Stifel has warned investors that BlackRock World Mining (BRWM ) could be preparing a dividend cut of around 40% in next month’s annual results.

Analyst Iain Scouller said fund managers Evy Hambro and Olivia Markham had previously warned about the impact on the portfolio’s free cash flow from increased capital expenditure and decarbonisation projects by miners. Nevertheless, he believed the scale of the cut to the final dividend of the financial year, which he estimates between 36%-43%, could be far worse than investors anticipate. 

High commodity prices and strong balance sheets made mining companies generous dividend payers in 2021 and 2022, making them the best years for income in the trust’s history, allowing the board to pay total dividends of 42.5p and 40p respectively. However, Scouller forecasts the total payout for 2023 will fall to 30p-31.5p, a decline of around 25%.

For longer-term shareholders, this will be a painful reminder of 2016 when the board wrote down the trust’s holding in London Mining after its Sierra Leone operations were hit by the Ebola virus outbreak. The company later cut the annual dividend by 38% to 13p, which remains the lowest payout since 2011. 

As the board pays out all surplus income, the dividend is a reflection of the year’s earnings. In the first half of 2023, revenues dropped 11% year-on-year, with UK company dividends and income from the Vale debenture, a form of royalty in the Brazilian steel company, almost halving.

The trend appears to have accelerated in the second half, despite Hambro and Markham saying at the half-year stage that they would try to maximise income during the rest of the year to offset recent reductions to dividends from core holdings.

‘However, based on the 606.5p net asset value [NAV] the company published in December, net revenue totalled 15.1p, compared with 23.95p a year earlier, indicating a significant fall in second-half revenues,’ he said.

In 2022, the final dividend totalled 23.5p, which was close to the 23.95p represented by the net income disclosed in the NAV. Based on that, Stifel assumes a final dividend of between 13.5p and 15p, which would amount to a decline of 36% to 43%.

While the scale of the cut may unsettle income investors, the dividend yield would still be relatively high at 6%, down from the current 7.7%, Scouller noted. The analyst maintained a ‘neutral’ rating as he did not see any immediate catalyst for a rerating in the shares, which stand on a 5% discount to asset value and have fallen 26.6% in the past year, with dividends included. 

That represents a big underperformance of the EMIX Global Mining index which has fallen 5.4%. Over five years, however, the trust is ahead, generating a 96.8% total return versus the benchmark’s 82.7%, according to Deutsche Numis data.

The trust traded at a premium for much of last year, enabling the board to issue £15.7m of new shares.