BlackRock World Mining Trust Plc - Final Results
PR Newswire
London, February 25
BlackRock World Mining Trust plc LEI - LNFFPBEUZJBOSR6PW155
Annual Results Announcement (Article 4 Transparency Directive, DTR 4.1)
for the year ended 31 December 2019
PERFORMANCE RECORD
| 31 December 2019 | 31 December 2018 | |
| Net assets (£'000)¹ | 757,110 | 685,595 |
| Net asset value per ordinary share (NAV) (pence) | 433.17 | 388.81 |
| Ordinary share price (mid-market) (pence) | 383.00 | 340.50 |
| Discount to net asset value2,3 | 11.6% | 12.4% |
| Performance | ||
| Net asset value per share (total return)3 | +17.2% | -11.5% |
| Ordinary share price (total return)3 | +19.4% | -10.7% |
| ============ | ============ |
1 The change in net assets reflects market movements, dividends paid and the buyback of ordinary shares into treasury during the year.
2 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 in the Annual Report and Financial Statements.
3 Alternative Performance Measures, see Glossary in the Annual Report and Financial Statements. Total return performance figures are calculated in sterling terms with dividends reinvested.
| Year ended 31 December 2019 | Year ended 31 December 2018 | Change % | |
| Revenue | |||
| Net revenue profit after taxation (£'000) | 39,561 | 32,013 | +23.6 |
| Revenue return per ordinary share (pence) | 22.46 | 18.15 | +23.7 |
| Dividend per ordinary share (pence) | |||
| - 1st interim | 4.00 | 3.00 | +33.3 |
| - 2nd interim | 4.00 | 3.00 | +33.3 |
| - 3rd interim | 4.00 | 3.00 | +33.3 |
| - Final | 10.00 | 9.00 | +11.1 |
| Total dividends paid and payable | 22.00 | 18.00 | +22.2 |
| ============ | ============ | ============ |
CHAIRMAN'S STATEMENT
I am pleased to report that 2019 was a record year for the Company in terms of revenue earnings per share and income available for distribution to shareholders. As a result, the Directors have recommended an annual dividend which is up 22.2% on last year.
PERFORMANCE
Over the twelve months to 31 December 2019, the Company's net asset value per share (NAV) returned 17.2%1 and the share price 19.4%1 (both percentages calculated in sterling terms with dividends reinvested). By way of reference, over the same period the EMIX Global Mining Index (net return) increased by 22.1%, a 'UCITS capped' version of the MSCI ACWI Metals & Mining 30% Buffer 10/40 Index (net return) returned 15.3%, the FTSE All-Share Total Return Index returned 19.2% and the UK Consumer Price Index (CPI) increased by 1.3%. A discussion on which indices might be considered useful as references in future is set out later in this statement.
As mentioned in the interim report, the mining sector started the year strongly as mined commodity prices recovered after a challenging end to 2018. However, towards the end of the summer, the sector fell on the back of deteriorating global economic activity. In the last couple of months of the year, sentiment began to turn on a perceived easing of geopolitical tensions and confidence increased as the US and China agreed more positive terms for a trade deal.
A detailed commentary on the portfolio's performance, its positioning and the investment outlook for the forthcoming year can be found in the Investment Manager's Report. Since the year end and up until the close of business on 25 February 2020, the Company's NAV has decreased by 6.9%.
¹Alternative Performance Measures. Further details of the calculation of performance with dividends reinvested are given in the Glossary in the Annual Report and Financial Statements.
REVENUE RETURN AND DIVIDENDS
The Company's revenue return per share for the year amounted to 22.46p compared with 18.15p for the previous year, representing an increase of 23.7%, a record high for the Company. This was due to increased dividend payments from portfolio companies, including additional special dividends, supplemented by option writing income and a 104.2% increase in returns from royalty related instruments.
During the year, three quarterly interim dividends each of 4.00p per share were paid on 28 June 2019, 1 October 2019 and 20 December 2019. The Board is proposing a final dividend payment of 10.00p per share for the year ended 31 December 2019. This, together with the quarterly interim dividends, makes a total of 22.00p per share (2018: 18.00p per share) representing an increase of 22.2% on payments made in the previous financial year and, as in past years, all dividends are fully covered by income. This level of dividend makes a new high in annual payments with the previous high being 21.00p per share.
Shareholders should be aware that the Company has a policy of maximising total return through the cycle and 2019 presented an opportunity to do so in relation to the income component of returns. While the Company seeks to diversify sources of revenue, it will continue to receive the majority of its income from dividends on its investments. Decisions on whether to invest in higher yielding investments or those expected to provide higher capital growth (and produce a higher total return) will affect the Company's income. In particular, dividend income may be affected by special dividends which in the year amounted to 3.8p per share. As a result, shareholders should appreciate that in future years there is no certainty that the current level of income will be maintained and the Board does not have a progressive dividend policy.
Subject to approval at the Annual General Meeting, the final dividend will be paid on 7 May 2020 to shareholders on the Company's register on 20 March 2020, the ex-dividend date being 19 March 2020. It remains the Board's intention to seek to distribute substantially all of the Company's available income.
DISCOUNT
The Directors recognise the importance to investors that the market price of the Company's shares should not trade at a significant discount to the underlying NAV and therefore, in normal market conditions, will consider the repurchase of shares when it believes it is in shareholders' interests. The second half of 2019 presented an opportunity to take advantage of a widened discount. Share repurchases were therefore commenced to capitalise on the situation. During the year, a total of 1,545,515 shares were purchased at an average price of 356.08p per share for a total gross consideration of £5,546,000. Subsequent to the year end, a further 979,707 shares have been purchased for a total consideration of £3,673,000. All shares have been placed in treasury. The average discount for the year to 31 December 2019 was 13.9% and the discount at the year end was 11.6%. At 25 February 2020 the discount was 11.9%.
The Company currently has authority to buy back up to 14.99% of the issued share capital, excluding treasury shares, and the Board is proposing that the existing authority be renewed at the forthcoming Annual General Meeting. No shares were issued or sold from treasury during the year ended 31 December 2019 or up to the date of this report.
REFERENCE INDICES
My interim statement discussed the drawbacks of comparing the Company's performance over the short term with an 'all-equity' reference index. Our Portfolio Managers' approach to investing in the sector will encompass a range of different mining securities, including fixed income investments, royalties and traded options. As a consequence, we already provide a number of indices as potential yardsticks for comparison, including the all-equity EMIX Global Mining Index (which was previously the Euromoney Global Mining Index).
After examining the range of possible 'all-equity' reference indices which are based on the mining sector, the Board believes that an index which restricts the size of any one position in line with the UCITS diversification rules would be better aligned to the Portfolio Managers' belief in the benefits of stock level diversification and the Company's investment policy. The Board has concluded that the MSCI ACWI Metals & Mining 30% Buffer 10/40 Index (MSCI ACWI) would provide a better future reference tool for shareholders. This index is designed to be less concentrated and more diversified than other indices by constraining the exposure to any single issuer to 10% of the index value and the sum of the weights of all securities with weights at more than 5% of the index at 40%. The index also has what is referred to as a 'buffer' at 30%. The buffer operates to ensure that the index does not have to be rebalanced constantly to retain its diversification characteristics due to the market movement of the index securities. The buffer is applied at the quarterly rebalancing of the index, further limiting the maximum weight of any index security and the sum of weights of larger securities. A more detailed explanation of the methodology is explained in the Glossary in the Annual Report and Financial Statements. The Board also believes the MSCI ACWI is a better-known family of indices, as well as being a broader index than the EMIX, as it includes steel companies.
The steel and diversified miners provide investors with exposure to the same end markets and make up the same supply chain. However, as global metals supply moves towards recycling, where the steel sector plays a key role, there is merit in considering these opportunities for investors.
For the time being the performance of both indices (as two of the range of reference indices provided) will be shown so that shareholders can make a fair comparison of the Company's performance over time. However, for the forthcoming year the principal reference index will be the MSCI ACWI Metals & Mining 30% Buffer 10/40 Index. In due course the Directors will consider dropping the EMIX Index.
BOARD OF DIRECTORS
As mentioned at the interim stage, the Board commenced a search to identify a new Director assisted by a third-party recruitment firm. Having carefully considered the Board's composition and the need to ensure a suitable balance of skills, knowledge and experience, I am delighted to welcome Ollie Oliveira who was appointed to the Board with effect from 3 February 2020. Ollie has over 35 years of strategic and operating experience in the mining industry and corporate finance, complementing and enhancing the skills and experience of the existing Board. Further details of Ollie's background can be found in his biography in the Annual Report and Financial Statements. Ollie will be subject to election by shareholders at the forthcoming Annual General Meeting, at which time shareholders will have an opportunity to meet him.
At the date of this report the Board consists of six non-executive Directors. Having served on the Board since July 2001, Colin Buchan has announced that he will not be seeking re-election at the Company's next Annual General Meeting. On behalf of my fellow Directors, I would like to thank Colin for his tremendous contribution to the Company during his time as a Director, including serving as both Senior Independent Director and Chairman of the Audit & Management Engagement Committee. Following Colin's retirement, Russell Edey will succeed him as Chair of the Audit & Management Engagement Committee and will also become Senior Independent Director.
SUSTAINABLE INVESTMENT
Since inception of the Company, and given the nature of mining as an industry, your Board has always had a strong focus on sustainable investment and the environmental and social impact of portfolio investments.
We have therefore been encouraged by the even greater emphasis placed on these factors by your Investment Manager, BlackRock, and the systematic integration of Environmental, Social and Governance (ESG) factors into the investment decision-making and monitoring process.
BlackRock have asserted their belief that climate change is now a defining factor in companies' long-term prospects, and that it will have a significant and lasting impact on economic growth and prosperity. In their view, which is shared by your Board, climate risk now equates to investment risk and this will drive a profound reassessment of risk and asset values as investors seek to react to the impact of climate policy changes. This in turn will drive a significant reallocation of capital away from traditional carbon intensive industries over the next decade. The Company has had minimal exposure to companies whose principal activity is the extraction of thermal coal and, going forward, the Portfolio Managers will no longer invest in businesses which generate more than 25% of their revenues from thermal coal production.
In January 2020, with this transition in mind, BlackRock announced that it would accelerate its efforts with regard to sustainable investing, making a number of enhancements to its investment management and risk processes, including the following:
· heightening scrutiny on sectors with a high ESG risk, such as thermal coal producers, due to the investment risk they present to client portfolios;
· putting ESG analysis at the heart of Aladdin (BlackRock's proprietary investment management system) and using proprietary tools to help analyse ESG risk; and
· placing oversight of ESG risk with BlackRock's Risk and Quantitative Analysis group (RQA), to ensure that ESG risk is given increased weighting as a risk factor and is analysed with the same weight given to traditional measures such as credit or liquidity risk.
Your Board fully supports and applauds this approach, which is set out in greater detail in the Strategic Report within the Annual Report and Financial Statements.
TAILINGS FACILITY MANAGEMENT
In 2019 the investment team undertook a comprehensive review of all investments in regard to tailings facility management, following the tragic Vale tailings dam failure. While the review was, on the whole, relatively satisfactory, it highlighted the complexity of tailings management and an area of weakness in company disclosure and global industry reporting standards. The review helped spur the investment community into action, which led to the formation of an Investor Mining & Tailings Safety Initiative. This review is an evolving process, but the investment team is working closely with the BlackRock Investment Stewardship and Sustainable Investment teams to engage with companies and the review panels on an ongoing basis to ensure standards and reporting are improved across the industry.
CORPORATE GOVERNANCE
Earlier this year, the Association of Investment Companies (AIC) published the 2019 Code of Corporate Governance (the AIC Code) which was endorsed by the Financial Reporting Council (FRC) as being appropriate for investment companies. The AIC Code applies to accounting periods beginning on or after 1 January 2019.
The Board has determined that the Company has complied with the recommendations of the AIC Code and the provisions contained within the UK Corporate Governance Code issued by the FRC in July 2018 (the UK Code) that are relevant to the Company for the accounting period which commenced on 1 January 2019. The AIC Code is, in most material respects, the same as the UK Code, save that there is greater flexibility regarding the tenure of the office of the Chairman and membership of the Audit Committee.
ANNUAL GENERAL MEETING
The Company's Annual General Meeting will be held at the offices of BlackRock at 12 Throgmorton Avenue, London EC2N 2DL on Thursday, 30 April 2020 at 11.30 a.m. Details of the business of the meeting are set out in the Notice of Meeting in 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
Mining is a cyclical sector, highly exposed to global trade and overall levels of economic activity. A preliminary agreement with China to halt the trade war should prove positive for markets and, in Europe, the outcome of the UK election has removed some degree of the uncertainty surrounding Brexit, improving sentiment. Global growth is therefore likely to stabilise and could gradually pick up over the next six to twelve months, helped in part by the easier financial conditions introduced in 2019 by the US Federal Reserve and European Central Bank. However, the recent escalation in US-Iran tensions and the virus outbreak in China is a reminder of the potential for unforeseen risks that can easily destabilise the rather encouraging outlook.
Your Portfolio Managers believe that the mining sector currently offers good risk adjusted value compared to other sectors and as such they feel there is the opportunity to generate competitive returns over the medium term. The focus will be on quality companies with the right ESG credentials that can deliver acceptable total return through the cycle.
DAVID CHEYNE
Chairman
27 February 2020
INVESTMENT MANAGER'S REPORT
PORTFOLIO PERFORMANCE
Despite the numerous macro risks 2019 was a strong year for shareholders, with the Company delivering a NAV total return of 17.2% and share price total return of 19.4% as mining companies continued down the path of disciplined capital allocation and a focus on shareholder returns. As can be seen in the table below, this return is in line with the broader mix of comparators that the Board uses to assess performance and was only marginally behind the EMIX Global Mining reference index, which, unlike the Company, is only exposed to equity securities. It is also important to note the significant contribution from income in 2019, with a record level of revenue earnings per share for the Company at 22.46p, up by 23.7% on the prior year. The strategy of allocating capital to enhance income whilst also diversifying the sources of income generation leaves the Company well positioned to benefit from any further growth in distributions and with lower overall income volatility.
| 2019 Price Change % | 2019 Total Return % | 3 Year Total Return % | 5 Year Total Return % | |
| BRWM share price | 12.5% | 19.4% | 32.4% | 67.4% |
| BRWM NAV | 11.4% | 17.2% | 28.7% | 60.6% |
| EMIX Global Mining Index (net total return) | 18.4% | 22.1% | 37.8% | 67.0% |
| FTSE 100 Index | 12.1% | 17.3% | 19.9% | 40.8% |
| FTSE All Share Index | 14.2% | 19.2% | 22.0% | 43.8% |
| UK CPI | 1.3% | 1.3% | 6.5% | 8.4% |
| =========== | =========== | =========== | =========== |
All performance figures in GBP.
