Half Yearly Report

RNS Number : 7086H

City Natural Res High Yield Tst PLC

26 February 2010

 



To:                   RNS

From:              City Natural Resources High Yield Trust plc

Date:               26 February 2010

Unaudited results for the six months ended 31 December 2009

·     Net asset value total return of 100.0 per cent since 1 January 2009

·     Named 'Specialist Trust of the Year' for 2009 by Investment Week

·     Net asset value total return of 36.2 per cent since 1 July 2009 compared to a total return of 42.2 per cent from the benchmark index

·     Dividend increase of 12.7 per cent for the half year

·     Ordinary share price total return since 1 July 2009 of 45.1 per cent

·     Net asset value total return of 388.8 per cent since 1 August 2003 compared to a total return of 244.6 per cent from the benchmark index

·     Ordinary share price total return since 1 August 2003 of 313.5 per cent

·     Ordinary share price discount of 15.3 per cent to net asset value

Chairman's Statement

Investment and Share Price Performance

When I wrote to you at this time last year I suggested that 2009 would "see some of the greatest opportunities available to investors in a generation".  So it proved, and at 31 December 2009 your Company's net asset value stood at 223.1 pence, giving a net asset value total return for the calendar year of 100.0 per cent.  This brought the Company's net asset value total return since its current incarnation on 1 August 2003 to 388.8 per cent; the benchmark index returned 244.6 per cent.

During the six month period under review the Company's net asset value total return was 36.2 per cent and its share price total return 45.1 per cent, compared with a return of 42.2 per cent from the benchmark index.  The share price return reflects a narrowing of the discount at which the Company's shares trade from 20.2 per cent to 15.3 per cent during the period; it has since widened back out to 17.6 per cent.  Your Board and Manager continue to work hard to minimise this figure, but the stability and reduced volatility that might mitigate discount levels remain elusive.

The final warrant exercise date on 31 October 2009 saw all 3.9 million warrants in issue exercised, adding £3.3 million to the Company's assets.  This means that there will be no dilution of net asset value returns for shareholders in future.

Income and Dividends

For a number of years the portfolio has been managed with income enhancement and a desire to progress the dividend firmly in mind, a policy that assumed even greater importance for us during the recent period of extreme turbulence for asset values. The four interim dividends paid in respect of the year to 30 June 2008 were 12.8 per cent higher than those paid in 2007, and the year to 30 June 2009 saw a further 15.8 per cent dividend increase.  Two interim dividends of 0.62 pence per share have been paid in respect of this year, representing an increase of 12.7 per cent on those paid last year. 

The yield on the Company's shares is 1.8 per cent as I write, and the revenue reserve stands at 4.6 pence per share, up from 4.3 pence per share at 30 June 2009.

Investment Strategy and Outlook

Bank bail outs, low interest rates, quantitative easing in its varying guises and ballooning budget deficits have averted depression; however, whether they amount to a programme that will encourage sustained recovery remains an open question.  We remain somewhat sceptical, but while commodity markets can not be decoupled from the prospects for Europe, Japan and America, the fact remains that China alone now accounts for close to 50 per cent of all demand for commodities other than oil.  Intelligence from the resource companies suggests that the metals that are being produced are being used and not stockpiled, so the demand appears to be real rather than speculative.  Add India and a number of other Asian economies that have demonstrated impressive resilience, as well as Brazil, and the strength of the commodity story even, or perhaps especially, against a background of possible disappointment elsewhere, stands out.  Corporate activity within the resource sector is another reason for optimism; companies will find it cheaper to buy assets rather than to build them, and a renewed wave of merger and acquisition activity would come as no surprise.

The Company's largest single commodity weighting remains gold, where the price has held up fairly well even in the face of a strengthening US dollar, a characteristic shared by oil.  Currency upheavals look set to play a large role in 2010 once again, and it remains difficult to make a convincing bull case for sterling - except, possibly, against the drachma.

We remain committed to the uranium sector, with the United States becoming the latest country to signal its renewed commitment to a nuclear future in President Obama's State of the Union address.  Elsewhere, rare earths continue to serve us well and copper, where the Company is well represented, looks set to benefit from limited supply growth.  At the softer end of the spectrum, palm oil remains interesting, while since the period end the Manager has built up a position in Société Internationale de Plantations d'Heveas (SIPH) which has cocoa and coffee interests as well as rubber.

