Global resource exposure - at a discount

Merrill Lynch World Mining Trust (MLW) is a listed investment trust that specialises in the international and domestic natural resource sector. The Trust was launched in December 1993, and aims to maximise real returns to shareholders through a world-wide portfolio of mining and metals securities.

MLW debuted on the LSE at an opening price of 100p. The trust performed solidly through to 2003 until a robust rally began. MLW recently traded at an all-time high of 340.75p. Despite the extent of recent gains and given our bullish view on commodities generally, we believe that the dominant upward trend is firmly in place.

We believe consolidation within the global resources sector will continue as larger producers seek to expand production in a cost efficient way. We have already seen a bidding war erupt for Falconbridge, the giant North American nickel producer and an approach made for Placer Dome by Barrick Gold of Canada. We believe that MLW is well positioned to benefit from this activity given its well balanced and diversified portfolio.

The Trust's underlying net tangible asset backing has performed strongly over the past three years, increasing by over 160 percent (to 31 October). MLW is managed by Graham Birch whose London based Merrill Lynch Investment Management Natural Resources team collectively manage around £5 billion.

MLW has been a fervent believer in the gold market for some time, with around 9 percent of the portfolio invested in the precious metal. We expect the weighting towards gold stocks to be increased in the not too distant future. This follows the upbeat comments made by Mr Evy Hambro, a member of the Natural Resources team, at a presentation we recently attended. The team's bullish outlook for the gold price compliments that of Fat Prophets very well.

We also believe the investment team gains an important advantage from being close to new opportunities emerging within the sector in countries such as Russia, Africa, and the Americas. The MLIM Natural Resources team is the only one rated AAA by Forsyth Partners and S&P Group.

In addition to significant weightings in large diversified resource organisations, the Trust also holds smaller resource companies, which offer strong growth prospects. As at 30 September the top ten holdings were:-

Many of the resource companies in the MLW portfolio are currently valued on low price earnings multiples. It could be argued that the low valuation reflects a commodities cycle nearing peak conditions. We believe however, that commodity prices are in a bull market which will continue for a number of years, although there are bound to be some sharp corrections along the way.

With China and India continuing to industrialise over the next few decades, increasing quantities of natural resources will be required to build infrastructure. Unlike past peaks in the commodity cycle, we believe demand will not taper off significantly. We also believe it will take some time before supply increases to match demand, and over the interim natural resource prices are likely to remain buoyant.

Additionally, supply has become more concentrated in recent years with large takeovers driving consolidation within the industry. Production is being dominated by fewer players and this is certainly bullish for prices in our opinion.

During the latest financial year, many of the world's largest resource companies have produced stellar results. Companies such as Xstrata, BHP Billiton, CVRD and Rio Tinto have all reported record earnings and cash flows as well as paying record dividends. In our opinion, results look just as promising over the next 12 months.

MLW believes that current valuations for many of the large resource companies are still too low, and that analysts are being too conservative in their forecasts. Since the start of the commodities bull market these forecasts have been constantly subjected to upward revision which has favourably impacted company valuations. We believe this argument has merit, especially after having witnessed a similar scenario occurring in the energy sector over the last four years.

One aspect of the current price cycle is that the resource companies themselves are being more disciplined with capital. In previous cycles, some companies such as BHP gave the green light to projects that in hindsight should not have been approved. Large takeovers were also conducted at the top of the market, when expensive prices were paid for acquisitions. We believe the current global trend of returning cash to shareholders is positive, and MLW is well poised to benefit from this.

With respect to the fee structure, the fund will pay the manager a 1.25 percent management fee. The fee will be paid quarterly based upon the fund's market value.

MLW currently trades around 335p, a 9 percent discount to underlying net tangible asset backing of 368.57p. In our opinion this gap will potentially close over the next 12 months as the resource boom gains further momentum. The Trust also offers the benefit of a small yield of 0.5 percent.

MLW represents a relatively low risk exposure to the global resources market. While the possibility of a near-term correction cannot be ruled out, we remain fervently bullish about the direction of commodities prices over the longer term. Given the current discount to NTA and our robust outlook for the resources sector, we believe MLW presents an attractive buying opportunity. Accordingly, for the first time we recommend MLW to all Members as a longer term buy around 340p.