2019 was a year of valuation recovery after the disappointing sell-off during the fourth quarter of 2018. Fears of recession and tighter monetary policy in the fourth quarter of 2018 caused a sudden drop in share prices which left the sector trading on valuations not seen for several years. Given the successful deleveraging that had taken place post the 2015 collapse, the market was discounting higher financial risk than was reality, leaving large amounts of value available for investors. Despite this, it seemed that the memory of pain from prior years was still too fresh and, with concerns on global trade, recession and elections, caused the recovery to be more gradual than expected. As the year unfolded, confidence peaked and troughed many times causing multiple rallies and declines but left the sector strongly up for the year as a whole.
2019 returns are explained by a small number of factors such as the rally in iron ore following the tragic tailings dam collapse in Brazil, the return of quantitative easing (QE) and the corresponding rally in gold companies, lower than expected commodity demand (especially for copper) and finally the increasing focus on Environmental, Social and Governance (ESG) issues by investors. The Company was positioned for better than expected iron ore prices with holdings in large diversified producers and the iron ore royalty exposure, but not the extreme price moves seen during the year. In addition, a positive view on copper, based around supply issues, did not play out due to the depressed demand which left this part of the portfolio lagging behind. However, copper holdings should catch up if the strong rally in price that we saw in December holds into the year ahead. Finally, the solid rally in gold prices was captured in the portfolio, but only in line with the sector as a whole due to our goal within the portfolio of always being diversified by commodity. The combination of the above, left the Company's NAV behind the reference index due to not having enough exposure to lower quality iron ore producers and the underperformance of our copper holdings. In addition, the very highly concentrated exposure to the large diversified mining companies in the reference index, which performed strongly, also impacted the Company's returns on a relative basis.
As mentioned earlier, revenue generated during the year was up strongly leading to a record level of revenue earnings per share, up by 23.7% on last year. The main drivers were increased ordinary dividends, a raft of special dividends, another year of solid returns from option premiums and a doubling of royalty related payments on the back of the Vale Debenture acquisition. The final dividend for the year is 10.00p, giving a total payment for the year as a whole of 22.00p which is a new high and up 22.2% on the prior year. The dividend is fully covered and again has delivered a superior yield to that available in the broader sector.
MINING SECTOR OVERVIEW
After the declines in the last few months of 2018, the year started from a low point on valuations. Investor sentiment for miners remained weak due to fears on global growth and the seemingly perpetual debate on a global recession. This was part of the two-speed economic system where services, which make up the majority of the developed markets economies, were held up on the back of modest global growth and technology names moved from strength to strength. Blame for the manufacturing recession has fallen at the feet of the 'trade war'; Donald Trump's broad campaign is to level the playing field with China and reduce the US/China trade deficit, as well as to protect American Intellectual Property and restrict Chinese players in critical industries like defence and 5G. This created uncertainty in China and delayed investment decisions and spending, slowing growth. The manufacturing industry globally was also negatively impacted by tightening credit conditions, caused by the Federal Reserve raising interest rates in the fourth quarter of 2018. This all contributed to the economic slowdown, which in turn was negative for mined metals as they are used in physical manufacturing, as well as construction. However, as the year unfolded, governments around the world took action with many cutting rates, injecting liquidity back into the economy and stimulating growth through fiscal spending. This sudden shift from quantitative tightening (QT) back to QE took investors by surprise and perpetuated the strong returns to growth away from value.
Given the above, expectations for commodity prices at the start of the year were low, especially for iron ore, and consensus positioning was for prices to fade as the year progressed. Soon into the year, the tragic collapse of the Brumadinho tailings facility in Brazil happened and, with it, huge amounts of iron ore supply were removed from the seaborne market. This disruption caused a rally in price but also the closing of the price differential between low and high grade ore. This led to a rally in the valuations of iron ore producers, especially those with balance sheet leverage, and not owning the likes of Fortescue Mining resulted in significant lost relative return.
The base metals suite suffered during the year with average prices for 2019 lower than those of the prior year. Nickel was the only exception to this as prices were supported by the Indonesian government ban on exports of nickel ore. As a result, base metal equities were generally laggards compared to the diversified names as the latter's exposure to iron ore meant cash generation significantly exceeded expectations.
The precious metal suite was a standout performer within the whole commodity space. Prices of gold, platinum and especially palladium soared on the back of the move to more accommodative and stimulative government policies. Gold had its best year in the last decade with prices rising 18.7% over the year, as demand from investors increased significantly on the back of the move back to QE. In addition, Central Banks were also large buyers of gold in 2019. Purchases were up 2.5% over the prior year and this now marks the eleventh year in a row of buying by Central Banks after over 30 years of selling prior to this. The move in gold was substantial but this was pedestrian compared with the 52.0% rise in the price of palladium. Shortages of supply and continued growth in demand meant prices moved to reflect the tightness in the market and platinum group metal equities soared higher.
In the interim report we emphasised the underlying themes that the Company invests in, with portfolio returns largely driven by those themes as opposed to just commodity beta. These themes evolve as the fundamentals of the companies and markets change. For example, from 2016 to 2018 the Company had significant exposure to deleveraging. This theme has largely played out and the companies have moved from deleveraging to rewarding shareholders. Resource replenishment, capital discipline, asset quality and growth remain key drivers of portfolio selection and we expect these to continue to support positive performance of the portfolio over the longer term. The reform agenda in China continues to play a key role in commodity markets especially with the increased global focus on the environment. A new area for the Company has been to review opportunities in recycling and reuse of materials. We expect this area to be a core part of global materials' production in years to come but at present the opportunity to invest in this area remains challenging due to a lack of choice. We actively consider investment opportunities within this thematic area.
SHAREHOLDER RETURNS
2019 was an echo of the previous 12 months, as the large diversified miners who deleveraged post the crash of 2015 continued to return cash to shareholders. During the year the Company received numerous special dividends on top of large increases in the ordinary dividends from a whole range of companies, with the biggest contributions coming from BHP and Rio Tinto. In addition, some of the mid-sized and junior mining companies either initiated dividends or announced significant increases to their payout ratios. The Company was a beneficiary of this due to holdings in companies like Lundin Mining and Teck Resources in the base metals space and Agnico Eagle Mines, B2Gold and Alamos Gold in the gold sector. Outside of dividends, share buyback plans continued and the equity base of the sector is now steadily shrinking which is compounding the small rates of volume growth on a per share basis. It was interesting to note that Newmont Mining has become the first gold miner to start buying back its shares.
GROWTH AND RESOURCE REPLENISHMENT
Despite the more positive tone to the sector during the year, growth in supply remains muted which is supportive for commodity prices. We continue to look for, and invest in, quality growth companies where we see that growth translating into growth on a value per share basis. For the last couple of years, the portfolio has focused on growth related to copper producers given the need for further supply to be added in that market longer term. Key copper growth investments in the portfolio include Ero Copper, First Quantum Minerals, OZ Minerals, Nevada Copper, SolGold and Lundin Mining (following their recent acquisition of the Chapada copper/gold mine from Yamana). Copper growth is also part of the reason for the ongoing exposure to Teck Resources whose expansion of the Quebrada project will diversify the company from the current high exposure to coal and oil.
A select few gold companies also fall into the growth basket. Most of this has come from acquisitions as mid-sized companies have been able to purchase non-core assets from the 'super majors' in a wave of activity not seen since the gold boom of the last decade. The Company has helped to finance many of these deals by either adding to existing holdings or initiating new positions in companies that should re-rate post deal. An example of this is Northern Star Resources which has added the Pogo project in Alaska and more recently purchased half of the famous Super Pit in Australia from Newmont. Another example is Teranga Gold which has utilised its existing plant facilities to extract synergies from the Massawa project it purchased from Barrick Gold in the latter part of 2019.
Outside of gold, the Company had a basket of growth-related equity exposure with the majority of holdings likely to be longer term in nature. An example would be exposure to Ivanhoe Mines which is developing huge new copper mines in the Democratic Republic of Congo (DRC) with Chinese backing and a new platinum mine in South Africa with Japanese partners. These projects will take several years before they generate their first cash flow, but the potential is vast. Nearer-term growth has come from Nickel Mines in Indonesia. This group has been able to unlock huge value from working closely with a large Chinese industrial group to fast track themselves into nickel production.
In the resource replenishment theme the driver is always exploration drilling. The ability for the Company to be patient and wait for discoveries has generated a lot of value over the life of the Company. Recent success in this area has mostly come from the gold space with Pretium Resources and B2Gold delivering significant life extension at their mines. Life extension can also come from strategic mergers and acquisitions (M&A) where new owners unlock additional life by changing operating practices that result in lower costs. The Company has exposure to this via groups like Northern Star who have been extremely active over the last five years buying non-core gold assets from major producers.
SUSTAINABLE MATERIALS
The rise of the electrified vehicle (EV) has continued this year, led by growth in sales of EVs in China which grew 1.3% year-on-year (Source: Autocar, January 2020). Sales have been incentivised by significant subsidies in China. However, the subsidies were so successful they are now no longer required to meet government targets. As such these subsidies were halved in July 2019 and will likely be reduced again in 2020. This was a headwind to EV sales in China in the second half of the year. Nevertheless, despite the recent hit to sentiment, China again committed to EVs and increased targets. In December, China released the latest draft of its New Energy Vehicle 2035 plan and increased the 2025 target from 20% of automotive sales to 25%. China appears to be driven to lead in the auto industry, reduce pollution and secure energy independence.
The main raw materials that go into batteries, cobalt and lithium, were hit by the tempering of expectations after strong price increases in 2017 and 2018. However, it is important to note that the absolute tonnage demand continues to grow strongly. For cobalt prices it was a year of two halves, with prices down in the first half before Glencore acted to balance the cobalt market in August with a decision to suspend the Mutanda project in the DRC for two years, impacting 20% of global supply. A key driver here has been production from the DRC where both Chinese and artisanal producers responded with surprising speed to the very high cobalt price in the first half of 2018. We also saw ESG concerns come to the fore in 2019 with Apple, Alphabet, Microsoft, Dell and Tesla facing a lawsuit by a human rights group over alleged child-labour abuses in the supply chain for cobalt used in their products. Both higher prices and supply chain concerns have resulted in increased thrifting of cobalt enabled by technological advances.
Prices for lithium moved lower throughout the year and ended down by 31.5%. As well as the tempered growth outlook, prices have been hit by bottlenecks in the battery supply chain with some Australian miners being unable to sell their lithium spodumene concentrate due to processing capacity projects being delayed. The holding in Albemarle was hit by negative sentiment around lithium prices and fell 5.2% during the year. Albemarle's key advantage, a portfolio of long-term contracts which secure pricing in exchange for quality supply, enabled Albemarle to mitigate losses in such weak markets. Currently we see signs of stabilisation in the price decline going into 2020. Prices are now sufficiently low in lithium for supply to be exiting the market, particularly at the junior end where we saw two bankruptcies of lithium project developers, Nemaska Lithium and Alita Resources. Albemarle also remains well placed to benefit from volume growth, with a number of key expansion projects such as Atacama and Greenbushes. Albemarle further added to its project pipeline by acquiring 50% of the Wodgina deposit from Mineral Resources. Immediately after acquiring the stake, Albemarle paused operations in an effort to deliver more value in the long term and we expect it to remain disciplined in their supply of material into the market.
Another major battery metal is nickel, where demand is likely to stand to benefit from the increased penetration of EVs and thus demand for lithium batteries which contain nickel in the cathode of the battery. However, today the number one use of nickel driving near-term demand is stainless steel production. Not all nickel production is created equal when it comes to suitability for different end-uses and for battery cathodes the most efficient raw nickel units are nickel sulphide tonnes, whilst for stainless steel ferronickel is very cost effective.
BASE METALS
Base metals were the weakest part of the commodity mix during the year with nickel being the only base metal to record a high average price year-on-year. A combination of generally weak industrial activity and resulting low demand growth left the complex under pressure from financial investors who chose to use the forward markets to express a negative view on the global economy. Large short positions in copper were a feature of the year and it was only towards the year end that these started to close. On the supply side, 2019 was a year of low growth and disruptions but the scale was not enough to move prices higher. With the general macro risk for the global economy now improving it is hoped that base metal demand should recover during 2020 and, with limited supply growth, prices should put in a better performance over the near term.
Within the copper space the Company has a large exposure to more growth orientated producers and it is hoped that when the metal price starts to improve these names should deliver strong performance due to a mix of balance sheet leverage, production growth and exploration potential. Key holdings are Freeport-McMoRan Copper & Gold, First Quantum Minerals, Ero Copper, OZ Minerals, Lundin Mining and Ivanhoe Mines. The Company also has holdings in debt securities issued by copper producers and these should also perform well with better metal prices.
During the year, the price of nickel went through a major cycle as depressed demand left the price languishing at the start of the year after a rapid sell-off in the second half of 2018. No sooner had the year begun prices started to rally and early price hikes were compounded by the announcement of export bans from Indonesia. The price soared and touched an intra year high of almost US$8.50/lb before giving up some of the gains during the final quarter of the year. The Company has two main exposures to nickel via a holding in Norilsk Nickel, which is a diversified base metal and Platinum Group Metals (PGM) producer in Russia, and Nickel Mines. The latter is a high growth company with exposure to domestic production of nickel in Indonesia which is integrated directly into a stainless-steel production facility. During the year the shares were up 137% despite having issued new equity to fund the ongoing production growth. The miner is now very well positioned to harvest returns from its existing assets, whilst also having further growth options it could develop.
