CQS NATURAL RESOURCES GROWTH AND INCOME PLC
Annual Results Announcement
for the year ended 30 June 2020
Financial Highlights
Total Return* |
Year to 30 June 2020 |
Year to 30 June 2019 |
Period from 1 August 2003 to 30 June 2020 |
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Net asset value |
(10.62)% |
(13.88)% |
211.08% |
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Ordinary share price |
(5.89)% |
(17.34)% |
163.96% |
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|||
Composite index |
5.81% |
12.79% |
376.93% |
|
|||
EMIX Global Mining Index (sterling adjusted) |
6.93% |
13.20% |
402.16% |
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|||
Credit Suisse High Yield Index (sterling adjusted) |
1.17% |
11.13% |
313.51% |
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Capital Values |
30 June 2020 |
30 June 2019 |
% change period |
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Net asset value per share |
98.6p |
116.2p |
(15.11)% |
|
|||
Ordinary share price (mid market) |
79.3p |
89.3p |
(11.20)% |
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|||
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Revenue and Dividends |
30 June 2020 |
30 June 2019 |
% change period |
|
|||
Revenue earnings per ordinary share |
3.35p |
2.67p |
25.47% |
|
|||
Dividends per ordinary share |
5.60p |
5.60p |
0% |
|
|||
Dividend Yield |
7.1% |
6.3% |
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|||
Discount (difference between share price and fully diluted net asset value) |
19.6% |
23.1% |
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|||
Gearing* |
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|
|
|||
Gearing provided by bank loan |
18.2% |
12.3% |
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|||
Ongoing charges (as a percentage of average shareholders' funds) |
1.8% |
1.9% |
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Year to |
Year to |
|
|||
|
|
30 June 2020 |
30 June 2020 |
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|||
Period's Highs/Lows |
|
High |
Low |
|
|||
Net asset value per share |
|
124.1p |
64.3p |
|
|||
Ordinary share price (mid market) |
|
93.3p |
50.6p |
|
|||
Discount |
|
27.4% |
13.4% |
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|||
Dividend History |
Rate |
xd date |
Record date |
Payment date |
|||
Fourth interim 2020 |
1.82p |
23 July 2020 |
24 July 2020 |
28 August 2020 |
|||
Third interim 2020 |
1.26p |
23 April 2020 |
24 April 2020 |
29 May 2020 |
|||
Second interim 2020 |
1.26p |
23 January 2020 |
24 January 2020 |
28 February 2020 |
|||
First interim 2020 |
1.26p |
24 October 2019 |
25 October 2019 |
29 November 2019 |
|||
Total |
5.60p |
|
|
|
|||
Fourth interim 2019 |
1.82p |
25 July 2019 |
26 July 2019 |
30 August 2019 |
|||
Third interim 2019 |
1.26p |
25 April 2019 |
26 April 2019 |
24 May 2019 |
|||
Second interim 2019 |
1.26p |
24 January 2019 |
25 January 2019 |
28 February 2019 |
|||
First interim 2019 |
1.26p |
25 October 2018 |
26 October 2018 |
30 November 2018 |
|||
Total |
5.60p |
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* A glossary of the terms, including alternative performance measures, used can be found in the Annual Report and Financial Statements.
STRATEGIC REPORT
CHAIRMAN'S STATEMENT
Overview
The year to 30 June 2020 has been completely overshadowed by the Coronavirus pandemic.
In my statement in March we referred to this but at that stage we did not anticipate the widespread lockdowns that were to be implemented across Europe and the Americas. The net result being that global economies suffered a severe shock that was much more damaging than any commentators originally anticipated.
In the first half of the year, before the pandemic, the Fund's performance had been positive and was recovering from the previous period. The brutal sell off in March wiped out this recovery and the Fund's net asset value fell by approximately 25% to 69p.
Notwithstanding the extreme market volatility the Managers held their nerve and stuck to their convictions, which included a 30% weighting to precious metals. As a result the net asset value recovered back to 98.6p at 30 June 2020 and since then has increased further to 112.79p as at 7 September 2020.
Investment, Share Performance and Discount
The NAV total return at 30th June was a decline of 10.62% which compares to an increase in the benchmark of 5.81%. It should be noted that the overlap of the Company's portfolio and the composite index is small and the effect of the pandemic has effected that index less than a number of the Company's small and mid-cap holdings.
The discount between NAV and the share price remains a significant challenge.
As at 30 June 2020 the Company's shares were trading at a discount of 19.6% and at the close of business on 7 September 2020 the discount was 17.5%.
The Board is very conscious of this issue and reviews it closely but has concluded that any form of discount control mechanism would be ineffective in the current climate nor in shareholders' interests.
Dividends and Income
Income and dividends have always been a focus of the Company and are now 2.8 times the amount paid per share in 2004.
