Final Results

RNS Number : 1021F

City Natural Res High Yield Tst PLC

25 October 2018

 

To:                    RNS

From:                City Natural Resources High Yield Trust plc

LEI:                  549300ES8CNIK2CQR054

Date:                25 October 2018

Chairman's Statement

Introduction

I am pleased to be writing to shareholders for the first time since I became Chairman in March 2018.  The year to 30 June 2018 saw further progress being made, both in terms of returns for shareholders and in the implementation of the strategic review which was set out in the interim statement.

Since then various factors, largely the confidence knock from the Trump trade war with China, have reversed this trend. The Investment Manager's Review explains this in more detail.

Investment and Share Price Performance and Discount Control

At 30 June 2018 your Company's net asset value stood at 142.4 pence per share, giving a net asset value total return for the year of 12.0 per cent. The benchmark index returned 17.4 per cent.

The Company's ordinary share price total return of 9.9 per cent for the six months was weaker than the net asset value total return, reflecting a widening in the discount at which the Company's shares traded from 17.0 per cent to 19.0 per cent during the period. 

As at 22 October 2018, the Company's net asset value is 121.3 pence and the share price is 101.8 pence, with the discount standing at 16.1 per cent.

It remains the Board's aim to mitigate the discount at which the Company's shares trade by good long term performance.  Over the long term, since the redirection of the Company in 2003, the net asset value total return is 304.2 per cent, ordinary share price total return 239.3 per cent, and benchmark total return 305.4 per cent.

Income and Dividends and Strategic Review

Income and dividends have been a focus of the Company since 2003.  The annual dividends per share are now 2.8 times the amount paid in 2004, and we believe they contribute an important element of stability in our volatile asset class. 

Dividends of 5.60 pence have been declared in respect of this year, the same level as those paid last year.

Earnings per share were 3.28 pence over the year to 30 June 2018 (5.08p 2017). 

The Investment Manager has increased the portfolio's allocation to equities as foreseen by this year's strategic review, and has selected equities with an eye to total return and without regard to their yield.  As anticipated, the dividend is uncovered for the current year and the Board has used distributable reserves to fund the shortfall.  Notwithstanding this use of reserves, the Board believes that an increased allocation to equities as the sector recovers will deliver the best net asset value total return to shareholders at the same time as maintaining the level of dividends they receive.

The Board has announced an annual dividend target of 5.60 pence per share for the next financial year.

The yield on the Company's shares is 5.5 per cent as at 22 October 2018.

Gearing and 3.5% Cumulative Unsecured Loan Stock 2018 ("CULS")

The CULS were repaid on 30^th September 2018.

This repayment was partially financed by a new £20million unsecured revolving credit facility, with Scotia Bank, the term being two years and interest at base rate plus 1.05% per annum.

Net gearing (i.e. the CULS less treasury stocks and cash) was generally maintained in the range of 20 to 25 per cent of shareholders' funds during the year, 25 per cent being the upper limit allowed under the Company's investment policy. This limit was not exceeded in the period. It was reduced towards the period end, partly in anticipation of the repayment of the £34.5m of CULS in issue, and stood at 16.9 per cent at 30 June 2018.

Relative to the CULS, the benefits of the revolving credit facility include flexibility to draw down and repay during the life of the facility according to market conditions and lower fixed costs.

Net gearing currently stands at 10.7 per cent, with £14.0m of the credit facility drawn down. 

Board Changes

Carole Cable and Christopher Casey joined the Board on 1 October 2017 and were welcomed by my predecessor when he wrote to you last year.  They have both made significant contributions and have swiftly become an integral part of our deliberations and decisions. 

Geoff Burns announced his departure from the Company after the publication of the interim results in March this year.  Geoff was Chairman of the Company for more than twelve years and I served with him on the Board for 11 of those.

Geoff was an excellent Chairman and provided very sound and strong leadership for the Company, especially during the turbulent years following the 2008 financial crisis.  I am sure that all shareholders would like to join me in extending our thanks and best wishes to him.

Outlook

The Company's investment objective and policy are more relevant than ever. It is well positioned to prosper in a world where, in developing countries, the prospect for increased infrastructure spending implicit in growing urbanisation remains undiminished. Renewable power continues to get cheaper and electricity storage more efficient, hastening the pace of an electric vehicle revolution that will benefit some of our core holdings.

The resources sector has seen much solid progress, with increasing evidence that improvements in balance sheet discipline and the reinstatement of dividends are durable features of the new landscape. They are underpinned by better corporate governance structures, while the prospects for the sector are brightened by a prolonged period of inadequate investment which begins to threaten supply shortages. The Investment Manager's Review sets out its investment thoughts and analysis going forward.

