Final Results

RNS Number : 1565Q

City Natural Res High Yield Tst PLC

14 October 2011

 



To:                    RNS

From:                City Natural Resources High Yield Trust plc

Date:                14 October 2011

Audited results for the year ended 30 June 2011

·      Net asset value total return of 58.8 per cent since 1 July 2010 compared to a total return of 27.1 per cent from the benchmark index.

·      Ordinary share price total return since 1 July 2010 of 64.4 per cent.

·      Dividend of 4.22 pence per share for the year, an increase of 13.7 per cent.

·      Sixth consecutive increase in the annual dividend, with an increase of over 111 per cent since 1 August 2003.

·      Net asset value total return of 690.6 per cent since 1 August 2003 compared to a total return of 331.1 per cent from the benchmark index.

·      Ordinary share price total return since 1 August 2003 of 577.9 per cent.

The Chairman, Geoff Burns stated,

'Investment and Share Price Performance

At 30 June 2011 your Company's net asset value stood at 354.2 pence, giving a net asset value total return for the year of 58.8 per cent.

The Company's share price total return during the year of 64.4 per cent was rather better than that of its net asset value, reflecting a further narrowing of the discount at which the Company's shares trade from 16.6 per cent to 13.9 per cent during the year. Recent high levels of market instability and volatility have seen this trend reverse, and the discount stands at 17.4 per cent as I write.

Your Company has generated net asset value and share price total returns of 690.6 and 577.9 per cent respectively since 1 August 2003; the benchmark index has returned 331.1 per cent.

Your Company's net asset value peaked at 406.7 pence on 8 April 2011, before falling back amidst renewed concerns over world economic conditions; it currently stands at 314.9 pence.

Income and Dividends

The Company paid a fourth interim dividend of 2.15 pence per share. This took the dividend for the year to a total of 4.22 pence, an increase of 13.7 per cent on last year and representing the sixth successive year of dividend increases. These have seen the Company's dividends grow by 111 per cent since 2004/05. 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

I am pleased to report that the Company successfully issued £40 million nominal of 3.5% Cumulative Unsecured Loan Stock ("CULS") on 26 September 2011. Your 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 more than 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 be deployed in accordance with the stated investment policy.

Investment Strategy and Outlook

Until recently the eurozone countries were King Canute-like defying the tide of excessive sovereign and bank debt. There are signs of them beating an undignified retreat up the beach. The consequences of the delay in this for European demand and the European financial sector are not pleasant to contemplate, while a glance across the Atlantic towards a Washington paralysed by policy gridlock even before election year does not reassure. The beneficent conditions that favoured the Company during much of the last year - the prospect of strong global economic recovery, combined with few safe havens for investment other than gold - have abated.

However, while reduced growth expectations certainly affect commodity demand and pricing in the short term, the coyness of any currency to step forward as a safe place to park cash continues to benefit gold, to which your Company has a near 30% exposure. This underpins your Board's confidence in our ability to weather any short term storms.

While during the year risk perceptions have risen and global growth expectations have reduced, in the medium term it remains our view that natural resources will remain in demand. The amassing of enormous reserves in the BRIC economies, earned from feeding old world consumers, creates conditions for consumption to rise in the new world. The only question is how fast this will take place, and in China, India and Brazil the early signs are there. Your Company remains focussed on being positioned to benefit from these trends.'

The Manager stated:

'This was a year of contrasting six month periods as the exuberance of the latter half of 2010 was transformed into a much more restrained 2011. The buoyant equity markets in the first six months of the Company's year saw the net asset value rise by 84% over that period, with further assistance coming from rising commodity prices, continued merger and acquisition activity across the resources sector and weakness in Sterling relative to the Australian and Canadian dollars.

Macroeconomic concerns have dominated in 2011, particularly the eurozone's travails and the search for a credible solution to the sovereign debt problems of the developed world's economies.  Resource markets have also reacted to heightened political risk, such as the events in North and West Africa, which have unfolded since the start of the year.

The tragic events following the earthquake off the coast of Japan and subsequent tsunami severely affected sentiment towards the uranium sector as the attempts to stabilise the stricken reactors at Fukushima were broadcast around the world. We believe that nuclear power has an important role to play providing baseload power and we look forward to a time that a debate can take place on energy policy based on science and without emotion.

The headwinds of the second half left the Company's net asset value 58.8% higher over the year and was greatly helped by overweight exposure to the gold sector. Whilst gold equities may have lagged the metal over the period they have outperformed the broader market by a wide margin. We feel that equity underperformance is due to three main reasons: firstly, investors have been nervous about rising costs affecting miners' margins, particularly those developing mines. Secondly, gold equities have suffered in the broader resources market weakness and thirdly, and most importantly, the money flows have been predominantly into the metal via physical demand out of India and China, Central Bank buying and the ETF demand. There are encouraging signs that this underperformance may be reversing as gold companies have learnt to offer what the ETF's cannot - dividends and growth. We look forward to the 3rd and 4th quarter figures this year confirming record earnings and increased dividends from the producing companies.