Whatever the strength of the commodity story over the medium term, however, we incline towards caution in the short term.  We have had a good run, and markets have an uncertain feel to them as the quality of the recovery is called into question.  The Manager has reduced gearing to less than 5 per cent, and we are prepared to batten down the hatches if need be.  We have put a new  borrowing facility in place with HSBC, and will look to take advantage of opportunities that do arise during any period of weakness.

Manager's Review

While the quantitative easing policy by Central Banks had the desired effect of calming the financial markets, it came at a cost of major volatility in the currency markets. At the start of the period under review it was the US dollar which was under pressure, but by calendar year end it was the euro and sterling which were showing sustained weakness. Throughout this period, both the Canadian and Australian dollars were the principal beneficiaries, a trend which has continued into the New Year.

In our last report we referred to the somewhat disappointing performance by gold bullion, but I am glad to say that interest in the metal has increased as has the performance of the relevant shares. So far there has been little distinction between the major producers and the emerging companies but, as is our usual policy, we are always inclined to the newer companies. Included in that list of holdings are Focus Minerals, Real Gold, Catalpa and Kingrose. There were distinct signs of the silver market sharing in the rise of bullion markets, with our main investment being in Great Panther.

We have long had an overweight position in the soft commodities markets, mainly through palm oil, and have kept our holdings in New Britain, R.E.A, Anglo Eastern and M. P. Evans. There has been a significant increase in the development of palm oil plantations in West Africa and we have introduced a new company involved in that part of the world, namely .Equatorial Palm Oil. The rubber price currently stands at a thirty five year high and we have been buying the shares of SIPH, a French quoted African producer.

On the energy front, the oil price continued to edge higher, but uranium remains in the doldrums. Nevertheless the fundamental outlook remains hugely encouraging. Barely a country hasn't at least examined the possibility of constructing nuclear power stations while China is currently building twenty four new power stations. Our main holding Extract (and its chief shareholder Kalahari), continue to produce outstanding exploration results, but the shares have been somewhat subdued.

There has been increasing publicity given to the usage of rare earths - a market dominated by the Chinese. These commodities are used in a multitude of high tech processes, not the least of which is in the new generation of car batteries. We have a significant holding in Neo Materials one of the world's leading processors, as well as a holding in Lynas an Australian company owning a large undeveloped rare earth project.

During the period under review, the two outstanding performances have been Kiwara and Polar Star. Kiwara has been the subject of a successful bid by First Quantum, while Polar Star continues to report encouraging results from its various projects in Chile. This company has the potential to be a major gold/copper producer in the future.

Looking forward, we expect further volatility in the world's currency markets which leads us to anticipate an upward break out in the gold price. Given our overweight position in this sector plus our ever increasing awareness of the importance of income as measured by significant increases over the last 2 years, while we remain confident of the future, we would point out that, on bare analysis, 22 per cent of out investments are UK based and actual income from this region is less than 10 per cent.

Enquiries:

Richard Lockwood

Investment Manager

New City Investment Managers Limited                     Tel:  [phone]

Martin Cassels

Company Secretary

F&C Asset Management plc                                       Tel:  [phone]

Unaudited Income Statement for the six months ended 31 December 2009

	2009	2009	2009
	Revenue	Capital	Total
	£'000	£'000	£'000
Realised gains on investments	-	6,392	6,392
Investment holding gains	-	32,264	32,264
Exchange losses	-	(179)	(179)
Income                                                               3	2,506	-	2,506
Investment management fee	(200)	(600)	(800)
Other expenses	(160)	-	(160)
Net return before finance costs and taxation	2,146	37,877	40,023
Interest payable and similar charges	(36)	(108)	(144)
Net return on ordinary activities before taxation	2,110	37,769	39,879
Tax on ordinary activities	(491)	400	(91)
Net return on ordinary activities after taxation	1,619	38,169	39,788
Return per share - basic                                 4	2.53p	59.70p	62.23p
Return per share - fully diluted                      4	2.53p	59.70p	62.23p

