Half Yearly Report

RNS Number : 3150Y

City Natural Res High Yield Tst PLC

29 February 2012

 



To:                    RNS

From:                City Natural Resources High Yield Trust plc

Date:                 28 February 2012

Unaudited results for the six months ended 31 December 2011

·      Net asset value total return of -17.3 per cent since 1 July 2011 compared to a total return of -17.5 per cent from the benchmark index

·      Share price total return of -19.2 per cent since 1 July 2011

·      Dividend increase of 11.6 per cent for the half year

·      Ordinary share price discount of 16.0 per cent to net asset value

Chairman's Statement

Investment and Share Price Performance

At 31 December 2011 the Company's net asset value stood at 290.3 pence, giving a net asset value total return for the six month period under review of -17.3 per cent, almost exactly in line with the benchmark index which fell by 17.5 per cent.

The Company's share price total return was -19.2 per cent, which reflected a widening of the discount at which the Company's shares trade from 13.9 per cent to 15.7 per cent during the six months.  Market instability and high levels of volatility have been particularly pronounced amongst risk asset classes and until a measure of stability returns, the battle to reduce discount levels is likely to be fought with only limited success.  The discount stands at 15.0 per cent as I write.

The Company has generated net asset value and share price total returns of 553.8 and 447.5 per cent respectively since 1 August 2003; the benchmark index has returned 255.8 per cent.

Income and Dividends

The Company's income performance remains strong. Two interim dividends of 0.77 pence have been paid in respect of this year, representing an increase of 11.6 per cent on those paid last year.  The total dividend of 4.22 pence for the 2010/2011 year was itself 13.7 per cent higher than that of the year before and represented the sixth successive year of dividend increases.  The Board intends to continue to implement a progressive dividend policy.

The yield on the Company's shares is 1.6 per cent as I write.

Gearing

The Company successfully issued £40 million nominal of 3.5% Cumulative Unsecured Loan Stock 2018 ("CULS") on 26 September 2011.  The Board believes that the CULS is attractive in its own right - the issue is more than five times covered by the Company's assets and the yield of 3.5% is twice that of the ordinary shares - and provides seven year financing for the Company at an attractive interest rate and extends the Company's capital base.

£21 million of the proceeds of the issue was used to repay the Company's existing short term bank loan and the balance will, over time, be deployed in accordance with the stated investment policy.

At 31 December 2011 the Company had £15.9 million of cash on its balance sheet.

Investment Strategy and Outlook

The last quarter of 2011 saw a despondent market fearful of a double-dip recession in the United States, the Chinese economy landing hard and, in particular, the threat that the sovereign debt crisis in Europe might precipitate Lehman II.

In the event, leading indicators in the United States have pointed towards a pick up in the economy, with unemployment back to levels not seen since 2008, and 2012 growth estimates of between 2 and 3 per cent.  China has seen inflation decline and belief grow that the property bubble can be contained; it is now anticipated that the authorities will continue to loosen monetary policy.  In Europe the key event has been the move by the European Central Bank to introduce its Long Term Refinancing Operation ("LTRO") programme.  This has boosted liquidity and dramatically reduced the chances of a systemic banking crisis in the region; at least for the time being.

This good news undid the conservatively positioned and the risk averse, and risk assets, including commodities, moved higher.  A bright start to 2012 saw the Company's net asset value increase by 11.4 per cent in January.

So the worst has not come to pass, and there are grounds for optimism; monetary policy should remain loose across the globe as headline inflation rates fall, and there seems to be momentum in the global economic recovery.  And yet … is the virtually free money being offered by central banks across the developed world really a sign of health?  The prudent savers being robbed of their real returns on sovereign debt and bank deposits (outside of southern Europe) in order to pay for the past profligacy of others would not think so.

Whether QE or LTRO is your preferred poison, printing money suggests that asset bubbles and inflation are unlikely to be strangers.  Nor has the curtain run down on a Greek tragedy where the suspicion remains that neither the author nor the players know how the plot concludes.

The Company's positioning reflects this ambivalence.  It is moderately geared, but maintains in excess of £11 million cash on the balance sheet; it feels like a good time to have secured seven year financing.  It has a near 30% exposure to gold which reassures, while the wide diversity of our other interests is the source of both opportunity and insurance against the unexpected.

