Further to my post yesterday about BlackRock World Mining Trust. I came across this chart from another Blogger Eddy Elfenbein and his site Crossing Wall Street, which he used to point out that Commodity prices are nearing 40 years lows. So at least you wouldn't be buying at the top and may have history on your side.
Meanwhile I knew BRWM's interims were due but I forgot to mention it in yesterday's post. They were out this morning and they confirmed an unchanged interim dividend of 7p which was covered by earnings of 9.51p. They also suggested that based on estimates for the remainder of the year that they are prepared to use some of the revenue reserves (which I touched on yesterday) to maintain this years full year dividend at 21p. So the suggested yield of around 8.5% looks on for this year. However, they then went onto say that the future use of reserves would depend on the Board’s confidence in returning to a fully covered position in the near term. Given the widespread challenges facing the mining sector, the sustainability of dividends at the underlying stock level is being closely monitored to determine the trusts appropriate dividend payments for the future.
So a good yield in the short term, but as I said the dividend is not cast in stone, although the manager is apparently focussing on those Companies which have responded to the tougher times so hopefully the downside to the revenues and dividend from here should not be too great. But given the scale of the reserves I'm a little surprised the board is not more willing to use them to maintain the dividend rather than focussing on returning to a covered dividend in short order.
Finally before I go out, in a week when we have been blessed with Perseids Meteor showers this weeks Compound Income Scores are out with appropriately Jupiter Fund Management at the top of the list.
Or a contrarian idea for you. Now it cannot have escaped your attention that commodity prices have been under pressure for a while now with the oil price halving last year for example. This has also been the case for industrial commodities like copper, iron ore and also gold too. The net effect of this has been pretty disastrous for the oil & gas and metals and mining sectors.
Indeed we saw further falls in the mining sector yesterday, along with the rest of the market as it happens, but this took the sector down to lows last seen at the depths of the crisis in 2009. This has stirred some contrarian interest on my part, so I thought I would do some digging of my own and share with you what I have dug up.
Here is a ten year chart for BHP Billiton (BLT) which is something of a bell weather for the broader mining sector given its diversified nature, although they have focussed a bit more recently with the disposal of some non core assets via the demerger of South 32. As you can see it is not quite back to its lows of 2009, probably reflecting the slightly better quality of their operations versus the sector overall.
In terms of its rating it currently stands on nearly 20x for the year to June 2016 with a big decline (more than halving) of earnings already baked into the forecasts. Despite this the dividend is forecast to be up by 5% this year before being flat may be in 2016 despite cover collapsing to less than 1x next year. Thus there could be a risk of a dividend cut which the 7% or so yield is starting to factor in, although their dividend policy form the report and accounts is as follows. "We have a progressive dividend policy that seeks to steadily increase or at least to maintain the dividend in US dollars at each half-yearly payment." I note they did maintain their dividend during the last downturn in 2009, although they had much greater levels of cover as mining was still in the midst of its so called super cycle back then.
Talking of which I read an interesting article the other day which suggested that the mining sector or rather demand for industrial commodities is really reflecting the reality of underlying economies, demand and supply balances and deflationary pressures. Whereas financial markets are in their own super cycle these days being boosted by liquidity from central banks and resultant demand for financial assets. Thus ironically the miners might be better able to withstand a withdrawal of central bank liquidity and rising interest rates than other sectors as that might then indicate a more sustainable pattern of growth in the world which could be good for commodities.
Any way I digress lets get back to digging for value and yield. An alternative to BHP Billiton would be Rio Tinto (RIO) another diversified mining group. They actually look better value on around 16x this years earnings although their yield is lower at 5.6% to 5.8% as their cover is expected to remain above one and there may therefore be less risk of a dividend cut. Failing that if you are a gold bug and wanted to get really speculative you could always check out a Zimbabwean Gold miner - Caledonia Mining (CMCL) which has reported first half results today, although the recent fall in gold price makes that one less attractive now.
But as Status Quo sang - Is there a better way? Well regular readers will know I am a keen on investment trusts (as well as music) and there are a few ways you can play the sector via these. One I would highlight is the biggest most liquid play in the sector - BlackRock World Mining (BRWM) which has a market cap. of over £400m and stands at a discount of around 7% or so to its estimated Net Asset Value. So not only can you pick up a diversified portfolio of miners (if you want to) at a discount (including 10% or so in both BLT & RIO) but you also get a yield of 8.5% based on the current 21p dividend and a 245p share price.
Now that dividend is not cast in stone as the dividend from this one has been quite variable over the years (see page 7 of the report and accounts) and they did last cut it by nearly 14% back in 2009. in recent years they have introduced more of a focus on delivering a yield, although this did mean they messed up a bit by getting too heavily into some royalty schemes which didn't work out so well. Putting that to one side though the other attractive feature is the fact that they have revenue reserves (which can be used to pay and smooth dividends) equivalent to about 140% of the cost of the dividend. So if the manager and the board do their job then barring a complete collapse in mining dividend generally then they should at least be able to maintain or only slightly cut the dividend again.