Amounts recognised as dividends in the period

	Six months	Six months
	ended	ended
	31 December	31 December
	2009	2008
	(unaudited)	(unaudited)
	£'000	£'000
Fourth interim dividend for the year ended
30 June 2008 of 1.00p per share	-	629
First interim dividend for the year ended
30 June 2009 of 0.55p per share	-	346
Fourth interim dividend for the year ended
30 June 2009 of 1.42p per share	894	-
First interim dividend for the year ended
30 June 2010 of 0.62p per share	390	-
	1,284	975

Unaudited Income Statement for the six months ended 31 December 2008

	2008	2008	2008
	Revenue	Capital	Total
	£'000	£'000	£'000
Realised losses on investment	-	(15,581)	(15,581)
Investment holding losses	-	(56,887)	(56,887)
Exchange losses	-	(192)	(192)
Income                                                               3	2,555	-	2,555
Investment management fee	(140)	(420)	(560)
VAT on management fees refund	41	124	165
Other expenses	(158)	(6)	(164)
Net return before finance costs and taxation	2,298	(72,962)	(70,664)
Interest payable and similar charges	(188)	(562)	(750)
Net return on ordinary activities before taxation	2,110	(73,524)	(71,414)
Tax on ordinary activities	(582)	391	(191)
Net return on ordinary activities after taxation	1,528	(73,133)	(71,605)
Return per share - basic                               4	2.43p	(116.28)p	(113.85)p
Return per share - fully diluted                    4	2.39p	(114.19)p	(111.80)p

Amounts recognised as dividends in the period

	Six months	Six months
	ended	ended
	31 December	31 December
	2008	2007
	(unaudited)	(unaudited)
	£'000	£'000
Fourth interim dividend for the year ended
30 June 2007 of 0.85p per share	-	534
First interim dividend for the year ended
30 June 2008 of 0.52p per share	-	346
Fourth interim dividend for the year ended
30 June 2008 of 1.00p per share	629	-
First interim dividend for the year ended
30 June 2009 of 0.55p per share	346	-
	975	880

Audited Income Statement for the year ended 30 June 2009

	2009	2009	2009
	Revenue	Capital	Total
	£'000	£'000	£'000
Realised losses on investment	-	(15,254)	(15,254)
Investment holding losses	-	(22,113)	(22,113)
Exchange losses	-	(440)	(440)
Income                                                                   3	4,539	-	4,539
Investment management fee	(279)	(838)	(1,117)
VAT on management fee refund	41	124	165
Other expenses	(528)	(6)	(534)
Net return before finance costs and taxation	3,773	(38,527)	(34,754)
Interest payable and similar charges	(258)	(776)	(1,034)
Net return on ordinary activities before taxation	3,515	(39,303)	(35,788)
Tax on ordinary activities	(914)	521	(393)
Net return on ordinary activities after taxation	2,601	(38,782)	(36,181)
Return per share - basic                                     4	4.13p	(61.65)p	(57.52)p
Return per share - fully diluted                          4	4.07p	(60.70)p	(56.63)p

Balance Sheet
	31 December	31 December	30 June
	2009	2008	2009
	(unaudited)	(unaudited)	(audited)
	£'000	£'000	£'000
Fixed assets
Investments	158,033	83,406	114,447
Current assets
Debtors	1,256	2,201	1,046
Cash at bank and on deposit	3,222	2,957	5,270
	4,478	5,158	6,316
Creditors: amounts falling due within one year	(13,348)	(15,980)	(13,447)
Net current liabilities	(8,870)	(10,822)	(7,131)
Net Assets	149,163	72,584	107,316
Capital and reserves
Called-up share capital	16,714	15,731	15,731
Special distributable reserve	30,386	30,386	30,386
Share premium	4,753	80	80
Warrant reserve	-	2,313	2,313
Capital reserve	94,254	21,734	56,085
Revenue reserve	3,056	2,340	2,721
Equity shareholders' funds	149,163	72,584	107,316
Net asset value per share - basic	223.11p	115.36p	170.55p
Net asset value per share - fully diluted	223.11p	113.57p	165.52p