Above all, the medium and long term case for investing in commodities remains intact.  The BRIC countries have no sovereign debt crisis, and across the new world consumption can only rise - a consumption that must be fuelled by the commodities that are the Company's raison d'être. Short term pressures on commodity demand and pricing are always possible, but the longer term trends are well established and the Company remains focussed on being positioned to benefit from these trends.

Geoff Burns

Chairman

Manager's Review

We were glad to greet 2012 and hopefully leave behind the market's fixation on the inability of politicians to find a credible resolution to the Eurozone's debt problems.  The last six months have seen resource equities come under severe pressure as investors fled the sector fearing economic contagion.  There can be no doubt that the Government debt crisis of the developed world has a long way to run and politicians and electorates have not fully grasped the implications of the de-leveraging process, which will be grim.  The remarkable expansion of the major central banks' balance sheets, whether by Operation Twist, LTRO or Quantitative Easing, are all terms to ease the stress on financial markets and , arguably, designed to keep policymakers in employment rather than provide a lasting solution to the debt crisis. 

Market sentiment towards the resources sector altered dramatically over the period as investors worried about the risk that is inseparable from the commodities sector.  Whether it is the unforeseeable (a tsunami striking the nuclear plant at Fukushima); the political (take your pick, but opportunistic and counterproductive mining taxes would be likely to make the short list), or "simple" market volatility (gold fell 10% in December, only to rise by 11% in January; this was not based on a shift in fundamentals), it is all too easy for nerves to get the better of even the stout hearted.

It is this that explains why many of the companies that we investment in ended the year in much better shape than they began, but, paradoxically, found their share prices were much lower. 

So long as the case for a secular bull market in commodities persists, and it resoundingly does, this is in the last analysis mostly background noise,  noise, moreover, which the Company's wide range of interests and tactical flexibility leave it well positioned to take advantage of.  The changes in valuations to which I refer above offer always gives rise to opportunity, and most producers benefited from expanded margins, particularly the gold miners, and now have robust balance sheets. We believe that this will lead to a continuation of M&A across the sector, a trend which saw the likes of Petrohawk Energy, MacArthur Coal, Minara Resources, Grand Cache Coal and Hathor Exploration all succumb to takeovers in the second half of 2011.  Strong cash generation has also led companies to increase returns to shareholders and this has enabled us to raise the interim dividend by 11.6% to 0.77 pence. In this era of low interest rates, those companies offering growth and meaningful dividends are in the spotlight and this has been shown by the performance of Iluka Resources and APA Group.

The takeover of Hathor Exploration by Rio and the proposed bid for Kalahari Minerals and Extract Resources by China Guandong Nuclear Power Corporation are of particular interest to the Trust, not least because Extract and Kalahari have been among the Trust's two largest holdings for a while, but importantly it shows that the strategic players, Rio, Cameco and CGNPC, have a very different view of the uranium market fundamentals than the equity market at present.  We have long maintained that tier 1 deposits end up in the hands of the majors and these were cases in point.

Looking forward we would like to think that we will be writing less about politics and more about the exciting companies in the portfolio, such as Americas Petrogas, unlocking the potential of shale gas in Argentina's Neuquen Basin, and Newstrike Capital discovering a new gold belt in Mexico. 

Enquiries:

Will Smith / Ian Francis

Investment Manager

New City Investment Managers                           Tel:  [phone]

Martin Cassels, Company Secretary

R&H Fund Services Limited                                Tel:  [phone]

Beth Harris, Newgate Threadneedle                     Tel:  [phone]

Unaudited Income Statement

for the six months ended 31 December 2011

			2011	2011	2011
		Revenue		Capital	Total
	Notes	£'000		£'000	£'000
Losses on investments	3	-		(46,263)	(46,263)
Exchange losses		-		(68)	(68)
Income	4	2,906		-	2,906
Investment management fee		(321)		(964)	(1,285)
Other expenses		(347)		-	(347)
Net return before finance costs and taxation		2,238		(47,295)	(45,057)
Interest payable and similar charges		(121)		(562)	(683)
Net return on ordinary activities before taxation		2,117		(47,857)	(45,740)
Tax on ordinary activities		(494)		521	27
Net return attributable to equity shareholders	5	1,623		(47,336)	(45,713)
Return per ordinary share	5	2.43p		(70.80p)	(68.37p)

