about. You know, part of that is the move in gold equities versus the rest of the mining universe. And part of it is deliberate in terms of how we have positioned ourselves.

I think the other thing to do is we’ve also seen, not just what I mentioned in terms of the cost conversion, but we’ve seen this diversions between individual names. And so, you know, a company like Agnico Eagle, which is a big position for us, has done incredibly well. You know, they’ve been the kind of leader out of the larger gold producers. They’ve had this fantastic track record around being able to deliver. And you compare that to some of the other large producers who have materially underperforms that company. And that’s because they haven’t delivered operationally. They haven’t converted those higher me margins from the rising price. They’ve had operational challenges et cetera, et cetera. And that has led to underperformance.

So, you know, although you’ve been right, you could have been right to be in gold if you’ve been in a gold equity ETF, which has huge weightings towards these large caps, you would’ve underperformed because of that, so many of them haven’t been able to deliver what you had hoped they would be able to deliver. I think the phase that we’re going into now though is that, you know, with gold prices where they are right now, and you mentioned when we’re recording this, you know, gold’s at a new high you know, through 3,000, $300 an ounce, you know, gold companies should be, you know, printing cash at these numbers. And we would hope this starts to come back to shareholders in terms of dividends. And it’s been really interesting to see a large number of gold equity companies in out share buybacks as well. So there’s a lot of focus on shareholder returns here.

CS: Just quickly on that, just to want a quick point on that, you mentioned those buybacks. You also mentioned they should be printing money. If we don’t see enough of that, do we think M&A will pick up in that area again?

EH: Yeah, I mean, M&A is a constant in the sector. I’m showing my age here, but I started doing this job for over 30 years ago. The sector is much more fragmented than it is today. We’ve seen huge amounts of consolidation, you know, so a big gold company, you know, 30 years ago might have been doing half a million ounces of gold a year. A big company today’s doing 5 million ounces of gold a year. And that’s because they bought other businesses and so on. So there’s been massive consolidation. Is there room for more or there’s always room for more? But I think it’s gonna be much more targeted and focused. It it when it happens. So gold companies looking for specific assets they might wanna build into a portfolio or specific expiration projects et cetera. I think rather than just general consolidation, big for being bigger kind of thing.

CS: Okay. I wanna turn to the base metal side again. You have around 30% in copper. The story on copper, is it sort of, we reached record highs last year and that was supported by China’s focus on green spending. And if I’m right, it was sort of at record highs until sort of last month. And the story’s been that again, it’s suffered with what’s happened with Trump. And then I think only a couple of days ago there’s been a bit of renewed hope that there might be some exemptions, et cetera. Do you almost put the short term story in a bucket on the side and go, electrification, AI, all these things need copper. There’s only so much copper in the world, you know, just focus on that long term story when it comes to something like copper.

OM: I mean, copper has been an absolutely fascinating market. You know, in the last couple of years, I think, you know, as the world has become increasingly focused on electrification, they’ve recognised that copper is almost like a linchpin in that equation because we do need to see a significant amount of supply growth, and that’s a real challenge for the industry. So I think the long term fundamentals of the copper market look very healthy. You know, you’ll hear lots of companies talking about copper deficits in time, the need for higher copper prices. And I would support, you know, a lot of those you know, positive comments out there. But you’re absolutely right in the short term copper is kind of like the bellwether commodity for global demand. And as you go through an environment of trade wars it becomes just from a macro shorter term perspective, challenging for the copper price.

It’s been really interesting though when you actually have a look before we kind of had the tariffs being announced actually just how well the copper price performed. Actually at one point in time, the copper price was up more than the gold price year to date. And then if you look at the Comex or the US copper price up even, even higher that very quickly down wound on the back of tariffs. But actually when we kind of look into the physical market it still looks pretty healthy. Like you go to China premiums to bring copper into the country up at really, really healthy levels with all of this kind of distortion that’s gonna happen around trade flows and maybe scrap from the US being not allowed to go into China, it’s really gonna tighten things up.

So, you know, for us when we run portfolios, you really kind of where the alpha and kind of where we think we create the most performance is by kind of looking over the medium to longer term. It’s harder to pick those very, very short term trends in commodity price moves. So when we look out on that medium to longer term view, we see some great value in some of the corporate, but I think we have to also be, you know what’s the right word here? I think we can’t be ignorant to the fact that there’s a lot of volatility in the short term. So I think you’ve got to focus on companies that are pretty well capitalised. You know, they’re still generating positive free cash flow, that can weather the storm as you go through some shorter term volatility and price.