Yet, for all the positives, it remains difficult to look beyond President Trump and the policies of the US Administration. The threat of import tariffs becoming a full blown trade war with China and Europe must head the list of concerns, but the strengthening US dollar with its implications for capital intensive emerging markets that are dollar denominated debt should not be overlooked.

The fundamentals of the commodities markets remain firm suggesting there could be a correction to this dislocation at sometime in the future.

The future, however, looks full of opportunity, and these are just the conditions that your Company is designed to take advantage of. The Investment Manager has articulated these opportunities, together with the risks, in much more detail in its Review. The Company's structure allows the Manager to take advantage of being able to invest over the medium to long term into a diversified portfolio with the added support of the extensive research capabilities of the CQS group.

I would like to conclude by extending my thanks to all shareholders for their continued support.

Richard Prickett

Chairman

24 October 2018

Investment Manager's Review

The dislocation between macro sentiment and fundamentals

Trade war concerns have provided a headwind for commodities since April, although this remains sentiment driven rather than significantly impacting the real economy. Continued synchronised global growth and commodity supply restraint have latterly been undermined by President Trump, which has weighed on resources and the fund's NAV. Confrontational trade policy announced in April this year, using import tariffs as a mechanism to support domestic industry against cheaper, state subsidised foreign imports has focussed in particular on China's steel and aluminium industries. This approach has raised fears regarding growth for more capital intensive emerging markets and also driven a strengthening US dollar as the currencies of these targeted markets weaken. Yuan weakness especially has added concern on the relative affordability of commodities in China, which remains a high proportion of global commodity demand. These moves were accentuated by reducing global liquidity, especially as the FED rate tightening shrinks US dollar availability, commodity markets have borne the brunt of this three pronged assault, stymying NAV progress.

These effects of Trump policy are reflected by the Fund's NAV path. Progressive performance earlier in the financial period, which saw the NAV rise over 20% by mid-January after US stimulus was announced, slipped back with the NAV ending the year up 7%. Over the year Sterling has cushioned volatility with a 10% appreciation against the US dollar reversing from April to end the year roughly flat. At the time of writing the current US$200bn worth of Chinese goods subjected to tariffs could possibly be increased to US$500bn. Such escalation to proposals by the Trump Administration, have sustained negative momentum with the result that the Fund NAV has declined by 10% since end-June.

Fundamentals remain robust

We think the extent of the selloff is overdone and commodity prices have dislocated from underlying fundamentals, presenting attractive investment opportunities. Though trade friction has impacted global demand growth forecasts since April, it has been marginal and overall growth remains relatively robust with the Chinese economy still expected to expand at or around 6% for the foreseeable future. In the face of Trump policy China's central planners are adjusting levers to achieve growth targets which are benefitting property prices, a useful lead indicator of underlying commodity demand. Set against this, the capital discipline still being displayed by the mining and energy industries and China's continued resolve to improve environmental conditions, will continue to restrain raw material supply and we believe commodity markets will recover. As illustration, demand for copper in China, which accounts for half of global consumption, has grown at 4-5% in the first eight months of 2018 and global demand growth would need to be zero for this market to return to surplus.

There has also been some inconsistency in commodity price moves. For example, copper, nickel iron ore, aluminium and zinc prices have declined between 16% and 33% from their April peaks whereas benchmark coal and Brent crude prices have remained little changed. Prices of strategic rare earth metals, production of which is dominated by China, have also been remarkably stable over this time frame. Similarly commodities influenced by physical rather than financial buying such as steel in China have also remained well supported, though we expect more pronounced summer demand from regional emission controls to have provided some benefit here. Overall, however, we believe the sharp declines of some commodities, notably zinc and copper, are overdone and with warehouse inventories significantly reduced present opportunity.

Changes to the Fund

Changes to the Fund's investment mandate are helpful in providing flexibility to invest for the capital growth opportunities that we believe the market fundamentals support. It is also important to note that the Company is in a comfortable position having refinanced its loan arrangements this year.

Top 10 positions and commodity exposure

Stock Name	%	Commodity
First Quantum Minerals	6.7	Copper
Trevali Mining	5.9	Zinc
Ascendant Resources	5.8	Zinc
Rea Holdings	5.6	Palm Oil
Hurricane Energy	5.0	Oil
Ero Copper	3.5	Coal
Metals X	3.5	Copper/Tin
Arch Coal	3.0	Coal
BW LPG	2.7	Gas Shipping
Independence Group	2.7	Nickel

Position weight as at 30/09/18

Against the fundamentally robust backdrop we outline some of the important themes which are also shaping the portfolio.

