| Commenting on the markets, Evy Hambro and Olivia Markham, representing the Investment Manager noted: |
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| Performance |
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| The Company’s NAV decreased by 5.1% in October, underperforming its benchmark, the EMIX Global Mining Index (net return), which decreased by 3.3%. |
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| October was a very challenging month for broader equity markets, with the MSCI World Index down by 7.3% and the VIX volatility index doubling, as concerns around rising interest rates, inflation and tariffs weighed on the market. As a cyclical sector, mining was caught up in the weakness but it was interesting to see the sector modestly outperform broader equity markets. In contrast to the equity moves, economic data from China remained resilient, with its manufacturing PMI increasing to 50.1, up from 50.0 in September. Meanwhile, within the mined commodities, we continued to see physically-traded commodities outperform more financially-traded commodities. The iron ore (62% fe) price finished the month up by 8.6% and the copper price ended down by 3.6%, for example. This is a trend we have commented on for several months now and one that suggests to us that physical supply and demand in most mined commodities remains tight. This is also backed up by the declining inventory levels we have seen for most mined commodities. Elsewhere, with the rise in volatility and broader market sell-off, the gold price benefited from ‘safe-haven’ buying, increasing by 2.0%. (All returns in USD.) |
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| The Company’s underperformance during the month was primarily driven by our beta versus our benchmark being modestly above one, as well as our copper bias. Positions in copper producers Lundin Mining, Ero Copper and First Quantum all appeared amongst the largest detractors. |
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| Not holding major gold producer Barrick Gold also detracted from relative performance. The company performed well on the back of the rising gold price and on the proposed merger of equals with Randgold Resources. The impact of this was, however, broadly offset by our position in Randgold Resources, which also benefited. |
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| On the positive side, our position in Vale appeared among the top performers. Vale has benefited from higher grade iron ore continuing to trade at a healthy premium to lower grade, a trend we have seen driven by China’s crackdown on inefficient steel production and stricter environmental standards. |
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| Strategy and Outlook |
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| After strong years in 2016 and 2017, this year has been more challenging for the mining sector so far. Sentiment has deteriorated on trade tensions and mined commodity prices have fallen across the board as a result. It has been interesting to see financially-traded commodities (e.g. copper, zinc and aluminium) underperforming the physically-traded ones (e.g. iron ore and steel), where investors are unable to speculate as much. This suggests to us that underlying fundamentals remain strong and weakness has been mainly driven by speculation. Meanwhile, underlying demand conditions in China appear to be stable, whilst we are seeing early signs of stimulus coming through. We believe we could be at peak pessimism around trade wars and are looking to add risk in the Company. Meanwhile, mining shares are trading on attractive multiples versus history and relative to broader equities. The sector is trading on close to its highest ever free cash flow yield, whilst relative price-to-book is close to a historic low. Finally, we believe the capital discipline story remains intact as management teams remain focused on capital discipline and shareholder returns. |
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| All data points are in GBP terms unless stated otherwise. |
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| 26 November 2018 |
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| Latest information is available by typing www.blackrock.co.uk/brwm on the internet. Neither the contents of the Manager’s website nor the contents of any website accessible from hyperlinks on the Manager’s website (or any other website) is incorporated into, or forms part of, this announcement. |