Not all gold equities have disappointed during the year and two exploration companies have been among the Company's best performers. Extorre, operating in Argentina, and Ausgold, working on its Katanning project in Western Australia, have both proved that exciting discoveries will be rewarded by the market.

The Trust has long favoured Palm Oil as a play on rising incomes in the developing world, and the strong performance this year of both REA Holdings and New Britain Palm Oil reflects both on the strong management of the companies and the increase in the palm oil price throughout the year.

The rare earth story continues to develop, blending an intriguing mixture of geo-politics, chemistry and

geology. There are now over 100 companies in the sector, but if our experience in the uranium sector during the boom of 2007 is correct, there will be few winners. The encouraging performance of both Neo-Materials and Great Western Minerals reflects their unique positions within the sector.

The outlook for the world's economies is most uncertain with the distinct possibility that the woes of the eurozone could spread. The unprecedented stimulus in the US having seemingly little effect on economic activity, it is difficult to know what ammunition policymakers have left to generate growth across the developed world.

Commodity prices have generally held up well during the period, particularly those that are not prey to

financial flows, such as Coal, Iron Ore and Mineral Sands. We would caution that even these could be

vulnerable in a global slowdown.

Finally, in this era of low interest rates, we fully recognise the importance of dividends and are always

searching to add quality bonds and convertibles to the portfolio.'

Enquiries:

Will Smith, New City Investment Managers:                     0207 201 6900

Ian Francis, New City Investment Managers:                    0207 201 6900

Martin Cassels, F&C Asset Management plc:                   0207 628 8000

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		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		3,404		84,896	88,300
Return per ordinary share	1	5.09p		126.98p	132.07p

Reconciliation of Movements in Shareholders' Funds

	Year ended 30 June 2011 Audited  £'000	Year ended 30 June 2010 Audited  £'000
Opening equity shareholders' funds	151,109	107,316
Gain on investments	86,661	40,840
Net return attributable to ordinary shareholders	3,404	3,188
Costs charged to capital	(1,643)	(1,071)
Exchange losses	(122)	(394)
Exercise of warrants	-	3,343
Dividends paid	(2,621)	(2,113)
Closing equity shareholders' funds	236,788	151,109

Audited Income Statement

for the year ended 30 June 2010

			2010	2010	2010
		Revenue		Capital	Total
	Notes	£'000		£'000	£'000
Gains on investments		-		40,840	40,840
Exchange losses		-		(394)	(394)
Income		5,060		-	5,060
Investment management fee		(431)		(1,294)	(1,725)
Other expenses		(423)		(12)	(435)
Net return before finance costs and taxation		4,206		39,140	43,346
Interest payable and similar charges		(61)		(182)	(243)
Net return on ordinary activities before taxation		4,145		38,958	43,103
Tax on ordinary activities		(957)		417	(540)
Net return attributable to equity shareholders		3,188		39,375	42,563
Return per ordinary share	1	4.88p		60.21p	65.09p

Balance Sheet

as at 30 June 2011

	As at 30 June 2011 Audited	As at 30 June 2010 Audited
	£'000	£'000
Fixed assets
Investments	253,745	160,293
Current assets
Debtors	1,636	1,089
Cash at bank and on deposit	57	4,382
	1,693	5,471
Creditors: amounts falling due within one year	(18,650)	(14,655)
Net current liabilities	(16,957)	(9,184)
Net assets	236,788	151,109
Capital and reserves
Called-up share capital	16,714	16,714
Special distributable reserve	30,386	30,386
Share premium	4,753	4,753
Capital reserves	180,356	95,460
Revenue reserve	4,579	3,796
Equity shareholders' funds	236,788	151,109
Net asset value per ordinary share                               2	354.17p	226.02p

Cash Flow Statement

for the year to 30 June

	Year ended 30 June 2011 Audited	Year ended 30 June 2010 Audited
	£'000	£'000
Operating activities
Investment income received	5,103	4,833
Deposit interest received	7	2
Other income received	35	90
VAT on management fees recovered	180	-
Investment management fees paid	(2,626)	(1,686)
Other cash payments	(593)	(520)
Net cash inflow from operating activities	2,106	2,719
Servicing of finance
Interest on bank facility	(343)	(291)
Net cash outflow from servicing of finance	(343)	(291)
Taxation
Tax paid	(461)	(70)
Capital expenditure and financial investment
Purchases of investments	(127,226)	(74,180)
Disposals of investments	120,103	68,937
Net cash outflow from capital expenditure and financial investment	(7,123)	(5,243)
Dividends
Equity dividends paid	(2,621)	(2,113)
Net cash outflow before financing	(8,442)	(4,998)
Financing
Bank facility draw down	4,239	1,161
Issue of ordinary shares following warrant exercise	-	3,343
Net cash inflow from financing	4,239	4,504
Decrease in cash	(4,203)	(494)
Reconciliation of net cash flow to movement in net debt Decrease in cash in the year	(4,203)	(494)
Cash inflow from drawdown of bank facility	(4,239)	(1,161)
Exchange losses	(122)	(394)
Movement in net debt in the year	(8,564)	(2,049)
Opening net debt at 1 July	(8,779)	(6,730)
Closing net debt at 30 June	(17,343)	(8,779)