Key Investment themes

·      Capital discipline from the industry limiting new production, supporting prices

·      China's environmental policy is curtailing production, benefitting zinc

·      Shale oil growth will cap the oil price longer term - but still opportunities

·      Precious metals unloved but still attractive as a diversifier - attractively valued

·      The transition to a low carbon economy benefits battery metals and copper

·      Uranium market fundamentals improving

Capital discipline - the supply side remains disciplined

We remain highly encouraged by the continued capital discipline from the mining and energy sectors as a whole, as evidenced by large mining conglomerates such as Rio Tinto and BHP, with the latter approaching zero net debt by mid-2019 following the sale of their US shale assets to BP. The resultant lack of growth investment across the industry over the last 5 years is tightening commodity markets and given a resilient demand backdrop remains supportive for the sector. Resource companies do ultimately need to replace their reserves, but the current dearth of exploration spending will limit new supply and M&A may offer an appealing means of replenishing growth. This was illustrated by the funds position in Nevsun that was bid for by Lundin and Zijin and Rio Tinto's stated interest in acquiring copper assets.

China's environmental policy benefits zinc - a key theme in the fund

China's environmental focus continues to limit supply. While China's Blue Sky Policy has widespread appeal and has helped support high quality coal and iron ore price premiums we believe China's environmental focus on pollution will continue to benefit metals such as zinc which currently represents approximately 12% of net fund assets. We believe the zinc market remains in deficit with declines in global mined zinc production estimated of 2% year-on-year to end-July led by China, which was previously self-sufficient in zinc production. We believe this market has over reacted to the prospect of some new production commencing in 2019 and with warehouse inventories having reduced to less than 10 days usage we believe this market will recover. Given the extent of price moves and heightened fear of escalating trade tensions ahead of US mid-term elections this autumn, the Fund has added to conviction positions, such as zinc producer Trevali, during the recent sector sell-off. The chart below highlights how the zinc market remains tight as warehouse inventories continue to decline despite recent mine additions and trade war fears. Zinc remains a key theme in the fund.

Crude prices are relatively resilient

In our view the outlook for crude oil markets faces challenges from rising output as OPEC/nOPEC unwind 1 Million barrels oil per day quota restrictions and US exports increase as 4 Million barrels oil per day of new pipeline and port capacity starts to be delivered from H2 2019. Despite trade concerns which have weighed heavily on other commodities and prospective supply growth, crude prices have been relatively resilient and investors appear to be ascribing a premium for OPEC's market backing, to buffer against potential downside demand risk. Fund exposure to crude has been via Hurricane Energy and Jacktel while LPG and crude shippers offer the potential to benefit from rising trade of cheap gas produced as a by-product of US output growth. Despite some caution on the broader crude market the Fund participated in the 7.5% convertible issued by North Sea developer, Hurricane Energy, which has made a solid contribution to performance.

Precious metals ignored despite uncertainty

In the context of rising risk aversion and the dislocation in emerging market performance, the lack of interest in gold has been surprising. Insurance demand against risks posed by Trump policy (both sanctions and tariff escalation) and possible contagion from Turkey's currency crisis appears to have been conspicuously absent with the gold price and equities ending the year little changed. Indeed a 10% rise in the gold prices to April has since unwound, mirroring trends of other industrial commodities while the performance of precious metals equities, which had shown some stability, has belatedly worsened slipping 20% since June. Despite the current lack of interest it remains a useful diversifier, particularly against a possible correction of highly rated US equity markets with which gold has shown strong inverse correlation since April, suggesting US investors have reallocated into equities.

Battery metals and copper to benefit from the low carbon economy transition

With regards the electric vehicle theme, Fund exposure has tended towards hidden value offered by projects such as the Australian Wingellina nickel-cobalt project, owned by copper miner Metals X, rather than alternatives located in the more risky DRC or via much hyped recent issues. Both nickel and cobalt lend themselves more readily to technology used in hybrid vehicles that we believe will benefit most from the move away from fossil fuels though the Fund has also successfully invested in some lithium developments. Importantly, power generation capacity may well be a bottleneck to achieving EV market penetration rates with electrification also sustaining copper demand.

Uranium market fundamentals improving

Illustrating to the capital discipline, environmental and low carbon themes we note the improving conditions in the uranium market have also led the Fund to add to its Nexgen position. Against a background of stable Asian-led demand growth, uranium market fundamentals have improved markedly following substantial regional production curbs by dominant producer Kazakhstan, which even after recent production cuts still has a near 35% share of the market, and Canadian producer Cameco. With strong demand growth led by Chinese reactor build out and improving trend of Japanese reactor restarts, the depressed market has moved into deficit. With the uranium price down 85% from its peak we believe the sector offers plenty of scope for improvement. Given extreme regional concentration of uranium production and enrichment capacity the market is also vulnerable to disruption, such as from potential US security policy as the Trump Administration assesses the adequacy of domestic supply, which could materially benefit prices.