The rest of the base metals complex was very weak, especially by comparison to precious metals and iron ore. The Company had minimal exposure to this area but, given the price falls to levels below long-term averages and improving macro outlook, it is an area we plan to monitor closely during the coming year as commodity prices have a long record of mean reversion.
BULK COMMODITIES
The iron ore price was up 28.1% in 2019 with the market significantly impacted by the tragic Brumadinho tailings dam incident which occurred at the beginning of the year. The tailings dam at the Feijão iron ore mine which is owned by Vale suffered a catastrophic failure collapsing and killing 272 people. The Feijão tailings dam was constructed using the 'Upstream' method, which meant that the dam's stability relied on the tailings material and this is seen as a key weakness of the Upstream construction method. Following the disaster, Vale announced that it would decommission nine Upstream iron ore dams in Brazil and suspended around 60mt of production. This, in addition to the direct production impact, resulted in Vale's iron ore production falling by around 80mt in 2019 compared with 2018, equivalent to 6% of global seaborne demand. Vale has guided for the 60mt of production to recommence once the dams are de-characterised over 2020 and 2021 (Source: Vale Quarterly results).
This was a significant shock to the market and resulted in sharply higher prices versus expectations. Although these high prices have incentivised an increase in supply at smaller mines, it has not been enough to stop global seaborne supply shrinking year-on-year. Notably the other big three suppliers outside Vale - Rio Tinto, BHP and Fortescue Metals - have not increased production. Supply in iron ore remains highly concentrated with the 'Big 4' supplying over 60% of the seaborne iron ore market. These major producers have evidenced they are pursuing a value over volume strategy limiting growth to maintain price and preserve margins. It is likely that the iron ore price will need to continue to incentivise new production, as well as draw down on inventory to balance the market in 2020. The ongoing resumption of suspended Vale production in 2021, as well as the ramp-up of Vale's Northern System production which was unaffected by the disaster, should balance the market in 2021.
Selected commodity price changes during 2019
| Price 31/12/2019 | % Change 12 month | % Change Avg 2019 vs. 2018 | |
| Precious Metals US$/oz | |||
| Silver | 17.92 | 15.5 | 3.2 |
| Gold | 1,520.50 | 18.7 | 9.7 |
| Platinum | 971 | 22.3 | -1.8 |
| Palladium | 1,920 | 52.0 | 49.2 |
| Base Metals US$/lb | |||
| Tin | 7.79 | -12.0 | -7.4 |
| Zinc | 1.03 | -9.5 | -12.8 |
| Lead | 0.87 | -4.7 | -10.9 |
| Aluminium | 0.81 | -4.4 | -14.9 |
| Copper | 2.79 | 3.4 | -8.0 |
| Nickel | 6.33 | 31.5 | 6.1 |
| Industrial Commodities | |||
| Coking Coal Future US$/t | 136.0 | -37.6 | -6.7 |
| Thermal Coal US$/t Newcastle | 64.9 | -36.0 | -27.1 |
| Iron Ore - fines 62% Fe China Import US$/t | 93.0 | 28.1 | 34.6 |
| Uranium US$/lb | 25.0 | -12.3 | 5.5 |
| Lithium Carbonate CIF to China spot 99% US$/t | 9,250 | -31.5 | -21.4 |
| =========== | =========== | =========== |
Sources: Datastream and Bloomberg.
Against this supply backdrop we have seen global demand growth this year, despite higher prices. This demand growth could only be met with a drawdown in global inventories. Iron ore is mainly used in steel production and Chinese steel production grew by 8.3% in 2019 as steel mill profitability remained strong, particularly for construction materials. As the Chinese economy has matured and generated more scrap steel, the mix of steel raw material has moved towards scrap steel, away from iron ore, and we saw this continue in 2019 with scrap accounting for 18% of Fe units from 17% in 2018 (Source: Citi).
The Company has benefited from the high iron ore prices through positions in Rio Tinto and BHP which returned 36% and 20% respectively. The Company's position in Vale has hurt performance with a sterling total return of -1% (Source: Bloomberg).
Coking coal is another key steel raw material, but unlike iron ore the price was down 37.6% in 2019. China introduced a quota system for coal imports in 2019 with the aim to prevent imports rising on 2018 levels and protect domestic thermal coal producers. As part of this, coking coal imports were also blocked. In addition, European coking coal demand was weak, partly due to falling demand for auto steel. Indian demand has increased, mitigating some of the impact of the Chinese quota, with India now the biggest seaborne coking coal market. The thermal coal price fell 36.0% through the year; as well as the Chinese import restriction, low Asian LNG prices and coal-gas switching in Europe, has weighed on demand.
The Company's coking coal holdings include Teck Resources and Coronado Global Resources which have both negatively impacted the Company's performance in 2019. However, both companies remain on attractive valuations and Coronado in particular has a track record of returning excess capital to shareholders, having returned 50% of its year end share price in dividends during 2019. Likewise, Teck Resources has paid special dividends during the last two years and is now regularly buying back its shares.
PRECIOUS METALS
2019 was a stellar year for precious metals as a group. Gold and silver prices were up by 18.7% and 15.5% respectively and this is the first year in nine that we have seen such significant moves. Key within this move for the companies is that the price increase has come about when the companies were already generating decent returns and, as such, this extra margin should flow through to the bottom line given the absence of growth in capex and debt to repay. It will still take some time for shareholders to receive the full benefit given that the price increase was mostly second half weighted, but it is very encouraging to see the first signs of this coming through. During 2019 several gold miners raised dividends; for example, Agnico Eagle Mines raised its dividend by 40%, Barrick Gold by 66% and Alamos Gold by 100%, but the most impressive has been Newmont Mining. Following the purchase of Goldcorp in the early part of the year, Newmont paid out a special dividend which is reflected in the income of the Company this year. In addition, in December Newmont announced a US$1 billion share buyback, the first for a gold producer for many years. Then, in January 2020, Newmont announced a 79% increase in its annual dividend and that they had already completed half of the buyback. Newmont has raised the bar for shareholder returns in the gold sector and we look forward to other companies following suit.
The last two years have been a busy period for M&A teams in the gold sector. The end of 2018 saw the merger of Barrick Gold and Randgold Resources, followed quickly by the takeover of Goldcorp by Newmont. This was then followed by the merger of Barrick and Newmont's Nevada gold assets to create a massive market-leading US gold business with huge synergies to come. Others have also been busy as the big players divested non-core assets. The famous Australian Super Pit was sold by Newmont and Barrick to Northern Star and Saracen Mineral. In Africa, Barrick sold the Massawa project to Teranga Gold and completed the buyout of the minorities in Acacia Mining, whilst in Canada Newmont sold Red Lake to Evolution Mining. We expect this period of gold company consolidation to continue as the mid cap producers look to gain relevance in global financial markets by increasing the size of their businesses. The Company has been very active during the year by helping to finance some of these deals and harvesting returns in the process.
The PGMs were the leaders within the precious metals area. The long bull run in these metal prices, especially palladium, continued in 2019 and with it the turnaround in the profitability of the producers. The Company bought a position in Impala Platinum during the third quarter of 2018 and it has been one of the best performers within the Company. The shares were up 312% in sterling terms during 2019 and the company has used the improving margins to strengthen the balance sheet and diversify its production away from South Africa into Canada. The other holding in the Company is Northam Platinum which, like Impala, saw a huge 207% increase in share price during the year. Outside of these producers the Company has exposure to PGMs via a holding in Norilsk Nickel and through Anglo American. Profit margins and free cash flow are expected to remain elevated for the near term and, should South African producers start to pay decent dividends, then this could turn into a driver of income for the Company as a whole.
ROYALTIES AND ILLIQUID INVESTMENTS
The Company currently has one unquoted investment, the OZ Minerals Brazil Royalty representing 1.9% of the portfolio (£15.8 million) as at the end of December 2019. The Company has an additional royalty investment in Vale Shareholder Debentures, representing 3.4% of the portfolio. The latter is technically listed in Brazil but due to limited liquidity it is covered in this section. Together, the two royalty investments make up 5.3% of the portfolio. These, and any future investments, will be managed in line with the guidelines set by the Board as outlined to shareholders in the Strategic Report*.
*Liquidity refers to the ease of buying and selling a particular investment. Illiquid investments, such as unquoted investments, or thinly traded investments, may not be easily sold without a loss in value and may also be hard to sell quickly, however there is often additional return available on illiquid investments which bear illiquidity risk.
OZ MINERALS BRAZIL ROYALTY CONTRACT (1.9%)
In July 2014 the Company signed a binding royalty agreement with Avanco Minerals. 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 mines built on two licenses containing Avanco's Antas North and Pedra Branca projects. In addition, there is a flat 2% royalty over all metals produced from any other discoveries within Avanco's license area as at the time of the agreement.
Last year we reported that the royalty has now been assumed by OZ Minerals, an Australian based copper and gold producer, after Avanco was successfully acquired by OZ Minerals. Since our initial US$12 million investment was made, we have received US$12.3 million in royalty payments with the royalty achieving full payback on the initial investment. As at the end of December 2019, the royalty was valued at £15.8 million (2.1% of NAV) which equates to a 176.5% total return since our investment.
In November 2019, OZ Minerals approved the development of the Pedra Branca underground mine and released a feasibility study and mine plan detailing an 8-year life of mine. This mine will provide ore which will be trucked to the existing processing facilities at the Antas license site from mid-2021, as part of the Carajas Antas Hub strategy which OZ Minerals outlined in July 2019 - a low risk, modest capital, hub strategy, with processing infrastructure on the Antas license serving multiple small to mid-scale mines. OZ Minerals has guided for mining on the Antas license to cease in 2021 but processing is expected to continue for at least the life of the Pedra Branca mine. Exploration activities also continue in the Carajas region with OZ Minerals detailing an exploration target of 2.0 to 4.0 million tonnes at a grade of 3.1% to 5.0% copper at their Clovis prospect, which is around 2km from Antas, following encouraging initial drill results.
From a valuation perspective, the positive decision to mine the Pedra Branca deposit results in a lower discount rate applied on the cash flow from this mine. However, the life of mine, at eight years, is shorter than originally expected from the Mineral Reserve released in July. An independent valuation of the royalty was completed giving a range of valuations under different scenarios. The current valuation sits both within the range of values given by the independent valuation and BlackRock's own internal valuation range. As such, the Directors have chosen to keep the value unchanged.
VALE SHAREHOLDER DEBENTURES
In early 2019 the Company completed a transaction to increase its existing holding in Vale Shareholder Debentures. The primary benefits of owning these securities are an entitlement to 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 these securities versus the current level of 3.4%. Vale has indicated that they are studying increasing production at the Northern System to further increase dry-processing operations and reduce its usage of tailings dams, which provides additional upside to our original expectations.
The chart on page 18 of the Annual Report and Financial Statements shows the historic distributions paid by Vale to the owners of the Debentures and in 2019 this amounted to R775 million. The payments are expected to grow further 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 195Mt and forecast to grow to 230Mt once S11D ramps-up, while the Southeastern System is currently operating at circa 75Mt and is expected to remain around this level.
Whilst the Vale Debentures are a royalty, they are also a listed security on the Brazilian National Debentures System. 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. Since the acquisition of a significant number of additional Debentures in February 2019, the Debentures have paid out a total of R2/Debenture versus the R23 paid for each one giving a yield on the acquisition cost of 9.0%.
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 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 8.1% of the portfolio as at the end of 2019. This year saw market conditions continue to improve and allowed companies to strengthen balance sheets by paying down debt. This was highlighted as a risk to an important source of income for the Company, especially when combined with potential rising interest rates which eat away at the arbitrage between the Company's cost of debt versus the underlying mining companies' costs. During the year a number of bonds were either repaid or positions were sold as the running yields reduced, which 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
The Company from time to time enters into derivatives contracts, mostly 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 2019 income generated from options was £6.0 million net of contracts repurchased. In common with last year most of the premium was generated from writing a mixture of puts and calls due to the swings in valuation over the year as a whole. The majority of options expired out of the money as options were written with short lives and share prices generally remained in narrow ranges during these periods. For the year as whole, option premium was in line with the prior year and at the end of 2019 the Company had 2.1% of net assets exposed to derivatives.
GEARING
Debt, 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. At 31 December 2019, the Company had debt net of group cash amounting to £88.5 million representing gearing of 11.7%. Over the last few years the amount of gearing allocated against higher yielding mining company corporate bonds has declined due to increased returns available in the equities and also reduced availability of bonds that meet the valuation criteria. Therefore, for 2019, the majority of the Company's debt was drawn against the equity portfolio and royalty positions.
ESG
The importance of sustainability to society is unquestionable and its consequent higher profile in the financial markets, particularly during the course of 2019, was marked. Campaigns to reduce single-use plastic, change food culture and reduce carbon emissions have played a part in the rapid increase in focus on this area during the year. We have also seen much greater interest in corporate sustainability, defined as creating long-term value for all stakeholders, from employees, to local communities, the environment and government.
The Company, like many in the industry, has historically analysed its investments looking at environmental, social and governance risks, and considered not just the legal right to operate a mine but the company's social license to operate. This has been an area of focus for the Company over many years and it has been core to the investment process run by the management team. Given the rapid increase in attention now focused on this area, we see potential risks and outcomes becoming broader and more impactful than ever before.
The majority of the Company's holdings are publicly traded securities and, as risks rise for certain securities, so will demanded returns. For example, this is seen in the coal sector where regulation has increased the cost of coal electricity, particularly in Europe, and has reduced European demand in favour of renewable power. Crucially, coal companies now trade at a major valuation discount to other miners on the back of a whole range of fears from the risk of further societal driven demand destruction, or regulatory supply constraints. This regulation does not actually have to occur; the increased investor perception of the risk is enough to drive negative returns. In addition, the reduced availability of capital to thermal coal producers from banks and investors means that the cost of capital has risen significantly and thus the equity risk premium for securities in this area is set to remain high for the foreseeable future. It is also interesting to note that, in the case of single use plastic, this was not driven by regulation but instead was in response to a grass roots movement fostered by social media.
In metals and mining, investors are becoming more demanding with higher expectations of how metals are produced, now and in the future. 2019 saw significant focus in three areas:
· Safety, particularly around tailings dams - The tragic Vale disaster highlighted the importance of employee safety and prompted the International Council on Mining and Metals to work with the United Nations Environment Programme (UNEP) and the Principles for Responsible Investment (PRI) to co-convene an inclusive global tailings review for the purpose of establishing an international standard for tailings storage facilities.