Notes

1.         The revenue return per ordinary share is based on a net profit after taxation of £3,404,000 (2010: £3,188,000) and on a weighted average of 66,857,143 ordinary shares in issue during the year (2010: 65,391,728).

The capital return per ordinary share is based on a net capital gain of £84,896,000 (2010: a net capital gain of £39,375,000) and on a weighted average of 66,857,143 ordinary shares in issue during the year (2010: 65,391,728).

2.         The net asset value per ordinary share is based on net assets of £236.8 million (2010: £151.1 million) and on 66,857,143 (2010: 66,857,143) ordinary shares, being the number of ordinary shares in issue at the year end.

3.         The Board declared a fourth interim dividend of 2.15p per share which was paid on 26 August 2011 to shareholders on the register on 5 August 2011, having an ex-dividend date of 3 August 2011. 

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

            As at 30 June 2011, the Company held shares in New City Energy and Golden Prospect Precious Metals, these two investment companies are also managed by the Manager.

Mr Lockwood is a non-executive director of Kalahari Minerals.  At the year end the Company held 3,600,000 Kalahari Minerals ordinary shares valued at £8,415,000 and 1,750,000 Kalahari Minerals 10% Cv 31/08/11 valued at £1,750,000. 

Mr Lockwood is also a non-executive director of Ausgold.  As the year end the Company held 4,000,000 Ausgold ordinary shares valued at £4,001,000 and 6,000,000 Ausgold warrants valued at £5,402,000.

Mr Prickett is a director of Patagonia Gold. At the year end the Company held 3,712,500 shares in Patagonia Gold valued at £1,899,000. There are no other transactions with the Board other than aggregated remuneration for services as Directors.

5.         The financial information set out above does not constitute the Company's statutory accounts for the year ended 30 June 2011.  The financial information for 2010 is derived from the statutory accounts for 2010 which have been delivered to the Registrar of Companies.  The Auditors have reported on the 2010 accounts, their report was unqualified and did not contain a statement under section 498 of the Companies Act 2006.  The statutory accounts for 2011 are audited and the Auditors have issued an unqualified opinion. The statutory accounts for 2011 will be finalised on the basis of the financial information presented in this announcement and will be delivered to the Registrar of Companies following the Company's Annual General Meeting.

Principal Risks

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. These risks, which have not changed materially since the annual report for the year ended 30 June 2010, and the way in which they are managed, are described in more detail in the annual report for the year ended 30 June 2011.  The report will be made available on the manager's website www.ncim.co.uk during October 2011.

The Company's financial instruments comprise its investment portfolio, cash balances, bank facilities, debtors and creditors that arise directly from its operations.  As an investment trust the Company holds a portfolio of financial assets in pursuit of its investment objective.  The Company makes use of flexible borrowings for short term purposes, as detailed in the Chairman's Statement, to achieve improved performance in rising markets and to seek to enhance the returns to shareholders, when considered appropriate by the Manager.  The downside risk of borrowings may be reduced by raising the level of cash balances held.

Listed fixed asset investments held are valued at fair value.  For listed securities this is either bid price or the last traded price depending on the convention of the exchange on which the investment is listed.  Unlisted investments are valued by the Directors on the basis of all information available to them at the time of valuation.  The fair value of all other financial assets and liabilities is represented by their carrying value in the Balance Sheet.  The fair value of the bank facility is not materially different from its carrying value in the Balance Sheet.

The main risks that the Company faces arising from its financial instruments are:

(i)         market price risk, being the risk that the value of investment holdings will fluctuate as a result of changes in market prices caused by factors other than interest rate or currency rate movements;

(ii)         interest rate risk, being the risk that the future cash flows of a financial instrument will fluctuate because of changes in market interest rates;

(iii)        foreign currency risk, being the risk that the value of investment holdings, investment purchases, investment sales and income will fluctuate because of movements in currency rates;

(iv)        credit risk, being the risk that the counterparty to a financial instrument will fail to discharge an obligation or commitment that it has entered into with the Company; and

(v)         liquidity risk, being the risk that the bank may demand re-payment of the loan or that the Company many not be able to liquidate quickly its investments.