Summary & Conclusion
So in summary the attraction here is that you can get a professionally managed and diversified portfolio of miners at a discount, plus a bit of gearing (12.5%) and with a yield that is greater than some of their main holdings and arguably better covered given the revenue reserves. Quite useful if you don't have the desire or inclination to get your head around metal prices and commodity cycles, but would like some longer term exposure as part of a diversified portfolio. If you did - then this seems like a good way to get it. The other reason to think about it now is on a contrarian basis as the sector has done so badly for the last six years or so and the yields available seem to indicate some value. However, as ever with investing no guarantees that it won't get worse and that the dividends and share prices could go down as well as up etc. but certainly one to put on the watch list. Personally as I was in need of some losses to offset against some of my gains I sold my BHP Billiton and stuck the proceeds into this for the reasons stated above.
Any way if that has whetted you appetite you can check out their site at the link in the name of the trust above where you'll also find a copy of their annual report and fact sheets etc. If not (did I mention I like music?) as a reward for getting this far, I'll leave you with some music, which hopefully you'll enjoy, as it is a fine album appropriately called After The Gold Rush by good old Neil Young.
..is not gold as the old saying goes and it may be appropriate to this post. First up a word of warning as this note is about a much smaller and probably more speculative type of share than I normally write about. So widows and orphans please click away now. Right so you agree you are not a widow or an orphan and that you will do your own research before you even consider buying this stock and not come back and blame me if it goes horribly wrong.
Right, with that out the way lets begin. So why am I looking at a smaller and more speculative stock than I do normally. Well as regular readers will know I have recently introduced the Compound income Scores (CIS) and this piece relates to a stock that has popped in towards the top of the list recently. It has a CIS of 100 and a Stockopedia StockRank of 98, a market cap. of about £22m but an enterprise value of just £8m due to plies of cash, it trades on a just under 5x with an indicated yield of 6.5% for the current year and trades on a price to book of 0.71, so as it has all the hall marks of a deep value investment what's not to like?
Well I bet you are thinking it must be pretty dodgy then - and you might well be right because it is wait for it....
a Canada-based exploration, development and mining corporation focused on Southern Africa (Zimbabwe) and listed on AIM! It is called Caledonia Mining (CMCL) and as I say is therefore definitely not for widows and orphans.
They have plans to ramp up production in Zimbabwe on the back of expanding existing mining operations. In a video interview their CFO explains all this is quite some detail and gives a good overview of the situation. He also suggested that he felt the dividend promised for this year could be maintained in 2016 if gold stayed above $1150, but of course quite sensibly, below that he gave no guarantees. So with this one trying to be a low cost producer (aren't they all) it all really hinges on the outlook for Gold price and their ability to ramp up production in the way they expect within the budget they expect. Lots of ifs and buts there potentially and as we all know mining projects often run into unforeseen difficulties so I wouldn't personally take their plans as read.
Any way that's enough from me already as this is quite a speculative play. But if you are that way inclined and want to find out more I suggest you visit their website or checkout a fairly detailed recent note from Edison which set out the background detail quite well, although you may have to sign up for free to access it if you are not already signed up to access their research.
Summary & Conclusion
Undoubtedly a speculative play and I guess you would also have to have a view on where you think the gold price might go from here (see chart above for the price over the last ten years. I know the Money week chartist has been bullish recently on a trading view and there are plenty of gold bugs out there would believe it will go to the moon if the financial system finally collapses under a mountain of debt - who knows I guess you pay your money a take your choice as I always say.
Technically for what that is worth the shares seem to have built something of a base just below the 40p level and having bounced recently look a bit overbought in the short term and 45p might offer some resistance. However, the 50 day has cut up through the 50 day which could be bullish. I guess if 45p can be cleared then it may open the way for a run up toward the gap on the chart and highs from last year between about 52p and 60p - but no guarantees obviously. I'm not sure I'm brave enough to buy it as it's not really my kind of thing.
I wrote recently about a service called Quant Investing and their Screener service which has introduced a way of screening for low liquidity stocks which I have written about in the past. Well a quick update for you as I have got around to trying it out and one of the first things I decided to do was to run their version of a low liquidity screen which you can read about here.
In essence it screens for companies by defining liquidity as "adjusted profits to yearly trading value and not as the number of yearly shares traded divided by the company’s total shares outstanding." Thus qualifiers therefore have a low level of turnover (value of annual volume traded in shares) in relation to their profitability. I screened for the top 20% in the UK which gave a list of just over 100 names.
The list does include some recent issues like AA and Shoe Zone so probably short history factor there. It also includes quite a few AIM stocks which I guess is perhaps not a surprise. Of the AIM names some of the quality names that I like such as James Halstead (JHD) and Nichols (NICL) are included. Interestingly for me it also includes a few other stocks l have written up like Computacenter (CCC) and PZ Cuzzons (PZC) and two of the more recent ones like Hill & Smith (HILS) and Connect Group (CNCT).
Otherwise the biggest surprise for me was to find BHP Billiton (BLT) on the list. Trying to rationalise it I guess investors have lost interest in miners recently, hence low turnover in the shares and they probably still have historically high profitability. That may however be under pressure going forward and it has certainly seen some down grades recently on the back of weaker commodity prices. However, as it is coming up on some of my other screens and it offers a reasonably well covered near 5% yield, it might be worth a look on a contrarian basis as a three year under performer.