· Society's desire to reduce its carbon impact - A key route to carbon reduction is renewable power. The mining sector is impacted broadly by power costs and we recently saw BHP move to take its Chilean operations away from coal power, breaking early from coal power contracts causing a US$700 million impairment. However, even including this impairment, BHP disclosed that renewable power has reduced spot power prices in Chile to such an extent that this move was net positive for value creation. We also saw investment decisions around reducing the carbon intensity of both steel and aluminium - for example the joint venture between Rio Tinto and Alcoa, ELYSIS, supported by Apple and the governments of Canada and Quebec, which is developing aluminium smelting technology with no direct greenhouse gas emissions.
· Recycling and the circular economy - There may be opportunities for miners who position themselves to benefit from the circular economy: metal production from recycling is expected to grow as a percentage of supply over the coming years. 2019 saw a number of investment decisions in recycled steel demand in the USA from BlueScope, Nucor and Steel Dynamics. This steel production will likely replace imports and domestic blast furnace production. The announcement of growth capital going into expanding recycling facilities in Europe and China was a regular occurrence and we expect the pace and scale of these investments to continue to increase going forward.
The whole subject of ESG is very broad and rapidly evolving. The Company has always taken into account these elements in its investment process to analyse risk to an operation but during the last few years opportunities have arisen for the Company to deploy capital in growth investments that should benefit from the demand for 'green' materials. It is likely that this area will become a more significant part of the portfolio, especially when this subsector of the materials space looks for fresh capital.
OUTLOOK AND STRATEGY FOR 2020
After the strong returns generated during the year it might seem foolish to expect another year of competitive total returns for the mining sector in 2020 but, with macro risks seemingly on the turn for the better, the outlook is relatively favourable. The US and China have recently agreed a 'Phase One' deal on new trade terms and this might mark a reversal in trade fears that have been a burden on commodities demand ever since the last US Presidential election. In addition, the return to accommodative monetary policies in 2019 has left the global economy poised for an increased level of economic activity especially in China and the US. During the last few months of 2019 data was very supportive of this view, with strong US labour markets and a recovery in the Chinese Manufacturing Purchasing Managers' Index to a 7-month high supported by rallying retail and industrial sales in China. In Europe, the data is less supportive but still not negative and with increased clarity on Brexit following the UK election this risk should start to fade. Offsetting the positives is the ongoing threat to growth from the recent virus outbreak. This looks potentially set to cause downgrades to economic growth given the likely disruption to trade via travel restrictions and consumer confidence. At the time of writing concerns are rising and we will watch out for signs of it being under control before deploying additional risk in the portfolio.
At the company level capital discipline has kept growth investments on hold, which means any increase in demand should result in better prices given the generally low level of metal inventories. Operating cost inflation looks to be under control and companies seem to be achieving productivity gains, with an increased use of big data analytics and automation. Finally, mining companies look set to continue returning surplus capital to shareholders, although the level of special dividends is likely to be lower year-on-year. With this in mind, we will seek to optimise the income element of the portfolio once again so as to maximise the total return should share prices not reflect the growth tailwinds in the global economy.
Shareholders should also be aware of the currency risk to income given the possibility of a recovery in sterling relative to the US dollar. At current levels the drag should not be material, but if the pound was to rally further, then this would reduce revenues in sterling terms.
In summary, we remain confident on the value available in the sector, especially when looked at relative to the low level of mining company indebtedness. It is our expectation that this will allow the Company to deliver a superior total return for its shareholders through the cycle, from a combination of capital growth and a premium yield to that generally available from the mining sector, and to continue to generate competitive returns compared to world markets.
EVY HAMBRO AND OLIVIA MARKHAM
BlackRock Investment Management(UK) Limited
27 February 2020
TEN LARGEST INVESTMENTS
1 = BHP (2018: 1st)
Diversified mining company
Market value: £82,204,000
Share of investments: 9.7%
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 = Rio Tinto (2018: 2nd)
Diversified mining company
Market value: £78,662,000
Share of investments: 9.3%
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 = Vale1,2 (2018: 3rd)
Diversified mining company
Market value: £73,107,000
Share of investments: 8.6%
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 a leading producer of nickel. The company also produces manganese ore, ferroalloys, metallurgical and thermal coal, copper, platinum group metals, gold, silver and cobalt.
4 + Anglo American (2018: n/a)
Diversified mining company
Market value: £51,863,000
Share of investments: 6.1%
A global mining company. The company's mining portfolio includes bulk commodities including iron ore, manganese and metallurgical coal, base metals including copper and nickel and precious metals and minerals including platinum and diamonds. Anglo American has mining operations globally, with significant assets in Africa and South America.
5 + Barrick Gold (2018: n/a)4
Gold producer
Market value: £37,617,000
Share of investments: 4.4%
Following the merger with Randgold Resources in 2018, Barrick Gold is the second largest gold company by market capitalisation and has operations and projects in fifteen countries across the world. In 2019 the company successfully established a joint venture with Newmont Mining across their Nevada assets to maximize the synergies across both sets of assets.
6 + Newmont Mining (2018: 9th)
Gold producer
Market value: £37,382,000
Share of investments: 4.4%
Following the acquisition of Goldcorp in the first half of 2019, Newmont is the world's largest gold producer by market capitalisation. The company has gold and copper operations on five continents, with active gold mines in Nevada, Australia, Ghana, Peru and Suriname.
7 - First Quantum Minerals1 (2018: 5th)
Copper producer
Market value: £35,581,000
Share of investments: 4.2%
An established growing copper mining company operating seven mines including their newest mine, Cobre Panama, which declared commercial production in September 2019. The company is a significant copper producer and also produces nickel, gold and zinc.
8 + Agnico Eagle Mines (2018: 21st)
Gold producer
Market value: £31,504,000
Share of investments: 3.7%
A Canadian based gold company with mines in Canada, Finland and Mexico, with exploration activities in each of these countries as well as in the United States and Sweden. Agnico Eagle has a strong operational track-record and has declared a cash dividend every year since 1983.
9 + Wheaton Precious Metals (2018: 17th)
Silver and Diamond producer
Market value: £31,036,000
Share of investments: 3.7%
A precious metals streaming company that purchases silver and gold production from mines that it does not own and operate. The company has streaming agreements with 22 operating mines worldwide including Newmont's Penasquito, HudBay's Constancia and Vale's Salobo and Sudbury mines.
10 = OZ Minerals2,3 (2018: 10th)
Copper producer
Market value: £27,233,000
Share of investments: 3.3%
An Australian based copper producer which operates Prominent Hill, a copper-gold mine in South Australia and is currently developing Carrapateena one of Australia's largest copper-gold resources. OZ Minerals is a well-capitalised company with strong cash generation, no debt and cash of A$505 million as at 31 December 2019. In 2018 the company successfully acquired Avanco Resources for A$418 million in a 50/50 cash/scrip deal. Along with its existing asset base, this transaction provides OZ Minerals with a strong copper growth pipeline with options in both Australia and Brazil.
1 Includes fixed income securities.
2 Includes investments held at Directors' valuation.
3 Includes mining royalty contract.
4 Excludes a 2.3% holding in Randgold Resources as at 31 December 2018. Randgold Resources and Barrick Gold merged in early 2019.
All percentages reflect the value of the holding as a percentage of total investments. Together, the ten largest investments represent 57.4% of total investments (ten largest investments as at 31 December 2018: 61.0%). Amounts in the table above are shown in pounds sterling.
INVESTMENTS AS AT 31 DECEMBER 2019
| Main geographical exposure | Market value £'000 | % of investments | |
| Diversified | |||
| BHP | Global | 82,204 | 9.7 |
| Rio Tinto | Global | 78,662 | 9.3 |
| Vale | Global | 44,405 | 5.2 |
| Vale 0% Debentures#* | Latin America | 28,702 | 3.4 |
| Anglo American | Global | 51,863 | 6.1 |
| Glencore | Global | 21,363 | 2.5 |
| Teck Resources | Global | 20,474 | 2.4 |
| Teck Resources Put Option 17/01/20 CA$28 | Global | (66) | - |
| Lundin Mining | Global | 14,418 | 1.7 |
| Boliden | Sweden | 7,028 | 0.8 |
| Boliden Put Option 17/01/20 SEK245 | Sweden | (58) | - |
| South32 | Global | 6,447 | 0.8 |
| ---------------------- | ---------------------- | ||
| 355,442 | 41.9 | ||
| ============ | ============ | ||
| Gold | |||
| Barrick Gold | Global | 37,617 | 4.4 |
| Newmont Mining | Global | 37,382 | 4.4 |
| Agnico Eagle Mines | Canada | 31,504 | 3.7 |
| Franco-Nevada | Global | 23,377 | 2.8 |
| Northern Star Resources | Australasia | 18,837 | 2.2 |
| Newcrest Mining | Australasia | 17,657 | 2.1 |
| B2Gold | Canada | 7,567 | 0.9 |
| Polyus | Russia | 5,683 | 0.7 |
| Teranga Gold | Other Africa | 4,766 | 0.6 |
| Pretium Resources | Canada | 3,637 | 0.4 |
| Alamos Gold | Latin America | 3,582 | 0.4 |
| Polymetal International | Russia | 2,390 | 0.3 |
| Shanta Gold Convertible* | Other Africa | 1,397 | 0.2 |
| TMAC Resources | Canada | 1,199 | 0.1 |
| Carawine Resources+ | Australasia | 5 | - |
| ---------------------- | ---------------------- | ||
| 196,600 | 23.2 | ||
| ============ | ============ | ||
| Copper | |||
| First Quantum Minerals* | Global | 35,581 | 4.2 |
| OZ Minerals Brazil Royalty#~ | Latin America | 15,790 | 1.9 |
| OZ Minerals | Global | 11,443 | 1.4 |
| Sociedad Minera Cerro Verde | Latin America | 22,337 | 2.6 |
| Freeport-McMoRan Copper & Gold | Global | 18,219 | 2.2 |
| Freeport-McMoRan Copper & Gold Call Option 17/01/20 US$13 | Global | (131) | - |
| Ero Copper | Latin America | 16,502 | 2.0 |
| Antofagasta | Latin America | 10,543 | 1.2 |
| Antofagasta Call Option 17/01/20 £9.60 | Latin America | (20) | - |
| Antofagasta Call Option 17/01/20 £9.20 | Latin America | (39) | - |
| Ivanhoe Mines | Other Africa | 7,578 | 0.9 |
| Nevada Copper | USA | 6,621 | 0.8 |
| SolGold | Latin America | 2,911 | 0.3 |
| Sierra Metals | Latin America | 2,066 | 0.2 |
| KAZ Minerals | Kazakhstan | 797 | 0.1 |
| Katanga Mining | Other Africa | 728 | 0.1 |
| ---------------------- | ---------------------- | ||
| 150,926 | 17.9 | ||
| ============ | ============ | ||
| Silver & Diamonds | |||
| Wheaton Precious Metals | Global | 31,036 | 3.7 |
| Mountain Province Diamonds* | Canada | 8,145 | 1.0 |
| Fresnillo | Latin America | 4,496 | 0.5 |
| Industrias Penoles | Latin America | 3,360 | 0.4 |
| Petra Diamonds* | South Africa | 1,723 | 0.2 |
| ---------------------- | ---------------------- | ||
| 48,760 | 5.8 | ||
| ============ | ============ | ||
| Industrial Minerals | |||
| Iluka Resources | Global | 9,870 | 1.2 |
| Umicore | Global | 8,616 | 1.0 |
| Pilgangoora* | Australasia | 8,036 | 1.0 |
| Albemarle | Global | 7,165 | 0.8 |
| Sheffield Resources | Australasia | 4,034 | 0.5 |
| Neo Lithium | Latin America | 559 | 0.1 |
| ---------------------- | ---------------------- | ||
| 38,280 | 4.6 | ||
| ============ | ============ | ||
| Nickel | |||
| Norilsk Nickel | Russia | 14,169 | 1.7 |
| Nickel Mines | Indonesia | 7,473 | 0.9 |
| Bindura Nickel | Other Africa | 23 | - |
| ---------------------- | ---------------------- | ||
| 21,665 | 2.6 | ||
| ============ | ============ | ||
| Iron ore | |||
| Labrador Iron | Canada | 10,024 | 1.2 |
| Equatorial Resources | Other Africa | 390 | - |
| ---------------------- | ---------------------- | ||
| 10,414 | 1.2 | ||
| ============ | ============ | ||
| Coal | |||
| Coronado Global Resources | Australasia | 3,870 | 0.5 |
| ---------------------- | ---------------------- | ||
| 3,870 | 0.5 | ||
| ============ | ============ | ||
| Aluminium | |||
| Metro Mining | Australasia | 1,441 | 0.2 |
| ---------------------- | ---------------------- | ||
| 1,441 | 0.2 | ||
| ============ | ============ | ||
| Zinc | |||
| Titan Mining | USA | 974 | 0.1 |
| Osisko Metals | Canada | 96 | - |
| ---------------------- | ---------------------- | ||
| 1,070 | 0.1 | ||
| ============ | ============ | ||
| Other | |||
| Impala Platinum | South Africa | 12,584 | 1.5 |
| Northam Platinum | South Africa | 4,411 | 0.5 |
| ---------------------- | ---------------------- | ||
| 16,995 | 2.0 | ||
| ============ | ============ | ||
| Portfolio | 845,463 | 100.0 | |
| ============ | ============ | ||
| Comprising | |||
| - Investments | 845,777 | 100.0 | |
| - Written options | (314) | - | |
| ---------------------- | ---------------------- | ||
| 845,463 | 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 2019 (including options classified as liabilities on the balance sheet) was 65 (31 December 2018: 65).
As at 31 December 2019 the Company held equity interests in three companies comprising more than 3% of a company's share capital as follows: Nevada Copper, Sheffield Resources and Titan Mining.