Other fund positioning

The Fund significantly reduced its position in Norilsk Nickel late in 2017, after US sanctions were imposed against Russian oligarchs, and subsequently exited its entire position in the high yielding stock. The holding of Central Asia Metals was also substantially reduced in the March quarter following useful performance but also due to it overly increasing exposure to zinc following an acquisition made by the group. Proceeds were reinvested into companies such as copper producer Metals X while as stated exposure to Trevali has latterly been increased. Elsewhere investment in US-based Arch coal, which benefits from healthy pricing for its exported metallurgical coal, continues to return cash to investors and remains a stable holding.

Ian Francis, Keith Watson, Rob Crayfourd

New City Investment Managers

24 October 2018

Audited Income Statement

For the year ended 30 June 2018

			2018	2018	2018
		Revenue		Capital	Total
	Notes	£'000		£'000	£'000
Gains on investments		-		10,009	10,009
Exchange gains		-		334	334
Income		3,700		-	3,700
Investment management fee		(290)		(869)	(1,159)
Other expenses		(506)		(18)	(524)
Net return before finance costs and taxation		2,904		9,456	12,360
Interest payable and similar charges		(303)		(1,393)	(1,696)
Net return on ordinary activities before taxation		2,601		8,063	10,664
Tax on ordinary activities		(404)		284	(120)
Net return attributable to equity shareholders		2,197		8,347	10,544
Return per ordinary share	1	3.28p		12.48p	15.76p

Audited Income Statement

For the year ended 30 June 2017

			2017	2017	2017
		Revenue		Capital	Total
	Notes	£'000		£'000	£'000
Gains on investments		-		6,438	6,438
Exchange gains		-		18	18
Income		4,892		-	4,829
Investment management fee		(293)		(878)	(1,171)
Other expenses		(521)		-	(521)
Net return before finance costs and taxation		4,078		5,578	9,656
Interest payable and similar charges		(305)		(1,729)	(2,034)
Net return on ordinary activities before taxation		3,773		3,849	7,622
Tax on ordinary activities		(378)		211	(167)
Net return attributable to equity shareholders		3,395		4,060	7,455
Return per ordinary share	1	5.08p		6.07p	11.15p

Audited Balance Sheet

As at 30 June 2018

	Notes	As at 30 June 2018	As at 30 June 2017
		£'000	£'000
Fixed assets
Investments		123,420	112,902
Current assets
Debtors		681	3,027
Cash and cash equivalent		7,722	7,371
		8,403	10,398
Creditors: amounts falling due within one year		(2,314)	(727)
3.5% Convertible Unsecured Loan Stock 2018		(34,292)	-
Net current liabilities/assets		(28,203)	9,671
3.5% Convertible Unsecured Loan Stock 2018	4	-	(33,824)
Net assets		95,217	88,749
Capital and reserves
Called-up share capital		16,722	16,721
Special distributable reserve		30,386	30,386
Share premium		4,851	4,832
Equity component of 3.5% Convertible Unsecured Loan Stock 2018	4	-	488
Capital reserve		39,101	30,347
Revenue reserve		4,157	5,975
Equity shareholders' funds		95,217	88,749
Net asset value per share	2	142.35p	132.69p

Audited Statement of Changes in Equity

For the year ended 30 June 2018

			Share	Special	CULS
	Share		premium	distributable	equity	Capital	Revenue
	capital		account	reserve	component	reserve	reserve	Total
	£'000		£'000	£'000	£'000	£'000	£'000	£'000
Balance at 30 June 2017	16,721		4,832	30,386	488	30,347	5,975	88,749
CULS conversion	1		18	-	(488)	488	-	19
Return on ordinary activities after taxation	-		-	-	-	8,265	2,197	10,462
Dividends paid	-		-	-	-	-	(4,013)	(4,013)
Balance at 30 June 2018	16,722		4,850	30,386	-	39,100	4,159	95,217

Audited Statement of Changes in Equity

For the year ended 30 June 2017

			Share	Special	CULS
	Share		premium	distributable	equity	Capital	Revenue
	capital		account	reserve	component	reserve	reserve	Total
	£'000		£'000	£'000	£'000	£'000	£'000	£'000
Balance at 30 June 2016	16,719		4,810	30,386	1,213	25,734	6,325	85,187
CULS conversion	2		22	-	(725)	725	-	24
Return on ordinary activities after taxation	-		-	-	-	3,888	3,395	7,283
Dividends paid	-		-	-	-	-	(3,745)	(3,745)
Balance at 30 June 2017	16,721		4,832	30,386	488	30,347	5,975	88,749