CS: When you want to take those longer term views. Do you think that volatility is an opportunity for you? I mean, you’ve got 30% now in copper, is it still an opportunity if you see those companies coming up with that long term story?

OM: Absolutely. I think one of the key things is that we’ve kept our overweight to copper as we’ve gone through the volatility. So, you know, there was some quite painful moves there and we actually selectively added to sort of exposure post the selloff. And the other thing that we also did is we stepped up our option writing to capture that volatility in the market and bank that through to income.

CS: Okay. I wanted to talk just quickly about a couple of features of the trust that perhaps people aren’t as aware of as maybe they would like to be. So let’s start with the first is that you have a sort of unquoted investment allocation within the portfolio. Could you just explain to listeners what that is and the benefits of it?

EH: Yeah, so we have kind of two parts of unquoted. The first is, which is the area we’ve done probably done most of through time is exposure to royalties. Now royalty is, you know, if you think about it, you know, a musician gets a royalty when they write a song. They, every time the song is played, they get a royalty check. And you know, obviously that’s pretty valuable to musicians. It’s part of their kind of their overall income stream. You know, we can also do royalty. There are royalties on people who invent pharmaceutical products and so on. And a royalty on a mining asset is, you know, a geologist might go and discover a new deposit of a mineral, and then somebody else might build the mine and the geologist might sell that deposit that they’ve discovered and they will get some cash from selling it.

And then every time that a unit of the mineral copper, gold, et cetera is produced, they’ll get a small payment and that’s effectively the royalty. So they’re exposed to the amount that’s produced, and obviously they’re exposed to the price that mineral trades at. And typically you can get 1%, 2%, 3% royalties on mineral assets. So we have some royalty exposure as part of our unquoted element of the portfolio principally to copper gold and iron ore. The three commodities that were exposed to.

Then the other part of the unquoted is to companies that aren’t yet listed on a public exchange. And so we have some small positions in companies that remain private but with the anticipation that those companies will IPO or will have a liquidity event at some point in the future. There are two names there. One is a copper technology company which has got exposure to cashflow today in terms of revenue today from the deployment to their technology. And we’re hoping that one can continue to grow. Another is an early stage copper exploration business which seems to be doing pretty well.

CS: And just quickly, do those companies come on your radar via your network? How do you…

EH: Yes, they do. Yeah, so I mean, I think we’re in a very fortunate position being that, you know, one of the largest investors in natural sources in the world. So the kind of the flow of opportunities that we see is pretty broad. So it does allow us to kind of pick and choose these, but we have a very, very tough valuation framework that we use. And as a result it’s, you know, we would love to do more, but being disciplined about how we do this is designed really to reflect the risk that you get from being exposed to illiquid companies.

OM: It also just on that in terms of some of those private companies we’ve actually had some great success over the last couple of years with two of those companies IPOing both at sort of a hundred percent higher than where our initial entry price was. So they have been a really good source of alpha, but once again, very selective in kind of the way that we we invest here.

CS: Okay. And then another element obviously that perhaps people don’t immediately associate is that you have a dividend portion of the portfolio. Could you maybe just explain what that looks like as well?

EH: Sure, yeah. I mean, dividends have been a very important part of the trust and the main kind of reason for that is that, what is the business of a mining company? Well, you find something, you develop it, you dig a hole in the ground ground, you produce the commodities, and if you don’t pay a dividend, then where do shareholders get their return? And so dividends are a very important part of the total return that a mining company can give to its shareholders. And so for us being an investor in a portfolio of mining companies, it’s really important that we maximise the income potential because then we’re exposed to the largest part of what you know is the return that mining companies generate through time.

And so we, in 2010 we sought to make sure that we sweated the portfolio as hard as possible to maximise the income potential while still being focused on the capital growth. And since then we’ve had this very, very strong dividend track record. You know, and this isn’t a fixed dividend. We pay out everything, you know, the language is that we pay out substantially all this is the director’s language of all of the income that’s generated during the year. So there is income volatility, you know, as companies pay us more or less, that is reflected through in our dividends. But what we have also tried to do is diversify our sources of income.

