By Alex MacDonald
LONDON--The BlackRock World Mining Trust (BRWM.LN) secured its
first royalty agreement on Monday from U.K.-listed London Mining
PLC (LOND.LN) and said it plans to make further investments of a
similar nature in the future as mining companies look for
alternative sources of financing amid a tough credit
environment.
The BlackRock World Mining Trust agreed to give London Mining an
upfront payment of $110 million in exchange for a 2% royalty
payment based on the iron ore sales from London Mining's Marampa
mine in Sierra Leone over the life of the mine.
The investment is attractive to BlackRock's mining trust for
several reasons, Evy Hambro, Chief Investment Officer of the
BlackRock Natural Resources Team and Fund Manager of the BlackRock
World Mining Trust told Dow Jones in an interview.
It gives BlackRock exposure to commodity prices by linking the
royalty directly to the price of iron ore, a key steel-making
ingredient. It also gives the company upside to any future growth
in production capacity while excluding it from the negative effects
of cost inflation since the royalty is linked to revenues and not
profit.
"It's an attractive deal to BlackRock because BlackRock can
borrow at well below the cost of debt that is available to mid-tier
to junior miners and earn a return on investment that's well above
that level," said Hambro. He didn't disclose what the return might
be but said the company is able to borrow at around Libor plus a
little bit more.
Hambro said the Trust had been working on securing royalty
payments for several years, but the abundance of relatively cheap
capital from different funding sources in years past didn't make
the royalty structure attractive enough as an investment vehicle.
Since the financial crisis of 2008, however, access to financing
has become more limited, thereby making royalty structures more
attractive.
"In today's financial environment, the banks' ability to lend
has been vastly reduced," said Hambro. "Bank capital is scarce and
when available, more expensive," he said. Royalties therefore
provide a cheaper alternative for companies to raise capital while
providing attractive returns for those offering capital in return
for royalty payments, Hambro said.
BlackRock is making the investment at a time when spot iron ore
prices have fallen to two-and-a-half year lows due to slower
economic growth in China which has translated into weaker demand
for the steelmaking ingredient from China, the world's largest
consumer of iron ore.
Since the beginning of the year, the spot price for iron ore
delivered into China has oscillated between $120 a metric ton to
$140 a metric ton and fell to around $116/ton on Friday.
"Prices for all commodities have been volatile," said Hambro. He
attributed the low price to the traditional seasonal lull in
commodities demand due to summer holidays in northern hemisphere.
It's "usually the weakest part of the year for industrial activity"
and therefore commodities demand, he said.
Hambro said he keeps in mind the long-term outlook for
commodities when making investments. "We see attractive margins for
iron ore producers and copper producers. The market is
under-estimating the long term profit margin for miners," he said.
In copper, for instance, the copper price is at about $3.40 a pound
and has hasn't dropped below $3/lb since 2009, Hambro said.
Hambro didn't disclose in which commodities or geographies
BlackRock would seek to make further royalty investments.
-Write to Alex MacDonald at alex.macdonald@dowjones.com
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