Audited Cash Flow Statement

For the year to 30 June 2018

		Year ended 30 June 2018	Year ended 30 June 2017
		£'000	£'000
Operating activities
Investment income received		3,756	4,155
Deposit interest received		11	4
Other income received		36	6
Investment management fees paid		(1,154)	(1,167)
Other payments		(518)	(519)
Net cash inflow from operating activities		2,131	2,479
Investing activities
Purchases of investments		(52,768)	(65,630)
Disposals of investments		55,875	70,722
Net cash inflow from investing activities		3,107	5,092
Financing activities
Equity dividends paid		(4,013)	(3,745)
Interest on bank facility/overdraft		(1)	(2)
Interest on 3.5% Convertible Unsecured Loan Stock 2018		(1,207)	(1,209)
Net cash outflow from financing activities		(5,221)	(4,956)
Increase/(decrease) in net cash		17	2,615
Reconciliation of net cash flow to movement in net cash
Increase/(decrease) in cash in the year		17	2,615
Exchange gains		334	18
Movement in net cash in the year		351	2,633
Opening net cash at 1 July		7,321	4,738
Closing net cash at 30 June		7,722	7,371

Notes

1.    Return per Ordinary Share

Return per ordinary share attributable to shareholders reflects the overall performance of the Company in the year.

	Year ended 30 June 2018	Year ended 30 June 2017
	£'000	£'000
Revenue return	2,197	3,395
Capital return	8,347	4,060
Total return	10,544	7,455
	Number	Number
Weighted average ordinary shares in issue	66,884,094	66,880,724
Revenue return per ordinary share	3.28	5.08
Capital return per ordinary share	12.48	6.07
Total return per ordinary share	15.76	11.16

2.    Net Asset Value per Ordinary Share

The net asset value per ordinary share is based on net assets of £95.2 million (2017: £88.7 million) and on 66,888,111 (2017: 66,882,974) ordinary shares, being the number of ordinary shares in issue at the year end.

3.    Dividends

	2018 Revenue	2017 Revenue
	£'000	£'000
Amounts recognised as distributions to equity holders in the year:
-    Fourth interim dividend for the year ended 30 June 2017 of 3.02p (2016 - 3.02p) per ordinary share	2,020	2,020
-    First interim dividend for the year ended 30 June 2018 of 0.86p       (2017 - 0.86p) per ordinary share	575	575
-    Second interim dividend for the year ended 30 June 2018 of 0.86p (2017 - 0.86p) per ordinary share	575	575
-    Third interim dividend for the year ended 30 June 2018 of 1.26p (comprising two third interim dividends of 0.86p and 0.4p) (2017 - 0.86p) per ordinary share	843	575
	4,013	3,745
Amounts relating to the year but not paid at the year end:
-    Fourth interim dividend for the year ended 30 June 2018 of 2.62p (2017 - 3.02p) per ordinary share	1,752	2,020

4.    3.5% Convertible Unsecured Loan Stock 2018

	Nominal number of CULS £'000	Liability component £'000	Equity component £'000
Balance at 30 June 2017	34,530	33,824	488
Amortisation of discount on issue and issue expenses	-	-	-
Transfer of CULS liability discount amortisation	-	488	(488)
Conversion during the year	(19)	(20)	-
Balance at 30 June 2018	34,511	34,292	-

	Nominal number of CULS £'000	Liability component £'000	Equity component £'000
Balance at 30 June 2016	34,554	33,025	1,213
Amortisation of discount on issue and issue expenses	-	97	-
Transfer of CULS liability discount amortisation	-	724	(724)
Conversion during the year	(24)	(22)	(1)
Balance at 30 June 2017	34,530	33,824	488

On 26 September 2011, the Company issued £40,000,000 nominal of 3.5% Convertible Unsecured Loan Stock 2018. The CULS can be converted at the election of holders into ordinary shares during the months of March and September in each year throughout their life, commencing March 2012 to September 2018 at a rate of 1 ordinary share for every 377.1848p nominal of CULS.

On 13 October 2017, the Company issued 17 ordinary shares in connection with the exercise of £65 nominal of the Company's CULS.

On 15 April 2018, the Company issued 5,120 ordinary shares in connection with the exercise of £19,319 nominal of the Company's CULS.

On 2 October 2018, the Company issued 398 ordinary shares in connection with the exercise of £1,508 nominal of the Company's CULS.

Once 80% of the nominal amount of the CULS issued have been converted, the Company is allowed to request that holders redeem or convert the remainder. Interest is paid on the CULS on 31 March and 30 September in each year. 25% of the interest is charged to revenue in line with the Board's expected long-term split of returns from the investment portfolio of the Company.

As at 30 June 2018, there was £34,511,074 nominal of CULS in issue of which £34,509,566 was repaid on 28 September 2018.

5.    Related Party Transactions

The following are considered related parties: the Board of Directors ('the Board') and CQS/New City Investment Managers ('the Investment Manager').

As at 30 June 2018, the Company held shares in New City Energy Ltd and Golden Prospect Precious Metals Ltd, these two investment companies are also managed by the Investment Manager.