PORTFOLIO ANALYSIS AS AT 31 DECEMBER 2019
COMMODITY EXPOSURE1
| 2019 Company portfolio | 2018# Company portfolio | 2019 EMIX Global Mining Index | |
| Other | 2.0% | 0.8% | 2.4% |
| Molybdenum | 0.0% | 0.0% | 0.2% |
| Zinc | 0.1% | 0.9% | 0.0% |
| Aluminium | 0.2% | 0.9% | 2.8% |
| Coal | 0.5% | 0.7% | 3.6% |
| Iron Ore | 1.2% | 0.1% | 2.1% |
| Nickel | 2.6% | 0.4% | 2.7% |
| Industrial Minerals | 4.6% | 6.6% | 1.4% |
| Silver & Diamonds | 5.8% | 6.4% | 2.7% |
| Copper | 17.9% | 18.9% | 7.6% |
| Gold | 23.2% | 15.5% | 30.1% |
| Diversified | 41.9% | 48.8% | 44.4% |
# Represents exposure at 31 December 2018.
GEOGRAPHIC EXPOSURE2
| 2019 | 2018 | |
| Global | 63.8% | 60.0% |
| Latin America | 13.0% | 12.4% |
| Canada | 7.3% | 7.4% |
| Australasia | 6.5% | 10.9% |
| Other3,4 | 5.4% | 3.3% |
| South Africa | 2.2% | 1.5% |
| Other Africa (ex SA) | 1.8% | 4.5% |
1 Based on index classifications.
2 Based on the principal commodity exposure and place of operation of each investment.
3 Consists of Indonesia, Kazakhstan, Russia, Sweden, United Kingdom and USA.
4 Consists of Indonesia, Kazakhstan, Russia, Turkey and USA.
STRATEGIC REPORT
The Directors present the Strategic Report of the Company for the year ended 31 December 2019. 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 in 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 14.2% and, at the financial reporting date, net gearing (calculated as borrowings less cash and cash equivalents as a percentage of net assets) stood at 11.7% of shareholders' funds (2018: 13.5%). For further details on borrowings refer to note 14 and the Alternative Performance Measure in the Glossary in the Annual Report and Financial Statements.
Portfolio analysis
As at 31 December 2019, the investment in the OZ Minerals Brazil Royalty was held at Directors' valuation, representing a total of £15,790,000 (US$20,918,000) (2018: £18,513,000 (US$23,578,000)). 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 investment listing and the portfolio analysis. 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. 2019 was a strong year, with mining companies continuing down the path of disciplined capital allocation and focusing on returning surplus capital to shareholders. The Directors remain confident on the value available in the sector and 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 profit for the year, after taxation, was £114,066,000 (2018: loss of £91,087,000) of which £39,561,000 (2018: £32,013,000) is revenue profit.
It is the Board's intention to distribute substantially all of the Company's available income. The Directors recommend the payment of a final dividend as set out in the Chairman's Statement. Dividend payments/payable for the year ended 31 December 2019 amounted to £38,515,000 (2018: £31,747,000).
Promoting the success of the Company
Directors of large companies now have to explain more fully how they have discharged their duties under section 172(1) of the Companies Act 2006 in promoting the success of their companies for the benefit of members as a whole. This includes the likely consequences of their decisions in the longer term and how they have taken wider stakeholders' needs into account.
The enhanced disclosure that follows covers how the Board has engaged with and understands the views of stakeholders and how stakeholders' needs have been taken into account, the outcome of this engagement and the impact that it has had on the Board's decisions. The Board considers the main stakeholders in the Company to be the Manager, Investment Manager and the shareholders. The Board's main working relationship is with the Investment Manager, who is responsible for the Company's assets, asset allocation, stock and sector selection and risk management, as well as ancillary functions such as administration, secretarial, accounting and marketing services. In addition to this, the Board considers investee companies and key service providers of the Company to be stakeholders; the latter comprise the Company's Custodian, Depositary, Registrar and Broker.
A summary of the key areas of engagement undertaken by the Board with its key stakeholders in the year under review and how Directors have acted upon this to promote the long-term success of the Company are set out in the table below.
| Areas of engagement | Issue | Engagement | Impact |
| Investment mandate and objective | Our main working relationship is with the management company that we hold to account in managing shareholders' assets. The Board has responsibility to shareholders to ensure that the Company's portfolio of assets is invested in line with the stated investment objective and in a way that ensures an appropriate balance between spread of risk and portfolio returns. | We continued to work very closely with the Investment Manager throughout the year in further developing our investment strategy and underlying policies, not simply for the purpose of achieving the Company's investment objective but in the interests of shareholders and future investors. | The portfolio activities undertaken by the Investment Manager can be found in their report. The Company has been building exposure to longer dated growth opportunities that have significant potential, as well as quality growth companies where that growth translates into growth on a value per share basis. |
| Responsible ownership | The mining industries in which the Company's investment universe operate are facing ethical and sustainability issues that cannot be ignored by asset managers and investment companies alike. More than ever before the importance of good governance and sustainability practices are key factors in making investment decisions. | The Board believes that responsible investment and sustainability are integral to the longer-term delivery of the Company's success. The Board works closely with the Investment Manager to regularly review the Company's performance, investment strategy and underlying policies to ensure that the Company's investment objective continues to be met in an effective, responsible and sustainable way in the interests of shareholders and future investors. The Investment Manager's approach to the consideration of ESG factors in respect of the Company's portfolio, as well as the Investment Manager's engagement with investee companies to encourage the adoption of sustainable business practices which support long-term value creation, are kept under review by the Board. The Board also expects to be informed by the Investment Manager of any sensitive voting issues involving the Company's investments. Environmental issues were prominent in the engagement, as was executive pay and the re-election of directors. The Investment Manager reports to the Board in respect of its ESG policies and how these are integrated into the investment process; a summary of BlackRock's approach to ESG and sustainability is set out in the Annual Report and Financial Statements. The Investment Manager's engagement and voting policy is detailed in the Annual Report and Financial Statements and on the BlackRock website. | The Board and the Investment Manager believe there is a positive correlation between strong ESG practices and investment performance. It is especially vital in mining given the long investment cycle and its ability to impact a company maintaining its social license to operate. ESG is one of the many factors that we look at and site visits to companies' mines provide valuable insights into their ESG practices. BlackRock has stated that, as part of its commitment to sustainability, it will divest any investment in companies that derive more than 25% of revenues from thermal coal production from all discretionary active investment portfolios. During the year under review, the Company has had minimal exposure to companies whose principal activity is the extraction of thermal coal. Within the parameters of the Company's existing investment policy, the Investment Manager is continuing to look for opportunities to deploy capital in growth investments that should benefit from the demand for 'green' materials. It is likely that this area will become a more significant part of the portfolio. |
| Shareholders | Continued shareholder support and engagement are critical to the continued existence of the Company and the successful delivery of its long-term strategy. | The Board is committed to maintaining open channels of communication and to engage with shareholders. The Company welcomes and encourages attendance and participation from shareholders at its Annual General Meetings. Shareholders will have the opportunity to meet the Directors and Investment Manager and to address questions to them directly. The Investment Manager will also provide a presentation on the Company's performance and the outlook for the mining sector. The Annual Report and Half Yearly Financial Report are available on the BlackRock website and are also circulated to shareholders either in printed copy or via electronic communications. In addition, regular updates on performance, monthly factsheets, the daily NAV and other information are also published on the website at blackrock.co.uk/brwm. Unlike trading companies, one-to-one shareholder meetings normally take the form of a meeting with the Investment Manager as opposed to members of the Board. The Company's willingness to enter into discussions with institutional shareholders is also demonstrated by the programmes of institutional presentations by the Investment Manager. If shareholders wish to raise issues or concerns with the Board, they are welcome to do so at any time. The Chairman is available to meet directly with shareholders periodically to understand their views on governance and the Company's performance where they wish to do so. He may be contacted via the Company Secretary whose details are given in the Annual Report and Financial Statements. | The Board values any feedback and questions from shareholders ahead of and during Annual General Meetings in order to gain an understanding of their views and will take action when and as appropriate. Feedback and questions will also help the Company evolve its reporting, aiming to make reports more transparent and understandable. Feedback from all substantive meetings between the Investment Manager and shareholders will be shared with the Board. The Directors will also receive updates from the Company's broker on any feedback from shareholders, as well as share trading activity, share price performance and an update from the Investment Manager. |
| Discount management | One of the Board's long-term strategic aspirations is that the Company's shares should trade consistently at a price close to the NAV per share. | The Board monitors the Company's discount on an ongoing basis and has met with the Investment Manager and the Company's Broker on a regular basis to discuss methods to manage the discount. A range of discount control mechanisms have been reviewed and the benefits and disadvantages of these have been discussed at length. In addition, the Board has worked closely with the Investment Manager to develop the Company's marketing strategy, with the aim of ensuring effective communication with existing shareholders and to attract new shareholders to the Company in order to improve liquidity in the Company's shares and to sustain the share rating of the Company. | During the financial year the Company bought back 1,545,515 shares at a cost of £5,546,000. Since the year end and up to the date of this report, the Company has bought back a further 979,707 shares at a cost of £3,673,000. The Company participates in a focused investment trust sales and marketing initiative operated by the Manager on behalf of the investment trusts under its management. Further details are set out in the Annual Report and Financial Statements. The Board also took the opportunity in the 25th anniversary to promote the Company through marketing and public relation initiatives and, at a wider social level, by supporting scholarships for talented, but financially disadvantaged students to continue their studies to pursue a career in the mining industry. The Company's average discount for the year to 31 December 2019 was 13.9% and the discount at 25 February 2020 stands at 11.9%. |
| Service levels of third party providers | The Board acknowledges the importance of ensuring that the Company's principal suppliers are providing a suitable level of service, including the Investment Manager in respect of investment performance and delivering on the Company's investment mandate; the Custodian and Depositary in respect of their duties towards safeguarding the Company's assets; the Registrar in its maintenance of the Company's share register and dealing with investor queries; and the Company's Brokers in respect of the provision of advice and acting as a market maker for the Company's shares. | The Investment Manager reports to the Board on the Company's performance on a regular basis. The Board carries out a robust annual evaluation of the Investment Manager's performance, their commitment and available resources. The Board performs an annual review of the service levels of all third-party service providers and concludes on their suitability to continue in their role. The Board receives regular updates from the AIFM, Depositary, Registrar and Brokers on an ongoing basis. | All performance evaluations were performed on a timely basis and the Board concluded that all third party service providers, including the Manager and Investment Manager, were operating effectively and providing a good level of service. The level of fees paid to the Depositary was reviewed and reduced from 1.15 basis points per annum of net assets to a rate of 0.95 basis points per annum with effect from 1 January 2019. The interest rate on the Company's overdraft facility with The Bank of New York Mellon (International) Limited and the revolving credit facility with The Bank of New York Mellon was also reduced during the year by 10 basis points. |
| Board composition | The Board is committed to ensuring that its own composition brings an appropriate balance of knowledge, experience and skills, and that it is compliant with best corporate governance practice under the UK Code, including guidance on tenure and the composition of the Board's committees. | The Board undertook a review of succession planning arrangements in the year and identified the need for a new Director. The Nomination Committee agreed the selection criteria and the method of selection, recruitment and appointment, Board diversity, including gender, were carefully considered when establishing the criteria. The services of an external search consultant, Norman Broadbent Group PLC, as well as the Directors' range of contacts, were used to identify potential candidates. | The Board appointed Ollie Oliveira as a Director of the Company with effect from 3 February 2020. His biography is set out in the Annual Report and Financial Statements. Details of each Directors' contribution to the success and promotion of the Company are set out in the Directors' Report in the Annual Report and Financial Statements. Colin Buchan will retire at the forthcoming Annual General Meeting. |
SUSTAINABILITY AND OUR ESG POLICIES
The Board's approach
Environmental, social and governance (ESG) issues can present both opportunities and threats to long-term investment performance. The Company's investment universe comprises sectors that are likely to be highly impacted by increasing regulation as a result of climate change and other social and governance factors. Your Board is committed to ensuring that we have appointed a Manager that applies the highest standards of ESG practice. The Board believes that BlackRock is well placed as Manager to fulfil these requirements due to the integration of ESG into its investment processes, the emphasis it places on sustainability in its investment stewardship activities and its position in the industry as the largest supplier of sustainable investment products in the global market. More information on BlackRock's approach to sustainability is set out below.
Responsible ownership - BlackRock's approach
As a fiduciary to its clients, BlackRock has built its business to protect and grow the value of clients' assets. From BlackRock's perspective, business-relevant sustainability issues can contribute to a company's long-term financial performance and thus further incorporating these considerations into the investment research, portfolio construction and stewardship process can enhance long-term risk adjusted returns. By expanding access to data, insights and learning on material ESG risks and opportunities in investment processes across BlackRock's diverse platform, BlackRock believes that the investment process is greatly enhanced. ESG factors have been a key consideration of the BlackRock Natural Resources team's investment process since the team was formed in 2001 and the Company's portfolio managers work closely with BlackRock's Investment Stewardship team to assess the governance quality of companies and investigate any potential issues, risks or opportunities. The Portfolio Managers use ESG information when conducting research and due diligence on new investments and again when monitoring investments in the portfolio.
BlackRock's approach to sustainable investing
Considerations about sustainability have been at the centre of BlackRock's investment approach for many years and the firm offers more than 100 sustainable products and solutions. BlackRock believes that climate change is now a defining factor in companies' long-term prospects and that will have a significant and lasting impact on economic growth and prosperity. It is BlackRock's belief that climate risk now equates to investment risk and this will drive a profound reassessment of risk and asset values as investors seek to react to the impact of climate policy changes. This in turn is likely to drive a significant reallocation of capital away from traditional carbon intensive industries over the next decade.