Amounts recognised as dividends in the period

	Six months	Six months
	ended	ended
	31 December	31 December
	2011	2010
	(unaudited)	(unaudited)
	£'000	£'000
Fourth interim dividend for the year ended
30 June 2010 of 1.85p per share	-	1,237
First interim dividend for the year ended
30 June 2011 of 0.69p per share	-	461
Fourth interim dividend for the year ended
30 June 2011 of 2.15p per share	1,437	-
First interim dividend for the year ended
30 June 2012 of 0.77p per share	515	-
	1,952	1,698

Unaudited Income Statement

for the six months ended 31 December 2010

			2010	2010	2010
		Revenue		Capital	Total
	Notes	£'000		£'000	£'000
Gains on investments		-		113,295	113,295
Exchange losses		-		(128)	(128)
Income	4	2,868		-	2,868
Investment management fee		(304)		(911)	(1,215)
Other expenses		(244)		-	(244)
Net return before finance costs and taxation		2,320		112,256	114,576
Interest payable and similar charges		(41)		(121)	(162)
Net return on ordinary activities before taxation		2,279		112,135	114,414
Tax on ordinary activities		(408)		289	(119)
Net return attributable to equity shareholders	5	1,871		112,424	114,295
Return per ordinary share	5	2.80p		168.16p	170.96p

Audited Income Statement

for the year ended 30 June 2011

			2011	2011	2011
		Revenue		Capital	Total
	Notes	£'000		£'000	£'000
Gains on investments		-		86,661	86,661
Exchange losses		-		(122)	(122)
Income	4	5,447		-	5,447
Investment management fee		(676)		(2,028)	(2,704)
Other expenses		(534)		11	(523)
Net return before finance costs and taxation		4,237		84,522	88,759
Interest payable and similar charges		(88)		(264)	(352)
Net return on ordinary activities before taxation		4,149		84,258	88,407
Tax on ordinary activities		(745)		638	(107)
Net return attributable to equity shareholders	5	3,404		84,896	88,300
Return per ordinary share	5	5.09p		126.98p	132.07p

Balance Sheet as at 31 December 2011
		As at 31 December	As at 31 December	As at 30 June
		2011	2010	2011
		(unaudited)	(unaudited)	(audited)
		£'000	£'000	£'000
Fixed assets
Investments		211,948	281,767	253,745
Current assets
Debtors		1,488	1,579	1,636
Cash at bank and on deposit		15,858	438	57
		17,346	2,017	1,693
Creditors: amounts falling due within one year		(722)	(20,078)	(18,650)
Net current assets / (liabilities)		16,624	(18,061)	(16,957)
3.5% Convertible Unsecured Loan Stock 2018	7	(34,476)	-	-
Net assets		194,096	263,706	236,788
Capital and reserves
Called-up share capital	8	16,714	16,714	16,714
Special distributable reserve	8	30,386	30,386	30,386
Share premium	8	4,753	4,753	4,753
Equity component of 3.5% Convertible Unsecured Loan Stock 2018	8	4,795	-	-
Capital reserve	8	133,198	207,884	180,356
Revenue reserve	8	4,250	3,969	4,579
Equity shareholders' funds	6	194,096	263,706	236,788
Net asset value per share		290.31p	394.43p	354.17p

Reconciliation of Movements in Shareholders' Funds

	Six months	Six months	Year
	ended	ended	ended
	31 December	31 December	30 June
	2011	2010	2011
	(unaudited)	(unaudited)	(audited)
	£'000	£'000	£'000
Opening equity shareholders' funds	236,788	151,109	151,109
Return on ordinary activities after taxation	(45,713)	114,295	88,300
Issue of 3.5% Convertible Unsecured Loan Stock 2018	4,973	-	-
Dividends paid	(1,952)	(1,698)	(2,621)
Closing equity shareholders' funds	194,096	263,706	236,788