The balance due to Directors for fees at the year end was £Nil (2017: £Nil).

6.    Post Balance Sheet Events

On 20 September 2018 the Company entered into a £20 million unsecured revolving credit facility with Scotia Bank. The facility has a two year term and the interest rate is base rate plus 1.05% per annum.

On 30 September 2018 the Company repaid £34,509,566 nominal of 3.5% Cumulative Unsecured Loan Stock 2018 ("CULS")

On 2 October 2018 the Company issued 398 ordinary shares of 25p each in connection with the exercise of conversion rights by holders of £1,508 nominal of CULS.

On 18 October 2018 the Company announced an annual dividend target of 5.60 pence per share for its 2018/19 financial year. A first interim dividend of 1.26 pence per share (2017: 0.86 pence per share) was announced on the same date.

7.    Financial Instruments

These are not full statutory accounts for the year ended 30 June 2018.  The full audited annual report and accounts for the year ended 30 June 2018 will be sent to shareholders in November 2018 and will be delivered to the Registrar of Companies following the Company's Annual General Meeting.

Strategic Review

Introduction

This review is part of the Strategic Report being presented by the Company under guidelines for UK-listed Companies' Annual Reports in accordance with The Companies Act 2006, and is designed to provide information primarily about the Company's business and results for the year ended 30 June 2018. It should be read in conjunction with the Chairman's Statement on pages 3 and 4 and the Investment Manager's Review on pages 5 and 6, which give a detailed review of the investment activities for the year and look to the future.

Business Model

The business model of the Company is described below. Investment Policy The Company invests predominantly in mining and resource equities and mining, resource and industrial fixed interest securities (including, but not limited to, preference shares, loan stocks and corporate bonds, which may be convertible and/or redeemable). The Company may invest in companies regardless of country, sector or size and the Company's portfolio is constructed without reference to the composition of any stockmarket index or benchmark. Exposure to higher yielding securities may also be obtained by investing in other sectors, including closed-end investment companies and open-ended collective investment schemes.

The Company may, but is not obliged to, invest in derivatives, financial instruments, money market instruments and currencies for the purpose of efficient portfolio management.

The Company may acquire securities that are unquoted at the time of investment but which are about to be, or are immediately convertible at the option of the Company into securities which are, listed or traded on a stock exchange, and may continue to hold securities that cease to be quoted or listed if the Investment Manager considers this appropriate. In addition, the Company may invest up to 10 per cent of its gross assets in other securities that are unlisted or unquoted at the time of investment.

The Company will not invest more than 10 per cent in aggregate of the value of its total assets (measured at the time of investment) in other investment trusts or investment companies which are listed on the Official List except that this restriction does not apply to investments in other investment trusts or investment companies which themselves have published investment policies to invest no more than 15 per cent of their total assets in other investment trusts or investment companies which are listed on the Official List.

The Company may borrow up to 25 per cent of shareholders' funds (measured at the time of drawdown).

The Investment Manager expects that the Company will normally be fully invested. However, during periods in which changes in economic circumstances, market conditions or other factors so warrant, the Company may reduce its exposure to securities and increase its position in cash, money market instruments and derivative instruments in order to seek protection from stockmarket falls.

The Company's performance in meeting its objectives is measured against key performance indicators ('KPIs') as set out on page 13. The primary KPI against which shareholders' returns are measured is a composite benchmark weighted two-thirds to the Euromoney Global Mining Index (sterling adjusted) and one-third to the Credit Suisse High Yield Index (sterling adjusted).

Principal Risks and Uncertainties and Risk Mitigation

Risks are inherent in the investment process, but it is important that their nature and magnitude are understood so that risks, particularly those which the Company does not wish to take, can be identified and either avoided or controlled. The Board has established a detailed framework of the key risks that the business is exposed to, with associated policies and processes devised to mitigate or manage those risks. The principal risks faced by Company are set out below.

Investment and Strategy Risk - The Board is responsible for deciding the investment strategy to fulfil the Company's objectives and monitoring the performance of the Investment Manager. Inappropriate strategy, including country and sector allocation, stock selection and the use of gearing, could lead to poor returns for shareholders. To manage this risk the Board requires the Investment Manager to provide an explanation of significant stock selection decisions and the rationale for the composition of the investment portfolio at each Board meeting, when gearing levels are also reviewed. The Board monitors the spread of investments to ensure that it is adequate to minimise the risk associated with particular countries or factors specific to particular sectors. The Investment Manager also provides the Board and shareholders with monthly factsheets which include an investment commentary.