Market price risk

Market price risk arises mainly from uncertainty about future prices of financial instruments held.  It represents the potential loss the Company might suffer through holding market positions in the face of price movements.  To mitigate the risk the Board's investment strategy is to select investments for their fundamental value.  Stock selection is therefore based on disciplined accounting, market and sector analysis, with the emphasis on long term investments.  An appropriate spread of investments is held in the portfolio in order to reduce both the statistical risk and the risk arising from factors specific to a country or sector.  The Investment Manager actively monitors market prices throughout the year and reports to the Board, which meets regularly in order to consider investment strategy. 

Interest rate risk

Financial assets

Bond and preference share yields, and their prices, are determined by market perception as to the appropriate level of yields given the economic background. Key determinants include economic growth prospects, inflation, the Government's fiscal position, short term interest rates and international market comparisons.  The Investment Manager takes all these factors into account when making any investment decisions as well as considering the financial standing of the potential investee company.

Returns from bonds and preference shares are fixed at the time of purchase, as the fixed coupon payments are known, as are the final redemption proceeds.  Consequentially, if a bond is held until its redemption date, the total return achieved is unaltered from its purchase date.  However, over the life of a bond the market price at any given time will depend on the market environment at that time.  Therefore, a bond sold before its redemption date is likely to have a different price to its purchase level and a profit or loss may be incurred.

Interest rate risk on fixed interest instruments is considered to be part of market price risk as disclosed above.

Floating rate

When the Company retains cash balances they are held in floating rate deposit accounts.  The benchmark rate which determines the interest payments received on cash balances is the bank base rate for the relevant currency for each deposit.

Financial liabilities

The Company may utilise the bank facility to meet any liabilities due.  The Company has borrowed in sterling at a variable rate based on the UK bank base rate. The Board sets borrowing limits to ensure gearing levels are appropriate to market conditions and reviews these on a regular basis.

The Company has borrowed in Sterling at a floating rate of interest.  The Board sets borrowing limits to ensure gearing levels are appropriate to market conditions and reviews these on a regular basis.

Foreign Currency Risk

The Company invests in overseas securities and may hold foreign currency cash balances which give rise to currency risks. The Company does not hedge its currency exposure and as a result the movement of exchange rates between pounds sterling and the other currencies in which the Company's investments are denominated may have a material effect, unfavourable or favourable, on the returns otherwise experienced on the investments made by the Company. Although the Manager may seek to manage all or part of the Company's foreign exchange exposure, there is no assurance that this can be performed effectively.

The Manager does not intend to hedge the Company's foreign currency exposure at the present time.

Credit Risk

Credit risk is the risk that a counterparty to a financial instrument will fail to discharge an obligation or commitment that it has entered into with the Company.  The Manager has in place a monitoring procedure in respect of counterparty risk which is reviewed on an ongoing basis.  The carrying amounts of financial assets best represent the maximum credit risk exposure at the balance sheet date.

Credit risk on fixed interest investments is considered to be part of market price risk.

Credit risk arising on transactions with brokers relates to transactions awaiting settlement.  Risk relating to unsettled transactions is considered to be small due to the short settlement period involved and the high credit quality of the brokers used. The Board monitors the quality of service provided by the brokers used to further mitigate this risk.

The cash held by the Company and all the assets of the Company which are traded on a recognised exchange are held by HSBC Bank, the Company's custodian.  Bankruptcy or insolvency of the custodian may cause the Company's rights with respect to securities held by the custodian to be delayed or limited.  The Board monitors the Company's risk by reviewing the custodian's internal control reports.

Should the credit quality or the financial position of HSBC Bank deteriorate significantly the Investment Manager will move the cash holdings to another bank.

There were no significant concentrations of credit risk to counterparties as at 30 June 2011 and as at 30 June 2010.

Liquidity risk

The Company's financial instruments include investments in unlisted investments which are not traded in an organised public market and which generally may be illiquid.  As a result, the Company may not be able to liquidate these investments at an amount close to their fair value.

The Company's liquidity risk is managed on an ongoing basis by the Investment Manager.  The Company's overall liquidity risks are monitored on a quarterly basis by the Board.

The Company maintains sufficient cash, has a short term bank facility and readily realisable securities to pay accounts payable and accrued expenses.  The Company also maintains sufficient cash and readily realisable securities to meet any demand repayment on its overdraft facility.

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

In accordance with Chapter 4 of the Disclosure and Transparency Rules, we confirm that to the best of our knowledge, in respect of the annual report for the year ended 30 June 2011, of which this statement of results is an extract:

·      The financial statements have been prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company; and

·      The Report of the Directors includes a 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 it faces.

On behalf of the Board

Geoff Burns, Chairman

14 October 2011

 

END

 

 

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