Condensed Cash Flow Statement for the six months ended 31 December 2011
	Six months ended 31 December 2011 (unaudited)	Six months ended 31 December 2010 (unaudited)	Year ended 30 June 2011 (audited)
	£'000	£'000	£'000
Net cash inflow from operating activities	775	1,406	2,106
Net cash outflow from servicing of finance	(143)	(151)	(343)
Taxation paid	(16)	-	(461)
Net cash outflow from financial investment	(4,643)	(9,010)	(7,123)
Equity dividends paid	(1,952)	(1,698)	(2,621)
Net cash outflow before financing	(5,979)	(9,453)	(8,442)
Bank facility (repaid) / drawndown	(20,569)	5,637	4,239
Issue of 3.5% Convertible Unsecured Loan Stock 2018	39,248	-	-
Increase / (decrease) in cash	12,700	(3,816)	(4,203)
Reconciliation of net cash flow to movement in net debt
Increase / (decrease) in cash	12,700	(3,816)	(4,203)
Repayment / (drawdown) of bank facility	20,569	(5,637)	(4,239)
Exchange losses	(68)	(128)	(122)
Movement in net cash /(debt) in the period	33,201	(9,581)	(8,564)
Opening net debt at 1 July	(17,343)	(8,779)	(8,779)
Closing net cash / (debt) at 31 December/ 30 June	15,858	(18,360)	(17,343)
Represented by:
Cash at bank	15,858	438	57
Bank facility falling due within one year	-	(18,798)	(17,400)
	15,858	(18,360)	(17,343
Reconciliation of operating revenue to net cash flow from operating activities
Net revenue before finance costs and taxation	(45,057)	114,576	88,759
Losses / (gains) on investments	46,263	(113,295)	(86,661)
Withholding tax suffered	(65)	(95)	(133)
Increase in accrued income	(410)	(114)	(168)
(Increase) / decrease in other debtors	(2)	125	140
(Decrease) / increase in other creditors	(22)	81	47
Exchange losses	68	128	122
Net cash inflow from operating activities	775	1,406	2,106

Notes

1.   The unaudited interim results which cover the six months to 31 December 2011 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 2011.

The interim results have been prepared using the same accounting policies as the preceding annual accounts, with the addition of the following accounting policy which is in accordance with the relevant accounting standard;

3.5% Convertible Unsecured Loan Stock 2018 ("CULS") issued by the Company is regarded as a compound instrument, comprising of a liability component and an equity component. At the date of issue, the fair value of the liability component was estimated by assuming that an equivalent non-convertible obligation of the Company would have a coupon rate of 5.75%. The fair value of the equity component, representing the option to convert liability into equity, is derived from the difference between the issue proceeds of the CULS and the fair value assigned to the liability. The accounting treatment of the CULS resulted in an uplift in the NAV of 2.5%. The liability component is subsequently measured at amortised cost using the effective cost interest rate.

Direct expenses associated with the CULS issue are allocated to the liability and equity components in proportion to the split of the proceeds of the issue. Expenses allocated to the liability component are amortised over the life of the instrument.

The interest expense on the CULS is calculated according to the effective interest rate method by applying the assumed rate of 5.75% at initial recognition to the liability component of the instrument. The difference between this amount and the interest paid is added to the carrying amount of the CULS.

While this additional 'notional' interest is charged to the capital account it is not considered to be a true loss and so this is transferred against the CULS equity as a reserve movement.

2.   A first interim dividend of 0.77p per share was paid on 25 November 2011.  A second interim dividend of 0.77p per share was paid on 24 February 2012.

3.   Included with losses on investments for the period ended 31 December 2011 are realised gains of £7,688,000 and unrealised losses of £53,951,000.

4.   The breakdown of income for the six months to 31 December 2011, 31 December 2010 and the year to 30 June 2011 was as follows:

	Six months ended 31 December 2011 £'000	Six months ended 31 December 2010 £'000	Year ended 30 June 2011 £'000
Income from investments;
UK dividend income	465	437	865
Overseas dividends	478	632	846
Interest on fixed interest securities	1,957	1,776	3,694
	2,900	2,845	5,405
Other income:
Deposit interest	3	1	7
Other income	3	22	35
Total income	2,906	2,868	5,447

5. The revenue return per ordinary share is based on a net profit after tax of £1,623,000 (31 December 2010 - £1,871,000 and 30 June 2011 - £3,404,000) and on a weighted average of 66,857,143 ordinary shares (31 December 2010 - 66,857,143 and 30 June 2011 - 66,857,143).

The capital return per ordinary share is based on a net capital loss after tax of £47,336,000 (31 December 2010 - a gain of £112,424,000 and 30 June 2011 - a gain of £84,896,000) and on a weighted average of 66,857,143 ordinary shares (31 December 2010 - 66,857,143 and 30 June 2011 - 66,857,143).

6.   The net asset value per ordinary share is based on net assets at the period end of £194,096,000 (31 December 2010 - £263,706,000, 30 June 2011 - £236,788,000) and on 66,857,143 (31 December 2010 - 66,857,143 and 30 June 2011 - 66,857,143) ordinary shares, being the total number of ordinary shares in issue at the period end.  The net asset value per ordinary share at 31 December 2011 was 290.31p.