Market Risk - The Company's assets consist principally of listed equities and fixed interest securities and its greatest risks are in consequence market-related. In addition to ordinary movements in the prices of the Company's investments and the loss that the Company might suffer through holding investments in the face of negative market movements, the Company's investment strategy necessarily amplifies this risk (see Sector Risk below). The Board seeks to mitigate this risk through the processes described in the paragraph above, monitoring the implementation and results of the investment process with the Investment Manager.

Sector Risk - The largest part of the Company's assets consist of equity-related investments in companies, usually mid-and smallcap companies, with a wide range of commodity exposures. The prices of the underlying commodities are often volatile and the companies can be located in countries at risk of political instability and vulnerable to natural disasters. The liquidity in the shares of the companies is often restricted, meaning that it can be difficult to buy or sell volumes of shares at the quoted price. The Board seeks to mitigate this risk through the processes described in the paragraph above on Investment and Strategy Risk. In addition, the closed-ended structure of the Company is an essential part of the Board's management of this risk, ensuring that parts of the portfolio do not have to be sold to raise liquidity to fund redemptions at short notice.

Financial Risk - The Company's investment activities expose it to a variety of financial risks that include market price risk, foreign currency risk, interest rate risk and liquidity and credit risk. Further details of these risks and the ways in which they are managed are disclosed in note 16 of the financial statements.

Earnings and Dividend Risk - Following the strategic review carried out during the year earnings no longer underpin the dividends declared, with the portfolio being managed on a total return basis. Future dividends are expected to be uncovered over the short to medium term and will be funded from distributable reserves as necessary.

Operational Risk - The Company relies upon the services provided by third parties and is reliant on the control systems of the Investment Manager and the Company's other service providers. The security and/or maintenance of, inter alia, the Company's assets, dealing and settlement procedures, and accounting records depend on the effective operation of these systems. These are regularly tested and monitored and are reported on at each Board meeting. An internal control report, which includes an assessment of risks, together with the procedures to mitigate such risks, is prepared by Maitland Administration Services Limited, whose systems and processes via Administrator relies upon. These are reviewed by the Audit committee as a minimum once a year. CQS delivers a risk based internal audit plan across the CQS Group which covers different areas of front, middle and infrastructure audits; any areas of concern are discussed with the Audit Committee when it meets. The Depositary and Custodian, HSBC Bank plc, produces an internal control report each year which is reviewed by its auditors and gives assurance regarding the effective operation of controls. This is reviewed by the Audit Committee.

Regulatory Risk - The breach of regulatory rules could lead to a suspension of the Company's stock exchange listing or financial penalties. Breach of Sections 1158 to 1159 of the Corporation Tax Act 2010 could lead to the Company being subject to tax on chargeable gains. The Company Secretary monitors the Company's compliance with the Listing Rules of the UK Listing Authority and Sections 1158 to 1159 of the Corporation Tax Act 2010. Compliance with the principal rules is reviewed by the Directors at each Board meeting.

Political risk - Political developments are closely monitored and considered by the Board. The Board has noted the continued uncertainty as to the terms on which the UK will leave the European Union, and also the apparent increase in protectionist threats to world trade. The Board will continue to monitor developments as they occur and assess the potential consequences for the Companys' future activities.

Viability Statement

In accordance with provision C2.2 of the 2016 revision of the UK Corporate Governance Code, the Directors have assessed the viability of the Company over a period longer than the 12 months required by the 'Going Concern' provision (this provision is detailed below). The Board conducted this viability review for a period of three years. The Board considers that this period reflects the long term objectives of the Company whilst taking into account the impact of uncertainties in the markets.

In making this statement the Board carried out a robust assessment of the principal risks facing the Company. These risks and their mitigations are set out on pages 11 and 12. The principal risks identified as most relevant to the assessment of the viability of the Company were those relating to potential under-performance of the portfolio and its effect on the ability to pay dividends.

When considering the risk of under-performance, the Board carried out a series of stress tests including the effects of any substantial future falls in investment value on the ability to re-pay and re-negotiate borrowings, potential breaches of loan covenants and the maintenance of dividend payments.

The Board also considered the impact of potential regulatory change and the controls in place surrounding significant third party providers, including the Investment Manager.

The Board also noted the liquidity risk in the portfolio where the percentage of Level 1 listed investments held at the year end was 81.6%.

Based on the Company's processes for monitoring revenue and costs and the Investment Manager's compliance with the investment objective and policies, the Directors have concluded that there is a reasonable expectation that the Company will be able to continue in operation and meets its liabilities as they fall due for a period of three years from the date of approval of this Report.

Going Concern

Since 2004, shareholders have been given the opportunity to vote on an Ordinary Resolution to continue the Company as an investment trust at each Annual General Meeting of the Company. Such a resolution has been proposed as Resolution 11 within the notice of Annual General Meeting on pages 49 and 50. If the resolution is not passed, the Board will put forward proposals to liquidate, open-end or otherwise reconstruct the Company. After making enquiries, and having considered the Company's investment objective, nature of the investment portfolio and expenditure projections, the Directors consider that the Company has adequate resources to continue in operational existence for the foreseeable future. For this reason, and in light of the Company's strong long term investment record, the Directors are satisfied that it is appropriate to adopt the going concern basis in preparing the accounts, notwithstanding that the Company is subject to an annual continuation vote as described above.