So we aren’t just beholden to the ordinary dividends that companies pay. You know, we get income from being invested in fixed income securities. We get income being from invested in the royalties that we have inside the portfolio that we just discussed. And we get income also from selling volatility as Olivia mentioned earlier on out the market. So where this sector is inherently volatile. So, because we’re always invested, we have a high degree of exposure to these names. So selling volatility to the market is a natural thing that we’re able to monetise. And that again, is diversification plus incremental growth in terms of our dividend. And, therefore if you think about 2016 when most mining companies cut their dividends to zero, we were still able to pay a very, very healthy dividend. And so what we’re doing is trying to soften that journey through time in terms of dividend and you know, 2024 was another great example where mining companies cut their dividends and our dividend fell because we had less income coming in. But it exceeded expectations we were able to pay out more than most people thought. And we hope we’re gonna be able to do the same in 2025 and going forward from there.

CS: Okay. I wanted to touch on a couple of countries, but maybe, perhaps not just necessarily in the tariff sort of sphere, but let’s start with China. Obviously it’s had a really strong six months until recently following a a tough period. Just sort of how important is China in terms of the outlook for mine commodities? Are the two integrated, how big a sort of focus is your sort of macro overlook on sort of an area like China when it comes to your general outlook on commodities?

OM: Yeah, so China is, you know, very key to the outlook for most commodities typically in the commodities that we’re investing in you know, they account for 50% or more of demand. So the direction of travel for China is something that we spend a lot of time looking at. And interesting we’ve just had China’s GDP for Q1 come out this morning and it’s running ahead of the 5% target for GDP growth for this year. So actual like activity on the ground in China following the stimulus measures at the end of last year is, you know, we are seeing a pickup.

And it’s quite interesting actually how China’s demand is evolving. You know, if you have a look back kind of 15 years ago, you know, China’s investment was very kind of properly focused focused early infrastructure and focus. Now as you look at how this spend is evolving, it’s very much going through to green infrastructure. You know, a lot of investments into the battery material, supply chain, EVs, wind, solar, advanced manufacturing. So as the economy develops as the consumer becomes wealthier, you know, their spending habits are changing. And that’s really important for us to understand because it kind of dictates what commodities we believe will benefit more than others. So we do spend a lot of time looking at this and we do think that, you know, China has got the kind of means and the firepower to keep on, you know, growing the economy in time at a lower rate than in the past. But you know, we, we continue to see, you know, still quite, you know, significant growth in areas like copper, like aluminium, even, you know, areas like steel as we go forward as well.

CS: Okay. We’ve also seen a bit of a pickup in infrastructure spending in Germany and a sort of broader trend towards onshore onshoring manufacturing in the us. Could you maybe just give us an insight into sort of how significant these develops are developments are for demand across the mining sector?

OM: Yeah, so I think this is quite an interesting theme that we expect to play out over a number of years. And part of it, I would say is in response to some of this tariff action, but we are seeing now increasing spend on infrastructure and onshoring of manufacturing across a range of developed economies.

More recently we’ve obviously had announcements out of Europe, most notably out of Germany, where they’re proposing to spend $500 billion on infrastructure. And that is a very significant number relative to where they have been in the past. So if we have a look back over the last decade, I’d say been almost two decades, some of these developed economies have not spent the appropriate amount of money on infrastructure. And their overall share of commodity demand has declined.

As China has accelerated, we think that we’re gonna say see, you know, a rebasing of some of this as we move forward and, you know efforts around tariffs and protectionism requires domestic spending again. So I very much we see kind of like a a rewiring, a rebasing of where commodity demand is going to by virtue of country as opposed to being a heavily dominated China in a story like it’s been for the last decade.

CS: Okay. And so one other area I wanted to focus on was the uranium, which sort of counts from almost 4% of the portfolio, or it did, I’m not sure it still does. Should we expect nuclear energy to sort of play a greater role in those sort of energy transition from this point?

OM: Yes, there’s definitely been a renaissance in uranium and nuclear more broadly. And maybe for people who aren’t as familiar with nuclear, you know, it is the single source of zero emissions base load power, so it does very much feel like it should fit within, you know, the kinda the energy transition and the broader energy mix going forward. So we are seeing increased focus on nuclear. You’re seeing a lot of the tech hyper-scalers look to use nuclear to power their data centres that they intend to build over the next 5, 10, 15 years. And that will require over time increased investment into uranium. We’ve seen the uranium spot price you know, move up from sub $50 a pound two years ago to to closer to $80 a pound now. And we’re also just seeing a pickup in contracting activity and contracting activity and investments across the entire nucleus supply chain more broadly. So yes, we have a position you know, we’ve really just focused on a single producer here who is the only uranium producer who is fully integrated across the entire nuclear value chain. And it’s an area that we’re continuing to watch because I do think it’ll be a source of growth for the future.