In January 2020, with this transition in mind, BlackRock announced that it would accelerate its sustainable investing efforts and make a number of enhancements to its investment management and risk processes, including the following:
· heightening scrutiny on sectors with a high ESG risk, such as thermal coal producers, due to the investment risk they present to client portfolios;
· putting ESG analysis at the heart of Aladdin (BlackRock's proprietary trading platform) and using proprietary tools to help analyse ESG risk; and
· placing oversight of ESG risk with BlackRock's Risk and Quantitative Analysis group (RQA), to ensure that ESG risk is given increased weighting as a risk factor and is analysed with the same weight given to traditional measures such as credit or liquidity risk.
| The importance of considering ESG when investing in the Natural Resources Sector | ||
| Environmental | Social | Corporate governance |
| Mines will inevitably have an impact on the local environment. Key is how companies manage this process ensuring the benefits are appropriately shared amongst all stakeholders. The negative impact on the market capitalisation of companies such as BHP and Vale, after the Samarco and Brumadinho tailings dam failures, highlights the key role that ESG has on share price performance. As set out in more detail in the Annual Report and Financial Statements, BlackRock will be aligning its engagement and stewardship priorities to UN Sustainable Development Goals and is committed to voting against management to the extent that they have not demonstrated sufficient progress in how they manage these environmental impacts and operating events. | BlackRock believes it is vital that natural resources companies maintain their social license to operate. By this, BlackRock means that companies maintain broad acceptance from their employees, stakeholders, local communities and the national government. The portfolio management team's site visits to companies' assets provide them with valuable insight into these issues which often cannot be properly understood from company reports. | As with all companies, good corporate governance is critical for natural resources companies. In conjunction with the BlackRock Investment Stewardship team, the portfolio management team actively engages with companies on a wide range of governance issues including board independence, executive compensation, shareholder protection and timely disclosure. |
Investment stewardship
BlackRock also places a strong emphasis on sustainability in its stewardship activities. BlackRock has engaged with companies on sustainability-related questions for a number of years, urging management teams to make progress while also deliberately giving companies time to enhance disclosure consistent with the Sustainability Accounting Standards Board (SASB) and the Task Force on Climate-related Financial Disclosures (TCFD). This includes each company's plan for operating under a scenario where the Paris Agreement's goal of limiting global warming to less than two degrees is fully realised, as expressed by the TCFD guidelines. To this end, BlackRock is now a member of Climate Action 100+, a group of investors that engages with companies to improve climate disclosure and align business strategy with the goals of the Paris Agreement. BlackRock will be aligning its engagement and stewardship priorities to UN Sustainable Development Goals (including Gender Equality and Affordable and Clean Energy). BlackRock is committed to voting against management to the extent that they have not demonstrated sufficient progress on sustainability issues.
BlackRock is committed to transparency in terms of disclosure on its engagement with companies and voting rationales. Last year BlackRock voted against or withheld votes from 4,800 directors at 2,700 different companies. More details about BlackRock's investment stewardship process can be found on BlackRock's website at https://www.blackrock.com/uk/individual/about-us/investment-stewardship.
In terms of its own reporting, BlackRock believes that the SASB provides a clear set of standards for reporting sustainability information across a wide range of issues, from labour practices to data privacy to business ethics. For evaluating and reporting climate-related risks, as well as the related governance issues that are essential to managing them, the TCFD provides a valuable framework. BlackRock recognise that reporting to these standards requires significant time, analysis and effort. BlackRock's own SASB-aligned disclosure is available on its website at https://www.blackrock.com/corporate/literature/continuous-disclosure-and-important-information/blackrock2018sasbdisclosure.pdf, and BlackRock is working towards a TCFD-aligned disclosure by the end of 2020.
BlackRock is also a founding member of the TCFD and a signatory to the UN's Principles for Responsible Investment. BlackRock also signed the Vatican's 2019 statement advocating carbon pricing regimes, which it believes are essential to combating climate change. BlackRock has also joined with France, Germany and global foundations to establish the Climate Finance Partnership, which is one of several public-private efforts to improve financing mechanisms for infrastructure investment. More information on BlackRock's policies on Corporate Sustainability can be found on BlackRock's website at https://www.blackrock.com/uk/individual/about-us/corporate-sustainability.
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 a number of indices as set out in the Financial Highlights in the Annual Report and Financial Statements.
Share price discount to net asset value per share (NAV)
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 2019, the discount fell from 12.4% on a cum income basis to 11.6% and the average discount for the year was 13.9%. During the year, the Company bought back 1,545,515 ordinary shares and a further 979,707 have been repurchased since the financial year end and up to the date of this report. More details are given in the Directors' Report in the Annual Report and Financial Statements. 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 in 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 at each Board meeting. A definition setting out in detail how the ongoing charges ratio is calculated is included in the Glossary in 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 in the Annual Report and Financial Statements.
| Year ended 31 December 2019 | Year ended 31 December 2018 | |
| Net asset value total return1,2 | 17.2% | -11.5% |
| Share price total return1,2 | 19.4% | -10.7% |
| Discount to net asset value2 | 11.6% | 12.4% |
| Revenue earnings per share | 22.46p | 18.15p |
| Total dividends per share | 22.00p | 18.00p |
| Ongoing charges2,3 | 1.02% | 0.93% |
| Ongoing charges on gross assets2,4 | 0.89% | 0.82% |
| ============= | ============= |
1 This measures the Company's NAV and share price total return, which assumes dividends paid by the Company have been reinvested.
2 Alternative Performance Measures, see Glossary in the Annual Report and Financial Statements.
3 Ongoing charges represent the management fee and all other recurring operating expenses, excluding finance costs, direct transaction costs, custody transaction charges and taxation, as a % of average shareholders' funds.
4 Ongoing charges based on gross assets represent the management fee and all other recurring operating expenses, excluding finance costs, direct transaction costs, custody transaction charges 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 and emerging 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 Committee chairmen of the BlackRock investment trusts 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 both the principal and emerging 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 that follows, together with an explanation of how they are managed and mitigated.
Emerging risks are considered by the Board as they come into view and are incorporated into the existing review of the Company's risk register. They were also considered as part of the annual evaluation process. Additionally, the Manager considers emerging risks in numerous forums and the Risk and Quantitative Analysis team produces an annual risk survey. Any material risks of relevance to the Company through the annual risk survey will be communicated to the Board.
The Board will continue to assess these risks on an ongoing basis. In relation to the 2018 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 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 other 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 and 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 Regulation, 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 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. |
| Operational The Company 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 (which acts as both Depositary, Custodian and Fund Accountant and maintains the Company's assets, settlement 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 (International) Limited, produce internal control reports to provide assurance regarding the effective operation of internal controls as reported on by their reporting accountant. These reports are provided to the Audit & Management Engagement Committee. The Company's financial 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 management contract 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 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 in the Annual Report and Financial Statements. |
VIABILITY STATEMENT
In accordance with Provision 31 of the 2018 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 (1.02%); 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 in 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 2019 are set out in the Directors' Biographies in 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 Strategic Report was approved by the Board at its meeting on 27 February 2020.
By order of the Board
CAROLINE DRISCOLL
For and on behalf of
BlackRock Investment Management (UK) Limited
Company Secretary
27 February 2020
TRANSACTIONS WITH THE INVESTMENT MANAGER AND AIFM
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 in the Annual Report and Financial Statements.
The investment management fee due for the year ended 31 December 2019 amounted to £6,480,000 (2018: £6,041,000). At the year end, £1,714,000 (2018: £1,359,000) was outstanding in respect of the management fee.
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 2019 amounted to £159,000 excluding VAT (2018: £139,000 excluding VAT). Marketing fees of £50,000 were outstanding as at 31 December 2019 (2018: £69,000).
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. Five members of the Board hold shares in the Company. Mr Buchan holds 29,000 ordinary shares, Mr Cheyne 24,000 ordinary shares, Mr Edey 20,000 ordinary shares, Ms Mosely 7,400 ordinary shares and Ms Lewis 5,362 ordinary shares. The amount of Directors' fees outstanding at 31 December 2019 was £14,375 (2018: £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 in 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 2018 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 in 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 2019, 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
DAVID CHEYNE
Chairman
27 February 2020
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 DECEMBER 2019
Notes | Revenue 2019 £'000 | Revenue 2018 £'000 | Capital 2019 £'000 | Capital 2018 £'000 | Total 2019 £'000 | Total 2018 £'000 | |
| Income from investments held at fair value through profit or loss | 3 | 40,880 | 32,049 | - | - | 40,880 | 32,049 |
| Other income | 3 | 5,634 | 6,145 | - | - | 5,634 | 6,145 |
| ----------------- | ----------------- | ----------------- | ----------------- | ----------------- | ----------------- | ||
| Total revenue | 46,514 | 38,194 | - | - | 46,514 | 38,194 | |
| ========== | ========== | ========== | ========== | ========== | ========== | ||
| Net profit/(loss) on investments held at fair value through profit or loss | - | - | 77,517 | (112,935) | 77,517 | (112,935) | |
| Net profit/(loss) on foreign exchange | - | - | 3,230 | (4,754) | 3,230 | (4,754) | |
| ----------------- | ----------------- | ----------------- | ----------------- | ----------------- | ----------------- | ||
| Total | 46,514 | 38,194 | 80,747 | (117,689) | 127,261 | (79,495) | |
| ========== | ========== | ========== | ========== | ========== | ========== | ||
| Expenses | |||||||
| Investment management fee | 4 | (1,564) | (1,454) | (4,916) | (4,587) | (6,480) | (6,041) |
| Other operating expenses | 5 | (1,030) | (1,025) | (20) | (14) | (1,050) | (1,039) |
| ----------------- | ----------------- | ----------------- | ----------------- | ----------------- | ----------------- | ||
| Total operating expenses | (2,594) | (2,479) | (4,936) | (4,601) | (7,530) | (7,080) | |
| ========== | ========== | ========== | ========== | ========== | ========== | ||
| Net profit/(loss) on ordinary activities before finance costs and taxation | 43,920 | 35,715 | 75,811 | (122,290) | 119,731 | (86,575) | |
| Finance costs | 6 | (896) | (798) | (2,683) | (2,369) | (3,579) | (3,167) |
| ----------------- | ----------------- | ----------------- | ----------------- | ----------------- | ----------------- | ||
| Net profit/(loss) on ordinary activities before taxation | 43,024 | 34,917 | 73,128 | (124,659) | 116,152 | (89,742) | |
| ========== | ========== | ========== | ========== | ========== | ========== | ||
| Taxation | (3,463) | (2,904) | 1,377 | 1,559 | (2,086) | (1,345) | |
| Profit/(loss) for the year | 39,561 | 32,013 | 74,505 | (123,100) | 114,066 | (91,087) | |
| ========== | ========== | ========== | ========== | ========== | ========== | ||
| Earnings/(loss) per ordinary share (pence) | 8 | 22.46 | 18.15 | 42.30 | (69.78) | 64.76 | (51.63) |
| ========== | ========== | ========== | ========== | ========== | ========== |
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 2019
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 2019 | ||||||||
| At 31 December 2018 | 9,651 | 127,155 | 22,779 | 114,147 | 373,301 | 38,562 | 685,595 | |
| Total comprehensive income: | ||||||||
| Net profit for the year | - | - | - | - | 74,505 | 39,561 | 114,066 | |
| Transactions with owners, recorded directly to equity: | ||||||||
| Ordinary shares purchased into treasury | 9, 10 | - | - | - | (5,512) | - | - | (5,512) |
| Share purchase costs | 10 | - | - | - | (34) | - | - | (34) |
| Dividends paid1 | 7 | - | - | - | - | - | (37,005) | (37,005) |
| ----------------- | ----------------- | ----------------- | ----------------- | ----------------- | ----------------- | ----------------- | ||
| At 31 December 2019 | 9,651 | 127,155 | 22,779 | 108,601 | 447,806 | 41,118 | 757,110 | |
| ========== | ========== | ========== | ========== | ========== | ========== | ========== | ||
| 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 (loss)/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 | - | - | - | (439) | - | - | (439) |
| Share purchase costs | 9 | - | - | - | (3) | - | - | (3) |
| Dividends paid2 | 7 | - | - | - | - | - | (27,523) | (27,523) |
| ----------------- | ----------------- | ----------------- | ----------------- | ----------------- | ----------------- | ----------------- | ||
| At 31 December 2018 | 9,651 | 127,155 | 22,779 | 114,147 | 373,301 | 38,562 | 685,595 | |
| ========== | ========== | ========== | ========== | ========== | ========== | ========== | ||
1 The final dividend of 9.00p per share for the year ended 31 December 2018, declared on 28 February 2019 and paid on 10 May 2019; 1st interim dividend of 4.00p per share for the year ended 31 December 2019, declared on 2 May 2019 and paid on 28 June 2019; 2nd interim dividend of 4.00p per share for the year ended 31 December 2019, declared on 20 August 2019 and paid on 1 October 2019; and 3rd interim dividend of 4.00p per share for the year ended 31 December 2019, declared on 14 November 2019 and paid on 20 December 2019.
2 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.
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 2019 | ||||||||
| At 31 December 2018 | 9,651 | 127,155 | 22,779 | 114,147 | 380,486 | 31,377 | 685,595 | |
| Total comprehensive income: | ||||||||
| Net profit for the year | - | - | - | - | 74,127 | 39,939 | 114,066 | |
| Transactions with owners, recorded directly to equity: | ||||||||
| Ordinary shares purchased into treasury | 9, 10 | - | - | - | (5,512) | - | - | (5,512) |
| Share purchase costs | 10 | - | - | - | (34) | - | - | (34) |
| Dividends paid1 | 7 | - | - | - | - | - | (37,005) | (37,005) |
| ----------------- | ----------------- | ----------------- | ----------------- | ----------------- | ----------------- | ----------------- | ||
| At 31 December 2019 | 9,651 | 127,155 | 22,779 | 108,601 | 454,613 | 34,311 | 757,110 | |
| ========== | ========== | ========== | ========== | ========== | ========== | ========== | ||
| 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 (loss)/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 | - | - | - | (439) | - | - | (439) |
| Share purchase costs | 9 | - | - | - | (3) | - | - | (3) |
| Dividends paid2 | 7 | - | - | - | - | - | (27,523) | (27,523) |
| ----------------- | ----------------- | ----------------- | ----------------- | ----------------- | ----------------- | ----------------- | ||
| At 31 December 2018 | 9,651 | 127,155 | 22,779 | 114,147 | 380,486 | 31,377 | 685,595 | |
| ========== | ========== | ========== | ========== | ========== | ========== | ========== | ||
1 The final dividend of 9.00p per share for the year ended 31 December 2018, declared on 28 February 2019 and paid on 10 May 2019; 1st interim dividend of 4.00p per share for the year ended 31 December 2019, declared on 2 May 2019 and paid on 28 June 2019; 2nd interim dividend of 4.00p per share for the year ended 31 December 2019, declared on 20 August 2019 and paid on 1 October 2019; and 3rd interim dividend of 4.00p per share for the year ended 31 December 2019, declared on 14 November 2019 and paid on 20 December 2019.