Performance Measurement and Key Performance Indicators

The Board uses a number of performance measures to assess the Company's success in meeting its objectives. The key performance indicators are as follows:

·      Performance measured against the benchmark, relevant indices and peers

The Board reviews and compares, at each meeting, the performance of the portfolio as well as the net asset value and share price for the Company and its benchmark, relevant indices and peers. (see inside front cover)

·      Discount/premium to net asset value ('NAV')

At each Board meeting, the Board monitors the level of the Company's discount/premium to NAV. The Company publishes a NAV per share figure on a daily basis, through the official newswire of the London Stock Exchange.

·      Dividends per share

The Board currently intends to at least maintain the level of dividend paid by the Company in respect of subsequent financial years. The continuing ability of the Company to do so is monitored on a quarterly basis.

·      Ongoing charges

The ongoing charges are a measure of the total expenses incurred by the Company expressed as a percentage of the average shareholders' funds over the year. The Board regularly reviews the ongoing charges and monitors all Company expenses. There has been no movement in the ongoing charges from prior year of 1.8%.

Social, Community, Employee Responsibilities and Environmental Policy

The Directors recognise that their first duty is to act in the best financial interests of the Company's shareholders and to achieve good financial returns against acceptable levels of risk, in accordance with the objectives of the Company.

In asking the Company's Investment Manager to deliver against these objectives, they have also requested that the Investment Manager take into account the broader social, ethical and environmental issues of companies within the Company's portfolio, acknowledging that companies failing to manage these issues adequately run a long term risk to the sustainability of their businesses.

More specifically, they expect companies to demonstrate ethical conduct, effective management of their stakeholder relationships, responsible management and mitigation of social and environmental impacts, as well as due regard for wider societal issues.

As an investment trust with its current structure the Company has no direct social, community, employee or environmental responsibilities of its own.

The Company has no greenhouse gas emissions to report from its operations for the year ended 30 June 2018 (as per the prior year), nor does it have responsibility for any other emissions producing sources under the Companies Act 2006 (Strategic Report and Directors' Reports) Regulations 2013 (including those within the underlying investment portfolio).

At 30 June 2018 there were three male Directors and two female Directors. The Company has no employees so is not required to report further on gender diversity.

As an investment vehicle the Company does not provide goods or services in the normal course of business and does not have customers. Accordingly, the Directors consider that the Company does not fall within the scope of the Modern Slavery Act 2015 and is not, therefore, obliged to make a slavery and human trafficking statement. In any event, the Company considers its supply chains to be of low risk as its suppliers are typically professional advisers.

In line with the requirements of The Criminal Finances Act 2017, the Directors confirm that the Company has a commitment to zero tolerance towards the criminal facilitation of tax evasion.

Statement of Directors' Responsibilities in Respect of the Annual Financial Report

The Directors are responsible for preparing the Annual Report and the financial statements in accordance with applicable law and regulations.

Company law requires the Directors to prepare financial statements for each financial year. Under that law they have elected to prepare the financial statements in accordance with UK Accounting Standards including FRS 102 The Financial Reporting Standard Applicable in the UK and Republic of Ireland.

Under company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Company and of the profit or loss of the Company for that period. In preparing these financial statements, the Directors are required to:

·      select suitable accounting policies and then apply them consistently;

·      make judgments and estimates that are reasonable and prudent;

·      state whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the financial statements; and

·      prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business;

·      prepare a director's report, a strategic report and a director's remuneration report which comply with the requirements of Companies Act 2006.

The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company's transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the financial statements comply with the Companies Act 2006. They have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Company and to prevent and detect fraud and other irregularities.

Under applicable law and regulations, the Directors are also responsible for preparing a Directors' Report, Directors' Remuneration Report and Statement of Corporate Governance that comply with that law and those regulations. The financial statements are published on www.ncim.co.uk which is a website maintained by the Company's Investment Manager. The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company's website. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

The Directors confirm that to the best of our knowledge:

·      the financial statements, prepared in accordance with UK GAAP, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company;

·      that in the opinion of the Directors, the Annual Report and Accounts taken as whole, is fair, balanced and understandable and it provides the information necessary to assess the Company's performance, business model and strategy; and

·      the Strategic Report includes fair review of the development and performance of the business and the position of the Company, together with a description of the principal risks and uncertainties that the Company faces.

On behalf of the Board

Richard Prickett,

Chairman

24 October 2018

 

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