Food for thought and other than that it is a list that might provide the basis for some further research as just because a stock is on this list doesn't mean it will necessarily outperform. However the research suggests that stocks as a whole with this type of characteristic have tended to outperform.
If it is of interest you can access the full list in the file below, cheers.
A note for you today on three stocks that provide income underpinned by different assets / operations. Yesterday we had Anglo Pacific (APF) which from its announcement about a placing describes itself as:
"A global mining royalty company. The Company's vision is to create a leading international diversified royalty company with a focus on base metals and bulk materials. The Company's strategy is to build a diversified portfolio of royalties, focusing on accelerating income growth through acquiring royalties in cash or near-term cash producing assets. It is an objective of the Company to pay a substantial portion of these royalties to shareholders as dividends. Further details can be found on the Company's website at www.anglopacificgroup.com."
In the announcements yesterday they raised gross proceeds of £10 million by placing shares representing about 5% of their issued share capital at 180 pence. The recently appointed executives and directors also subscribed and now own around 9% of the equity between them. This was done to help finance the acquisition of a royalty in something called the Maracás Vanadium Project for up to $25 million, for which they get a 2% net smelter return royalty interest on all mineral products sold from the area of the Maracás Project to which the royalty interest relates. This is in line with the new managements strategy of expanding their portfolio with high quality base metals and bulk commodity mining projects that have existing or near-term production. You can download a presentation about this acquisition here and about investing in royalties and the new management team's strategy here.
I like this one as it is a way of playing commodities but with reduced cost risks as their royalties tend to be related to production volumes, although obviously production outages or delays are a risk. It trades at a small discount to its year end book value of 196 pence and offers a decent 5.7% yield, although it is not very well covered or forecast to grow that much in the short term, but it has grown by 5.5% per annum over the last five years.
Meanwhile moving on to today we had a final results announcement from LondonMetric (LMP) a UK property REIT which has invested in commercial and residential property in the past. In the last year or so they have now shifted the emphasis of the portfolio to out of town retail and distribution assets. The highly experience Chairman Patrick Vaughan commented on the property market outlook by saying:
"I believe we are somewhere in the middle of the cycle for UK commercial property in which an improving economy, the availability of reasonably priced credit and strong competition for supply makes the investment market very competitive, but I am confident that we will maintain a high level of investment and build on the activity this year for future outperformance and further excellent returns for our shareholders."
The NAV on this one (a key metric for property related shares) came in at 121 pence up by 11 to 12% so the shares, like many other property companies these days trade at a premium to this, trading at around 145 pence reflecting some of the expected growth to come. The other attraction is the yield which based on the declared unchanged dividend of 7 pence gives a yield of 4.8% which they say is fully covered by contracted rental income. Other key things to watch on these type of funds is the debt or the loan to value ratio which here came in at a reduced level of 32% versus 43% last year and had a weighted average cost of 3.9%. So they should be making a decent return over and above that. The other swing factor is occupancy levels or voids, rental increase potential and lease lengths. They have 99.6% occupancy, 32.6% of rent roll benefiting from fixed uplifts and unexpired leases averaging 12.7 years. So all fairly solid if a little dull, but a reasonable way of getting exposure to commercial property if you want to) with an experienced management team that gives you a decent yield, although it has not grown in the last couple of years but is forecast to edge up by around 2% this coming year.
Finally, today we had Preliminary results from Pennon (PNN) the water utility and waste recycling group. Which as it is fairly self explanatory I won't go into too much detail. The headlines were that the regulated side was good and has got it plans for the next regulatory period - K6 approved already. While the waste side Viridor saw profits down around 19% due to difficult market conditions in recycling and investing for future growth especially in energy from waste facilities. They increased the dividend by a useful 6.5% in line with their RPI +4% guidance that has been in place in the current five year regulatory period (K5). We will not know about the future dividend policy until next year as they said: "The Board will review the dividend policy for the K6 period following the Final Determination for South West Water and will make an announcement at the 2014/15 Preliminary Results." So some uncertainty there until things are finalised but at least we know their plans have already been accepted so hopefully their shouldn't be any nasty surprises. Indeed, the last time I wrote on this one I referenced their document about the latest regulatory round which given that their proposals have been accepted, seemed to suggest that they would expect to deliver around 5% dividend growth, which at the current level of starting yield should give a total return of 9% assuming an unchanged rating. So overall another reasonable yield of around 4% from this one but with a little uncertainty as to the level of growth going forward. In fact I was a bit surprised to see it was as low as 4% so I guess it could drift off from here unless there is another bout of demand for defensive stocks.
Any way sorry it was such a boring note today and well done if you got this far - but hey who ever said income investing was exciting? So as a reward if you did get this far see the following which carries on my recent dog theme and sums up what I have been saying here - enjoy, hopefully it will brighten up an otherwise dull day. Note: if you are reading this on the e-mail you may have to visit the site to view it.