BlackRock looks to royalties to revive mining fund

The £1 billion BlackRock World Mining Trust has proposed that its ability to invest in mining royalties be increased in an attempt to boost its performance.

The fund has generated negative total returns over one, three and five-year timeframes amid a slump in commodity prices, albeit that it has fared relatively better than its peer group.

In an effort to turn its fortunes around, the fund is seeking permission from its shareholders to invest more of its portfolio in royalty deals.

Under such arrangements, the fund provides financing for a mining project in return for a cut of that project’s future revenues from the operator.

This means the fund is not exposed to any volatility in the operator’s share price, as would be the case in a standard equity investment. It equally insulates the fund from cost pressures on the mining company or any disastrous acquisitions it might make, although it is still exposed to fluctuations in commodity prices.

BlackRock also views royalty contracts as a way to enhance the income generated by the fund, which can in turn be distributed to shareholders.

The World Mining Trust entered into such a transaction in July 2012, whereby it took 2 per cent of the revenues from an iron ore mine run by London Mining (LON:LOND) in Sierra Leone.

Now the fund is looking for explicit authorisation from its shareholders to devote up to 20 per cent of its gross assets to unquoted investments, which could encompass royalties. Currently it is limited to a maximum allocation of 10 per cent, of which it is using 8.76 per cent, to such instruments.

BlackRock clarified that although this change would allow it to invest a fifth of its portfolio in derivatives and physical assets, which are also classified as unquoted, it expected to use the quota ‘principally’ for royalties.

The proposal will be put to the fund’s shareholders at a general meeting on Wednesday 21 August 2013.