2 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.
CONSOLIDATED AND PARENT COMPANY STATEMENTS OF FINANCIAL POSITION AS AT 31 DECEMBER 2019
| 31 December 2019 | 31 December 2018 | ||||
| | Notes | Group £'000 | Company £'000 | Group £'000 | Company £'000 |
| Non current assets | |||||
| Investments held at fair value through profit or loss | 845,777 | 851,732 | 778,526 | 784,300 | |
| ----------------- | ----------------- | ----------------- | ----------------- | ||
| Current assets | |||||
| Other receivables | 4,626 | 4,626 | 2,326 | 2,326 | |
| Cash collateral held with brokers | 431 | 431 | 650 | 650 | |
| Cash and cash equivalents | 1,399 | 39 | 35,501 | 30,793 | |
| ----------------- | ----------------- | ----------------- | ----------------- | ||
| 6,456 | 5,096 | 38,477 | 33,769 | ||
| ----------------- | ----------------- | ----------------- | ----------------- | ||
| Total assets | 852,233 | 856,828 | 817,003 | 818,069 | |
| ========== | ========== | ========== | ========== | ||
| Current liabilities | |||||
| Other payables | (4,003) | (5,071) | (16,725) | (17,791) | |
| Derivative financial liabilities held at fair value through profit or loss | (314) | (314) | (312) | (312) | |
| Bank overdraft | (99) | (3,626) | - | - | |
| Bank loans | (90,583) | (90,583) | (114,221) | (114,221) | |
| ----------------- | ----------------- | ----------------- | ----------------- | ||
| (94,999) | (99,594) | (131,258) | (132,324) | ||
| ----------------- | ----------------- | ----------------- | ----------------- | ||
| Total assets less current liabilities | 757,234 | 757,234 | 685,745 | 685,745 | |
| ========== | ========== | ========== | ========== | ||
| Non current liabilities | |||||
| Deferred taxation liability | (124) | (124) | (150) | (150) | |
| Net assets | 757,110 | 757,110 | 685,595 | 685,595 | |
| ========== | ========== | ========== | ========== | ||
| 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 | 108,601 | 108,601 | 114,147 | 114,147 |
| Capital reserves | |||||
| At 1 January | 373,301 | 380,486 | 496,401 | 503,885 | |
| Net profit/(loss) for the year | 74,505 | 74,127 | (123,100) | (123,399) | |
| ----------------- | ----------------- | ----------------- | ----------------- | ||
| 10 | 447,806 | 454,613 | 373,301 | 380,486 | |
| ----------------- | ----------------- | ----------------- | ----------------- | ||
| Revenue reserve | |||||
| At 1 January | 38,562 | 31,377 | 34,072 | 26,588 | |
| Net profit for the year | 39,561 | 39,939 | 32,013 | 32,312 | |
| Dividends paid | (37,005) | (37,005) | (27,523) | (27,523) | |
| ----------------- | ----------------- | ----------------- | ----------------- | ||
| 10 | 41,118 | 34,311 | 38,562 | 31,377 | |
| ----------------- | ----------------- | ----------------- | ----------------- | ||
| Total equity | 757,110 | 757,110 | 685,595 | 685,595 | |
| ========== | ========== | ========== | ========== | ||
| Net asset value per ordinary share (pence) | 8 | 433.17 | 433.17 | 388.81 | 388.81 |
| ========== | ========== | ========== | ========== | ||
CONSOLIDATED AND PARENT COMPANY CASH FLOW STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2019
| 31 December 2019 | 31 December 2018 | ||||
| | Notes | Group £'000 | Company £'000 | Group £'000 | Company £'000 |
| Operating activities | |||||
| Net profit/(loss) before taxation | 116,152 | 116,152 | (89,742) | (89,742) | |
| Add back finance costs | 3,579 | 3,579 | 3,167 | 3,167 | |
| Net (profit)/loss on investments held at fair value through profit or loss (including transaction costs) | (76,960) | (77,141) | 113,315 | 113,234 | |
| Net (profit)/loss on foreign exchange | (3,230) | (3,230) | 4,754 | 4,754 | |
| Sales of investments held at fair value through profit or loss | 377,210 | 377,210 | 235,980 | 235,980 | |
| Purchases of investments held at fair value through profit or loss | (367,499) | (367,499) | (221,634) | (218,342) | |
| Increase in other receivables | (2,058) | (2,058) | (119) | (119) | |
| Increase/(decrease) in other payables | 268 | 270 | (1,889) | (1,889) | |
| (Increase)/decrease in amounts due from brokers | (118) | (118) | 360 | 360 | |
| (Decrease)/increase in amounts due to brokers | (13,713) | (13,713) | 13,639 | 13,639 | |
| Net movement in cash collateral held with brokers | 219 | 219 | 1,333 | 1,333 | |
| ----------------- | ----------------- | ----------------- | ----------------- | ||
| Net cash inflow from operating activities before taxation | 33,850 | 33,671 | 59,164 | 62,375 | |
| ========== | ========== | ========== | ========== | ||
| Taxation paid | (2,035) | (2,035) | (969) | (969) | |
| Taxation on investment income included within gross income | (124) | (124) | (765) | (765) | |
| ----------------- | ----------------- | ----------------- | ----------------- | ||
| Net cash inflow from operating activities | 31,691 | 31,512 | 57,430 | 60,641 | |
| ========== | ========== | ========== | ========== | ||
| Financing activities | |||||
| (Repayment)/drawdown of loans | (20,000) | (20,000) | 20,000 | 20,000 | |
| Interest paid | (3,815) | (3,815) | (3,167) | (3,167) | |
| Payments for ordinary shares purchased into treasury | (4,632) | (4,632) | (439) | (439) | |
| Share purchase costs paid | (32) | (32) | (3) | (3) | |
| Dividends paid | 7 | (37,005) | (37,005) | (27,523) | (27,523) |
| ----------------- | ----------------- | ----------------- | ----------------- | ||
| Net cash outflow from financing activities | (65,484) | (65,484) | (11,132) | (11,132) | |
| ========== | ========== | ========== | ========== | ||
| (Decrease)/increase in cash and cash equivalents | (33,793) | (33,972) | 46,298 | 49,509 | |
| Cash and cash equivalents at start of the year | 35,501 | 30,793 | (11,556) | (19,475) | |
| Effect of foreign exchange rate changes | (408) | (408) | 759 | 759 | |
| ----------------- | ----------------- | ----------------- | ----------------- | ||
| Cash and cash equivalents at end of year | 1,300 | (3,587) | 35,501 | 30,793 | |
| ========== | ========== | ========== | ========== | ||
| Comprised of: | |||||
| Cash and cash equivalents | 1,399 | 39 | 35,501 | 30,793 | |
| Bank overdraft | (99) | (3,626) | - | - | |
| ----------------- | ----------------- | ----------------- | ----------------- | ||
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2019
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 26th 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 have been applied consistently, other than where new policies have been adopted and are set out below.
(a) Basis of preparation
The Group and Parent Company financial statements have been prepared under the historic cost convention modified by the revaluation of certain financial assets and financial liabilities held at fair value through profit or loss and 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 October 2019, is compatible with IFRS, the financial statements have been prepared in accordance with guidance set out in the SORP.
The revised SORP issued in October 2019 is applicable for accounting periods beginning on or after 1 January 2019. As a result, the gains on disposals of investments of £31,498,000 (2018: loss of £60,679,000) and gains on revaluation of investments of £45,462,000 (2018: loss of £52,636,000) have now been combined, as shown in note 10 in the Annual Report and Financial Statements. The result of this change has no impact on the net asset value or total return for both the current year and prior year. No other accounting policies or disclosures have changed as a result of the revised 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 the currency of the primary economic environment in which the Group operates. All values are rounded to the nearest thousand pounds sterling (£'000) except where otherwise indicated.
IFRS standards that have been recently 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 Group 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 Group to recognise uncertain tax positions which are more than probable within its financial statements and could potentially require the Group to recognise tax reclaims filed with HMRC if their recoverability becomes more than probable. The adoption of this interpretation has had no impact on the financial statements of the Group.
IFRS standards that have yet to be adopted:
A number of new standards, amendments to standards and interpretations are effective for the annual periods beginning on or after 1 January 2020 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 Group.
Amendments to IFRS 3 - definition of a business (effective 1 January 2020). This amendment revises the definition of a business. According to feedback received by the International Accounting Standards Board, application of the current guidance is commonly thought to be too complex and it results in too many transactions qualifying as business combinations. The standard has not been endorsed by the EU. This standard is unlikely to have any impact on the Group.
Amendments to IAS 1 and IAS 8 on the definition of material (effective 1 January 2020). The amendments to IAS 1, 'Presentation of financial statements', and IAS 8, 'Accounting policies, changes in accounting estimates and errors', and consequential amendments to other IFRSs require companies to:
(i) use a consistent definition of materiality throughout IFRSs and the Conceptual Framework for Financial Reporting;
(ii) clarify the explanation of the definition of material; and
(iii) incorporate some of the guidance in IAS 1 about immaterial information.
The standard has not been endorsed by the EU. This standard is unlikely to have any impact on the Group.
Amendments to IFRS 9, IAS 39 and IFRS 7 - Interest rate benchmark reform (effective 1 January 2020). These amendments provide certain reliefs in connection with the interest rate benchmark reform. The reliefs relate to hedge accounting and have the effect that the Inter Bank Offer Rate (IBOR) reform should not generally cause hedge accounting to terminate. However, any hedge ineffectiveness should continue to be recorded in the income statement. Given the pervasive nature of hedges involving IBOR based contracts, the reliefs will affect companies in all industries.
The standard has been endorsed by the EU. This standard is unlikely to have any significant impact on the Group as it does not hedge.
IFRS 17 - 'Insurance contracts' (effective 1 January 2021). This standard replaces IFRS 4, which currently permits a wide variety of practices in accounting for insurance contracts. IFRS 17 will fundamentally change the accounting by all entities that issue insurance contracts and investment contracts with discretionary participation features. The standard has not been endorsed by the EU. This standard is unlikely to have any impact on the Group as it has no insurance contracts.
(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 (together 'the Group'). The subsidiary company is not considered an investment entity.
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 consolidated statement of comprehensive income
In order to better 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 in 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
In accordance with IFRS 9, the Group classifies its investments at initial recognition as held at fair value through profit or loss and are managed and evaluated on a fair value basis in accordance with its investment strategy and business model.
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 as much 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. See note 2(q) below.
(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 on an amortised cost basis.
(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) Share repurchases
Shares repurchased and subsequently cancelled - share capital is reduced by the nominal value of the shares repurchased and the capital redemption reserve is correspondingly increased in accordance with section 733 of the Companies Act 2006. The full cost of the repurchase is charged to the special reserve.
Shares repurchased and held in treasury - the full cost of the repurchase is charged to the special reserve.
(q) 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 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 a 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 18(d) of the Annual Report and Financial Statements.
3. INCOME
| | 2019 £'000 | 2018 £'000 |
| Income from investments held at fair value through profit or loss: | ||
| UK dividends | 11,817 | 10,806 |
| UK special dividends | 4,402 | - |
| Overseas dividends | 11,394 | 12,245 |
| Overseas special dividends | 2,249 | 396 |
| Income from contractual rights (OZ Minerals Royalty) | 1,541 | 2,294 |
| Income from debentures (Vale) | 3,708 | 277 |
| Fixed income | 5,769 | 6,031 |
| ----------------- | ----------------- | |
| 40,880 | 32,049 | |
| ========== | ========== | |
| Other income: | ||
| Option premium income | 6,008 | 6,129 |
| Deposit interest | 106 | 36 |
| Underwriting commission | - | 188 |
| Stock lending income | 77 | 172 |
| Losses on investment dealing in the subsidiary | (557) | (380) |
| ---------------- 5,634 | ---------------- 6,145 | |
| ----------------- | ----------------- | |
| Total income | 46,514 | 38,194 |
| ========== | ========== |
During the year, the Group received option premiums totalling £5,986,000 (2018: £5,874,000) for writing options for the purposes of revenue generation. Option premiums of £6,008,000 (2018: £6,129,000) were amortised to revenue; see accounting policy note 2(e). At 31 December 2019, there were five (2018: two) open positions with an associated liability of £314,000 (2018: £312,000).
Dividends and interest received in cash during the year amounted to £27,581,000 and £8,252,000 respectively (2018: £23,675,000 and £6,060,000).
Special dividends amounting to £5,229,000 (2018: £nil) have been recognised in capital during the year and included within investment gains.