Reconciliation of Movements in Shareholders' Funds

	Six months	Six months	Year
	ended	ended	Ended
	31 December	31 December	30 June
	2009	2008	2009
	(unaudited)	(unaudited)	(audited)
	£'000	£'000	£'000
Opening equity shareholders' funds	107,316	145,131	145,131
Exercise of warrants	3,343	33	33
Return on ordinary activities after taxation	39,788	(71,605)	(36,181)
Dividends paid	(1,284)	(975)	(1,667)
Closing equity shareholders' funds	149,163	72,584	107,316

Condensed Cash Flow Statement
	Six months ended 31 December 2009 (unaudited)	Six months ended 31 December 2008 (unaudited)	Year ended 30 June 2009 (audited)
	£'000	£'000	£'000
Net cash inflow from operating activities	1,270	1,696	3,531
Net cash outflow from servicing of finance	(196)	(1,139)	(1,386)
Taxation paid	(31)	(61)	(86)
Net cash (outflow) / inflow from financial investment	(4,971)	12,311	17,001
Equity dividends paid	(1,284)	(975)	(1,667)
Net cash (outflow) / inflow before financing	(5,212)	11,832	17,393
Net cash inflow / (outflow) from financing	3,343	(11,967)	(14,967)
(Decrease) / increase in cash	(1,869)	(135)	2,426
Reconciliation of net cash flow to movement in net debt
(Decrease) / increase in cash	(1,869)	(135)	2,426
Repayment of loans	-	12,000	15,000
Exchange losses	(179)	(192)	(440)
Movement in net debt in the period	(2,048)	11,673	16,986
Opening net debt at 1 July	(6,730)	(23,716)	(23,716)
Closing net debt at 31 December/ 30 June	(8,778)	(12,043)	(6,730)
Represented by:
Cash at bank	3,222	2,957	5,270
Debt falling due within one year	(12,000)	(15,000)	(12,000)
	(8,778)	(12,043)	(6,730)
Reconciliation of operating revenue to net cash flow from operating activities
Net revenue before interest payable and taxation	40,023	(70,664)	(34,754)
(Gains) / losses on investments	(38,656)	72,468	37,369
(Increase) / decrease in accrued income	(189)	(40)	592
Increase in other debtors	(5)	(149)	(165)
(Decrease) / increase in other creditors	(82)	(81)	51
Exchange losses	179	192	440
Overseas withholding tax suffered	-	(30)	-
Net cash inflow from operating activities	1,270	1,696	3,531

Notes

1.         The unaudited interim results which cover the six months to 31 December 2009 have been prepared in accordance with applicable accounting standards and adopting the accounting policies set out in the statutory accounts of the Company for the year ended 30 June 2009.

2.         A first interim dividend of 0.62p per share was paid on 27 November 2009.  A second interim dividend of 0.62p per share was paid on 26 February 2010.

3.         The breakdown of income for the six months to 31 December 2009, 31 December 2008 and the year to 30 June 2009 was as follows:

	Six months ended 31 December 2009 £'000	Six months ended    31 December 2009 £'000	Year ended 30 June 2009 £'000
Income from investments
UK dividend income	216	194	263
Overseas dividends	194	199	463
Interest on fixed interest securities	2,029	2,082	3,717
	2,439	2,475	4,443
Other income
Deposit interest	1	73	82
Other income	66	7	14
Total income	2,506	2,555	4,539

4.         The basic revenue return per ordinary share is based on a net profit after tax of £1,619,000 (31 December 2008 - £1,528,000 and 30 June 2009 - £2,601,000) and on a weighted average of 63,934,322 ordinary shares in issue during the period (31 December 2008 - 62,895,080 and 30 June 2009 - 62,909,535).

The fully diluted revenue return per ordinary share is based on a net profit after tax of £1,619,000 (31 December 2008 - £1,528,000 and 30 June 2009 - £2,601,000) and on a weighted average of 63,934,322 ordinary shares in issue during the period (31 December 2008 - 64,044,499 and 30 June 2009 - 63,896,056 being the weighted average number of ordinary shares and warrants in issue during the period).