7.   3.5% Convertible Unsecured Loan Stock 2018

	Number of units £'000		Liability component £'000		Equity component £'000
Balance at the beginning of the period		-		-		-
Issue of 3.5% Convertible Unsecured Loan Stock 2018		40,000		34,931		5,069
Expenses of issue		-		(656)		(96)
Amortisation of discount on issue and issue expenses		-		201		-
Transfer of CULS liability discount amortisation		-		-		(178)
Balance at the end of the period		40,000		34,476		4,795

On 26 September 2011, the Company issued a total of £40,000,000 nominal of 3.5% Convertible Unsecured Loan Stock 2018 ("CULS"). The CULS can be converted at the election of holders into ordinary shares during the months of March and September each year throughout their life, commencing March 2012 to January 2018 at a rate of 1 ordinary share for every 377.1848p nominal of CULS. Once 80% 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 each year, commencing 31 March 2012. 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 31 December 2011, there was £40,000,000 nominal of CULS in issue.

8.   Reserves

	Special reserve £'000	Share premium £'000	Equity element of CULS £'000	Capital reserve £'000	Revenue reserve £'000
At 30 June 2011	30,386	4,753	-	180,356	4,579
Exchange losses	-	-	-	(68)	-
Losses on investments	-	-	-	(46,263)	-
Management fees charged to capital	-	-	-	(964)	-
Finance costs charged to capital	-	-	-	(562)	-
Taxation credited to capital	-	-	-	521	-
Dividends paid	-	-	-	-	(1,952)
Retained net revenue for the period	-	-	-	-	1,623
Issue of 3.5% Convertible Unsecured Loan Stock 2018	-	-	5,069	-	-
Expenses of issue	-	-	(96)	-	-
Transfer of CULS liability discount amortisation	-	-	(178)	178	-
At 31 December 2011	30,386	4,753	4,795	133,198	4,250

9.   The Company's investment manager is CQS Cayman Limited Partnership which has in turn delegated this function to its wholly owned subsidiary New City Investment Managers ("NCIM"). CQS receive a monthly fee at the rate of 0.1 per cent of the Company's gross assets (excluding cross-holdings) less current liabilities and any borrowings, payable in arrears.  During the period investment management fees of £1,285,000 were incurred, of which £190,000 was payable at the period end.

As at 31 December 2011, the Company held shares in New City Energy and Golden Prospect Precious Metals; these two investment companies are also managed by the Manager.  The valuations of these holdings are deducted from gross assets when calculating the management fee.

10.  After making enquiries and having considered the Company's investment objective, nature of the investment portfolio, bank 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.

11.  The results for the six months ended 31 December 2011 and 31 December 2010, which have not been reviewed by the Company's auditors, pursuant to the Auditing Practices Board guidance on "Review of Interim Financial Information", constitute non-statutory accounts in terms of Section 434 of the Companies Act 2006.  The latest published accounts which have been delivered to the Registrar of Companies are for the year ended 30 June 2011; the report of the auditors thereon was unqualified and did not contain a statement under Section 498 of the Companies Act 2006. The abridged financial statements shown above for the year ended 30 June 2011 are an extract from those accounts.

12.  The report and accounts for the half-year ended 31 December 2011 will be posted to shareholders and made available on the website www.ncim.co.uk.  Copies may also be obtained from the Company Secretary, R&H Fund Services Limited, Lochside House, 7 Lochside Avenue, Edinburgh, EH12 9DJ.

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 2011.  The Company's principal risks and uncertainties have not changed materially since the date of the report and are not expected to change materially for the rest of the Company's financial year.

Statement of Directors' Responsibilities in Respect of the Financial Statements

The accordance with Chapter 4 of the Disclosure and Transparency Rules the Directors confirm that to the best of their knowledge:

·      the condensed set of financial statements has been prepared in accordance with applicable UK accounting standards and gives a true and fair view of the assets, liabilities, financial position and return of the Company;

·      the half-yearly report includes a fair review of the important events that have occurred during the first six months of the financial year and their impact on the financial statements;

·      the Directors' Statement of Principal Risks and Uncertainties shown above, is a fair review of the principal risks and uncertainties for the remainder of the financial year; and

·      the half-yearly report includes details of related party transactions.

On behalf of the Board

Geoff Burns

Chairman

28 February 2012

 

END

 

 

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