4. INVESTMENT MANAGEMENT FEE
| 2019 | 2018 | |||||
| Revenue £'000 | Capital £'000 | Total £'000 | Revenue £'000 | Capital £'000 | Total £'000 | |
| Investment management fee | 1,564 | 4,916 | 6,480 | 1,454 | 4,587 | 6,041 |
| ----------------- | ----------------- | ----------------- | ----------------- | ----------------- | ----------------- | |
| Total | 1,564 | 4,916 | 6,480 | 1,454 | 4,587 | 6,041 |
| ========== | ========== | ========== | ========== | ========== | ========== | |
The investment 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 £5,888,000 (2018: £5,830,000) of the investment management fee was generated from net assets and £592,000 (2018: £211,000) from the gearing effect on gross assets due to the quarter-on-quarter increase in the NAV per share during the year as set out below:
Quarter end | Cum income NAV per share (pence) | Quarterly increase/ (decrease) % | Gearing effect on management fees (£'000) |
| 31 December 2018 | 388.81 | - | - |
| 31 March 2019 | 422.80 | +8.7 | 188 |
| 30 June 2019 | 440.97 | +4.3 | 148 |
| 30 September 2019 | 414.80 | (5.9) | - |
| 31 December 2019 | 433.17 | +4.4 | 256 |
| ========== | ========== | ========== |
The daily average of the net assets under management during the year ended 31 December 2019 was £733,356,000 (2018: £755,993,000). 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
| 2019 £'000 | 2018 £'000 | |
| Allocated to revenue | ||
| Custody fee | 114 | 127 |
| Auditors' remuneration: | ||
| - audit services | 36 | 33 |
| - non-audit services1 | 7 | 7 |
| Registrar's fee | 88 | 87 |
| Directors' emoluments2 | 190 | 221 |
| AIC Fees | 22 | 20 |
| Broker fees | 24 | 25 |
| Depositary fees | 63 | 88 |
| FCA fee | 18 | 18 |
| Directors' insurance | 14 | 22 |
| Marketing fees | 159 | 139 |
| Stock exchange fees | 19 | 19 |
| Legal and professional fees | 43 | 67 |
| Bank facility fees3 | 75 | 72 |
| Directors' search fees | 26 | - |
| Printing and postage costs | 45 | 26 |
| Other administrative costs | 87 | 54 |
| ----------------- | ----------------- | |
| 1,030 | 1,025 | |
| ========== | ========== | |
| Allocated to capital | ||
| Custody transaction charges | 20 | 14 |
| ----------------- | ----------------- | |
| 1,050 | 1,039 | |
| ========== | ========== |
| 2019 | 2018 | |
| The Company's ongoing charges4, calculated as a percentage of average net assets and using recurring expenses excluding finance costs, direct transaction costs, custody transaction charges and taxation were: | 1.02% | 0.93% |
| The Company's ongoing charges4, calculated as a percentage of average gross assets and using recurring expenses excluding finance costs, direct transaction costs, custody transaction charges and taxation were: | 0.89% | 0.82% |
| ========== | ========== |
1 Fees paid to the auditors for non-audit services of £6,580 excluding VAT (2018: £6,580) relate to the review of the half yearly financial statements.
2 Details of the Directors' emoluments are given in the Directors' Remuneration Report in 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 loan facility amount whether drawn or undrawn.
4 Alternative Performance Measures, see Glossary in the Annual Report and Financial Statements.
For the year ended 31 December 2019, expenses of £20,000 (2018: £14,000) 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
| 2019 | 2018 | |||||
| Revenue £'000 | Capital £'000 | Total £'000 | Revenue £'000 | Capital £'000 | Total £'000 | |
| Interest on bank loans | 889 | 2,662 | 3,551 | 779 | 2,312 | 3,091 |
| Interest payable - bank overdraft | 7 | 21 | 28 | 19 | 57 | 76 |
| ----------------- | ----------------- | ----------------- | ----------------- | ----------------- | ----------------- | |
| Total | 896 | 2,683 | 3,579 | 798 | 2,369 | 3,167 |
| ========== | ========== | ========== | ========== | ========== | ========== | |
7. DIVIDENDS
| Record date | Payment date | 2019 £'000 | 2018 £'000 | |
| Final dividend of 9.00p per share for the year ended 31 December 2018 (2017: 6.60p) | 22 March 2019 | 10 May 2019 | 15,870 | 11,646 |
| 1st interim dividend of 4.00p per share for the year ended 31 December 2019 (2018: 3.00p) | 31 May 2019 | 28 June 2019 | 7,053 | 5,294 |
| 2nd interim dividend of 4.00p per share for the year ended 31 December 2019 (2018: 3.00p) | 20 August 2019 | 1 October 2019 | 7,052 | 5,293 |
| 3rd interim dividend of 4.00p per share for the year ended 31 December 2019 (2018: 3.00p) | 22 November 2019 | 20 December 2019 | 7,030 | 5,290 |
| ----------------- | ----------------- | |||
| 37,005 | 27,523 | |||
| ========== | ========== |
The total dividends payable in respect of the year ended 31 December 2019 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:
| 2019 £'000 | 2018 £'000 | |
| 1st interim dividend of 4.00p per share for the year ended 31 December 2019 (2018: 3.00p) | 7,053 | 5,294 |
| 2nd interim dividend of 4.00p per share for the year ended 31 December 2019 (2018: 3.00p) | 7,052 | 5,293 |
| 3rd interim dividend of 4.00p per share for the year ended 31 December 2019 (2018: 3.00p) | 7,030 | 5,290 |
| Final interim dividend of 10.00p per share for the year ended 31 December 2019 (2018: final dividend 9.00p)* | 17,380 | 15,870 |
| ----------------- | ----------------- | |
| 38,515 | 31,747 | |
| ========== | ========== |
* Based on 173,805,020 (2018: 176,330,242) ordinary shares in issue on 27 February 2020.
8. CONSOLIDATED EARNINGS AND NET ASSET VALUE PER ORDINARY SHARE
| 2019 | 2018 | |
| Net revenue profit attributable to ordinary shareholders (£'000) | 39,561 | 32,013 |
| Net capital profit/(loss) attributable to ordinary shareholders (£'000) | 74,505 | (123,100) |
| ---------------------- | ---------------------- | |
| Total profit/(loss) attributable to ordinary shareholders (£'000) | 114,066 | (91,087) |
| =========== | =========== | |
| Equity shareholders' funds (£'000) | 757,110 | 685,595 |
| The weighted average number of ordinary shares in issue during the year, on which the earnings per ordinary share was calculated was: | 176,135,318 | 176,426,789 |
| The actual number of ordinary shares in issue at the year end, on which the net asset value per ordinary share was calculated was: | 174,784,727 | 176,330,242 |
| Earnings per share | ||
| Revenue earnings per share (pence) | 22.46 | 18.15 |
| Capital profit/(loss) per share (pence) | 42.30 | (69.78) |
| ---------------------- | ---------------------- | |
| Total profit/(loss) per share (pence) | 64.76 | (51.63) |
| =========== | =========== |
| As at 31 December 2019 | As at 31 December 2018 | |
| Net asset value per ordinary share (pence) | 433.17 | 388.81 |
| Ordinary share price (pence) | 383.00 | 340.50 |
| =========== | =========== |
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 2018 | 176,330,242 | 16,681,600 | 193,011,842 | 9,651 |
| Shares purchased into treasury | (1,545,515) | 1,545,515 | - | - |
| ---------------------- | ---------------------- | ---------------------- | ---------------------- | |
| At 31 December 2019 | 174,784,727 | 18,227,115 | 193,011,842 | 9,651 |
| ============ | ============ | ============ | ============ |
During the year 1,545,515 shares were bought back and transferred to treasury for a total consideration of £5,546,000 (2018: 125,000 shares were bought back and transferred to treasury for a total consideration of £442,000). Since the year end a further 979,707 ordinary shares have been bought back and held in treasury for a total consideration of £3,673,000.
10. RESERVES
| Distributable reserves | ||||||
Group | Share premium account £'000 | Capital redemption reserve £'000 | Special reserve £'000 | Capital reserve - arising on investments sold £'000 | Capital reserve - arising on revlauation of investments held £'000 | Revenue reserve £'000 |
| At 31 December 2018 | 127,155 | 22,779 | 114,147 | 252,127 | 121,174 | 38,562 |
| Movement during the year: | ||||||
| Total comprehensive income: | ||||||
| Net capital profit for the year | - | - | - | 29,423 | 45,082 | - |
| Net revenue profit for the year | - | - | - | - | - | 39,561 |
| Transactions with owners recorded directly to equity: | ||||||
| Ordinary shares purchased into treasury | - | - | (5,512) | - | - | - |
| Share purchase costs | - | - | (34) | - | - | - |
| Dividends paid | - | - | - | - | - | (37,005) |
| ---------------------- | ---------------------- | ---------------------- | ---------------------- | ---------------------- | ---------------------- | |
| At 31 December 2019 | 127,155 | 22,779 | 108,601 | 281,550 | 166,256 | 41,118 |
| ============ | ============ | ============ | ============ | ============ | ============ | |
| 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 2018 | 127,155 | 22,779 | 114,147 | 252,126 | 128,360 | 31,377 |
| Movement during the year: | ||||||
| Total comprehensive income: | ||||||
| Net capital profit for the year | - | - | - | 28,484 | 45,643 | - |
| Net revenue profit for the year | - | - | - | - | - | 39,939 |
| Transactions with owners recorded directly to equity: | ||||||
| Ordinary shares purchased into treasury | - | - | (5,512) | - | - | - |
| Share purchase costs | - | - | (34) | - | - | - |
| Dividends paid | - | - | - | - | - | (37,005) |
| ---------------------- | ---------------------- | ---------------------- | ---------------------- | ---------------------- | ---------------------- | |
| At 31 December 2019 | 127,155 | 22,779 | 108,601 | 280,610 | 174,003 | 34,311 |
| ============ | ============ | ============ | ============ | ============ | ============ | |
Pursuant to a resolution of the Company passed at an Extraordinary General Meeting on 13 January 1998 and following the Company's application to the Court for cancellation of its share premium account, the Court approval was received on 27 January 1999 and £157,633,000 was transferred from the share premium account to a special reserve which is a distributable reserve.
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. 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 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.
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. The determination of what constitutes 'observable' inputs requires significant judgement by the Investment Manager.
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 risks 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 2019 - Group | Level 1 £'000 | Level 2 £'000 | Level 3 £'000 | Total £'000 |
| Assets: | ||||
| Equity investments | 761,242 | - | - | 761,242 |
| Fixed income securities | 38,646 | 30,099 | - | 68,745 |
| Investment in contractual rights | - | - | 15,790 | 15,790 |
| ---------------------- | ---------------------- | ---------------------- | ---------------------- | |
| Total assets | 799,888 | 30,099 | 15,790 | 845,777 |
| ============ | ============ | ============ | ============ | |
| Liabilities: | ||||
| Derivative financial instruments - written options | - | (314) | - | (314) |
| ---------------------- | ---------------------- | ---------------------- | ---------------------- | |
| Total | 799,888 | 29,785 | 15,790 | 845,463 |
| ============ | ============ | ============ | ============ | |
| 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 investments | 676,645 | 6,101 | - | 682,746 |
| Fixed income securities | 74,017 | 3,250 | - | 77,267 |
| Investment in contractual rights | - | - | 18,513 | 18,513 |
| ---------------------- | ---------------------- | ---------------------- | ---------------------- | |
| Total assets | 750,662 | 9,351 | 18,513 | 778,526 |
| ============ | ============ | ============ | ============ | |
| Liabilities: | ||||
| Derivative financial instruments - written options | - | (312) | - | (312) |
| ---------------------- | ---------------------- | ---------------------- | ---------------------- | |
| Total | 750,662 | 9,039 | 18,513 | 778,214 |
| ============ | ============ | ============ | ============ | |
| Financial assets/(liabilities) at fair value through profit or loss at 31 December 2019 - Company | Level 1 £'000 | Level 2 £'000 | Level 3 £'000 | Total £'000 |
| Assets: | ||||
| Equity investments | 758,889 | - | 8,308 | 767,197 |
| Fixed income securities | 38,646 | 30,099 | - | 68,745 |
| Investment in contractual rights | - | - | 15,790 | 15,790 |
| ---------------------- | ---------------------- | ---------------------- | ---------------------- | |
| Total assets | 797,535 | 30,099 | 24,098 | 851,732 |
| ============ | ============ | ============ | ============ | |
| Liabilities: | ||||
| Derivative financial instruments - written options | - | (314) | - | (314) |
| ---------------------- | ---------------------- | ---------------------- | ---------------------- | |
| Total | 797,535 | 29,785 | 24,098 | 851,418 |
| ============ | ============ | ============ | ============ |
| Financial assets/(liabilities) at fair value through profit or loss 31 December 2018 - Company | Level 1 £'000 | Level 2 £'000 | Level 3 £'000 | Total £'000 |
| Assets: | ||||
| Equity investments | 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 |
| ---------------------- | ---------------------- | ---------------------- | ---------------------- | |
| Total assets | 747,750 | 9,351 | 27,199 | 784,300 |
| ============ | ============ | ============ | ============ | |
| Liabilities: | ||||
| Derivative financial instruments - written options | - | (312) | - | (312) |
| ---------------------- | ---------------------- | ---------------------- | ---------------------- | |
| Total | 747,750 | 9,039 | 27,199 | 783,988 |
| ============ | ============ | ============ | ============ | |
| 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 | 2019 £'000 | 2018 £'000 | ||
| Opening fair value | 18,513 | 18,943 | ||
| Total profit or loss included in net (loss)/profit on investments in the Consolidated Statement of Comprehensive Income: | ||||
| - assets disposed during the year | - | - | ||
| - assets held at the end of the year | (2,723) | (430) | ||
| ---------------------- | ---------------------- | |||
| Closing balance | 15,790 | 18,513 | ||
| ============ | ============ | |||
| Level 3 Financial assets at fair value through profit or loss At 31 December - Company | 2019 £'000 | 2018 £'000 | ||
| Opening fair value | 27,199 | 27,928 | ||
| Total profit or loss included in net (loss)/profit on investments in the Consolidated Statement of Comprehensive Income: | ||||
| - assets disposed during the year | - | - | ||
| - assets held at the end of the year | (3,101) | (729) | ||
| ---------------------- | ---------------------- | |||
| Closing balance | 24,098 | 27,199 | ||
| ============ | ============ | |||
The 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 in the Annual Report and Financial Statements under 'Valuation process and techniques'.
Quantitative information of significant unobservable inputs - Level 3 - Group and Company
| Description | 2019 £'000 | 2018 £'000 | Valuation technique | Unobservable input |
| OZ Minerals Brazil Royalty | 15,790 | 18,513 | Discounted cash flows | Discounted rate - weighted average cost of capital Average gold and copper prices |
| Investment in subsidiary company | 8,308 | 8,686 | 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 2019 are as shown below.
Description | Input | Estimated sensitivity used* | Impact on fair value |
| OZ Minerals Brazil Royalty | Discount rate - weighted average cost of capital | 2019 - 1% 2018 - 1% | 2019 - £0.8m 2018 - £2.3m |
| Average gold and copper prices | 2019 - 10% 2018 - 10% | 2019 - £2.2m 2018 - £3.5m | |
| ============= | ============= |
* 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 2019 (2018: 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 2019 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 2019 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 2018, 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, 30 April 2020 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 enquires:
Ed Hooper, Lansons Communications
Tel: 020 7294 3620
E-mail: BlackRockInvestmentTrusts@lansons.com or EdH@lansons.com
27 February 2020
12 Throgmorton Avenue
London EC2N 2DL