The basic capital return per ordinary share is based on a net capital gain after tax of £38,169,000 (31 December 2008 - a loss of £73,133,000 and 30 June 2009 - a loss of £38,782,000) and on a weighted average of 63,934,322 ordinary shares in issue during the period (31 December 2008 - 62,895,080 and 30 June 2009 - 62,909,535 being the weighted average number of ordinary shares and warrants in issue during the period).

The fully diluted capital return per ordinary share is based on a net gain after tax of £38,169,000 (31 December 2008 - a loss of £73,133,000 and 30 June 2009 - a loss of £38,782,000) and on a weighted average of 63,934,322 ordinary shares in issue during the period (31 December 2008 - 64,044,499 and 30 June 2009 - 63,896,056 being the weighted average number of ordinary shares and warrants in issue during the period).

5.         The basic net asset value per ordinary share is based on net assets at the end of the period of £149,163,000 (31 December 2008 - £72,584,000, 30 June 2009 - £107,316,000) and on 66,857,143 (31 December 2008 - 62,924,229, 30 June 2009 - 62,924,229) ordinary shares, being the total number of ordinary shares in issue at the period end.  The basic net asset value per ordinary share at 31 December 2009 was 223.1p.

6.         On 13 November 2009 the Company issued 3,932,914 ordinary shares of 25 pence, following the exercise of the warrants. Following this there were 66,857,143 ordinary shares of 25p in issue.  As at 31 December 2008 and 30 June 2009 there were 3,932,914 warrants in issue.

7.         The Company's investment manager is CQS Cayman Limited Partnership who have delegated this function to its wholly owned subsidiary New City Investment Managers Limited. CQS receive a basic monthly fee at the rate of 0.1 per cent of the Company's net assets (excluding borrowings), payable in arrears.  During the period investment management fees of £800,000 were incurred, of which £150,000 was payable at the period end.

Mr Prickett is also a director of Patagonia Gold. At the period end the Company held 2,150,000 shares in Patagonia Gold valued at £371,000.

8.         After making enquiries and having considered the Company's investment objective, nature of the investment portfolio, loan facility and expenditure projections, the Directors consider that the Company has adequate resources to continue in operation for the foreseeable future.  For this reason the Directors are satisfied that it is appropriate to adopt the going concern basis in preparing this report.

9.         The financial information for the six months ended 31 December 2009 and 31 December 2008 comprises non-statutory accounts.  The audited accounts for the year ended 30 June 2009 which were unqualified have been lodged with the Registrar of Companies.

10.       The report and accounts for the half-year ended 31 December 2009 will be    posted to shareholders and made available on the website www.ncim.co.uk.  Copies may also be obtained from the Company Secretary, F&C Asset Management plc, 80 George Street, Edinburgh, EH2 3BU

Directors' Statement of Principal Risks and Uncertainties

The Company's assets consist principally of listed equities and fixed interest securities and its principal risks are therefore market related.  The Company is also exposed to currency risk in respect of the markets in which it invests. Other key risks faced by the Company relate to investment and strategic, regulatory, operational matters and financial controls.  These risks, and the way in which they are managed, are described in more detail under the heading 'Principal risks and risk management' within the Directors' Report and Business Review contained within the Company's annual report and accounts for the year ended 30 June 2009.  The Company's principal risks and uncertainties have not changed materially since the date of the report.

Directors responsibility statement in respect of the Half-Yearly financial report

We confirm that to the best of our knowledge:

• the condensed set of financial statements has been prepared in accordance with the Statement Half-yearly financial reports issued by the UK Accounting Standards Board;

• the interim management report includes a fair review of the information required by:

(a) DTR 4.2.7R of the Disclosure and Transparency Rules, being an indication of important events that have occurred during the first six months of the financial year and their impact on the condensed set of financial statements; and a description of the principal risks and uncertainties for the remaining six months of the year; and

(b) DTR 4.2.8R of the Disclosure and Transparency Rules, being related party transactions that have taken place in the first six months of the current financial year and that have materially affected the financial position or performance of the entity during that period; and any changes in the related party transactions described in the last annual report that could do so.

Geoff Burns

Chairman

25 February 2010

 

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