CS: Just quickly you mentioned the spot price there, do you still think it’s cheap versus history or is it hard to gauge versus history now given the story that you think it’s starting to be involved in terms of the energy transition?

OM: Yeah, I think it can be a little dangerous actually for a lot of commodities to always look at the current price versus history, because really important to focus on the margins for the producers. And there has been a lot of cost inflation and capital cost inflation across the space. As we look forward and we think about the amount of new uranium supply that will need to be added to the market and the cost of delivering those pounds into the market you need a price around this level or higher to be able to incentivise a lot of that supply in. So, you know, I wouldn’t say it’s at all expensive now.

CS: I wanted to finish with M&A. We touched on it a bit earlier, obviously it’s a big part of the market, but how sort of involved have you been in the past couple of years and do you think the sort of story around M&A will continue? Do you expect it to grow in the next couple of years as well?

EH: Yeah, I think we both make some comments on this. I think the first thing to say is that, M&A has been a feature of this sector and every other sector for years. And so I don’t think it’s gonna be any different. One thing that you know, I think has been on our mind is that, you know, if we look at the kind of the M&A journey through time, you know, there was a kind of the peak of of deployment of capital and money towards M&A in the kind of China related cycle in the early 2000s. And then the kind of, that ended in 2011 and we had this period of, I guess austerity in terms of activity going through to kind of 2015, 2016, and then the sector really sought to kind of recapitalise, rebuild, trust and so on. And so there wasn’t much for, for quite, for many years, but we have seen a pickup just recently.

I think one thing we need to be conscious of is we just need to watch out for companies doing ill disciplined capital allocation. And, you know, where deals make sense, obviously that’s fine, but when it’s companies looking, just buy other businesses just for the sake of getting bigger, you know, or spending too much money on a transaction so you’re not gonna get a return. That’s what we’re really keeping an eye on it. And at the moment, you know, we aren’t seeing that happening, but there are signs that companies are looking to start overspending, whether that’s internal growth projects or building or you know, internal growth projects, building assets or looking to buy businesses. And if we were to see a deterioration in balance sheet strength, balance, you know, or companies not being as disciplined in deploying capital, then that would be an alarm sign for us. But I’ll let Olivia comment on last year.

OM: Yeah, so I mean, we had a number of deals last year. Some of those are in the gold space. We also saw some action in the competence space as well. I think most notable was BP’s approach for, for Anglo-American last year. You know, when we kind of look at M&A, I think a really interesting thing to look at is, what is the cost of building new capacity versus buying that capacity through buying a company. And when we see some of the capital cost inflation and the rise in capital intensity of building new copper projects, actually that kind of buy versus build argument becomes quite interesting to us. So, you know, I think that that is something that the corporates are constantly looking at. I think also when we look at M&A sort of going forward projects and growth are becoming more challenging and they’re becoming this sort of more technically challenging.

And actually having just the expertise within your company to be able to develop these projects becomes a bit tougher. So I think also, you know, once again, combining with other companies to kind of develop projects also makes sense as well. And I think the other thing too, which is, is also quite interesting to think about is, you know, companies that look at M&A for growth provide, you know, obviously they need to be sensible in terms of the valuation that they’re planning and the returns that they’re targeting. But you know, for every dollar that’s spent on M&A, that’s a dollar that’s not spent on adding new supply. So it also tightens up those commodity markets as well. And I, and I think that the corporates are very aware of that, that too. So, you know, the volatility that we’ve seen always, opportunities are thrown up and, and I would, I would think that M&A remains a part of the market this year as well.

CS: Evy and Olivia, thank you very much for your time today. I have a whole load of more questions, but I appreciate that we’ve only got so much time today, but I really appreciate you spending some of it with us.

OM: Thanks so much, Chris.

EH: Yeah, thanks a lot.

SW: BlackRock World Mining is a specialist trust offering exposure to mining and metals companies globally. It also offers an attractive dividend yield to investors. For more information on the BlackRock World Mining Trust, please visit fundcalibre.com – and don’t forget to subscribe to the Investing on the go podcast, available wherever you get your podcasts.