The Board considers that the dividend policy is very attractive to shareholders and therefore provides an element of share price stability especially whilst other companies have been forced to cut dividends. Therefore, we have decided to continue to pay quarterly dividends this year totalling 5.6p per share, equalling the previous year.
Since the Manager is focused on generating capital growth and income from the portfolio the dividend may not always be completely covered by income and in those circumstances the Board will use distributable reserves to meet any shortfall.
The yield on the Company's shares is 4.9% as at 7 September 2020.
Gearing
As at 30 June 2020 the gearing was 18.2% but has reduced to 15.9% as at 7 September 2020. Gearing is recalculated and reviewed at each month end. The highest gearing in the period was 23.8% as at the end of March 2020, which was below the target maximum gearing level of 25% of net assets.
The amount drawdown under the Scotiabank facility is £12 million and the £20 million facility has been renewed for a further year at £15 million with the option for the Company to extend to £20 million if the Board deems appropriate.
Annual General Meeting
The business of the AGM is summarised in the Directors' Report within the Annual Report. The AGM will be held at One Fleet Street Place, London, EC4M 7WS at 2pm on Wednesday 9 December 2020.
It is hoped that by that date restrictions due to Covid-19 will have eased sufficiently for the AGM to be held in the usual way and, if so, shareholders are encouraged to attend. However, should this not be the case the AGM may have to be held as a closed meeting. In this eventuality, or if shareholders are reticent about using public transport to reach the meeting venue, it is recommended that shareholders exercise their votes by means of registering them with the Company's registrar ahead of the meeting, online or by completing paper proxy forms, and appoint the Chairman of the meeting as their proxy. Recognising the potential for shareholders to be unable to attend and ask questions, the Board invites anyone with questions on the business of the meeting, or otherwise, to address them to the Company Secretary, by email to BNP Paribas Securities Services ('BNP') or, by letter, to BNP at 10 Harewood Avenue, London, NW1 6AA. Questions will be relayed to the Board and responses provided via market announcement or the Company's website as appropriate. The Board recommends that shareholders vote in favour of all resolutions as each of the Directors intends to do in respect of their own shares.
Administration Changes
During the year The Board reviewed a number of their service providers and following a thorough selection process, the Board has chosen BNP Paribas Securities Services as the Company's new Company Secretary and Administrator. BNP's appointment will be effective from 15 September 2020. BNP will replace Maitland Administration Services (Scotland) Limited as Company Secretary. BNP will also replace HSBC Bank plc as the Company's Depositary, Custodian and Banker from the same date. As well as being a cost effective move, the Board believes this will assist communication and operational efficiency by having everything under one roof.
Broker
Following the withdrawal of Cantor Fitzgerald from the UK equity business, the Company has appointed N+1 Singer as it's broker on 15 May 2020. Contact details for N+1 Singer can be found on page 58 of the Annual Report.
Outlook
There are numerous issues to consider when looking forward which will increase volatility and the Manager has articulated these in some depth in their report. In particular the Coronavirus pandemic continues to have a savage effect on global economies and Central banks worldwide have supported economies with vast sums of stimuli. In this environment we believe that gold and commodities are a good place to be.
The Fund's net asset value has subsequently recovered with global markets to 112.79p per share and the yield is 4.9%.
The Board has confidence in our Manager, the CQS group who are supported by extensive research capabilities, to steer us through these difficult times. I would like to conclude again by extending my thanks to all shareholders for their continued support.
Richard Prickett
Chairman
8 September 2020
INVESTMENT MANAGER'S REVIEW
Summary
Markets, and particularly commodity markets, have been defined by the impact of and response to the COVID-19 pandemic.
Economic disruption and the subsequent stimulus response since lockdowns were imposed by Governments around the world have been unprecedented and investment classes across the board have reacted markedly. In addition, a pivotal shift in strategy by the OPEC+ alliance, to open pumps in order to defend market share against emerging exports from the US decimated the oil price. It has been a tumultuous period demanding profound changes in government and also corporate policies.
The impact on different commodities has varied materially. While gold and silver have been clear beneficiaries, which has benefitted the fund due its large weighting of approximately 30% as at end June. There has been a broad recovery across most asset classes after the COVID related sell-off in late February and March as investors anticipate the effects of co-ordinated global central bank and government stimulus programmes - rather than anything in the activity data which will continue to look weak as it feeds through. Equities and to some extent commodities (for those where sufficient storage capacity is available) have looked through shortterm shocks, pricing off future supply/demand expectations. While knock-on effects from the additional government borrowing together with disruption caused by the pandemic may be felt for a number of years, optimism is nevertheless returning as countries look to ease restrictions. China, which was first into the crisis, has also been the first to emerge from it and has been accumulating industrial metals at pace, taken advantage of the period of depressed pricing as demand ex-China collapsed during lockdowns. This has benefitted the base metal names in the fund, especially the copper miners, such as First Quantum and Ero Copper amongst others.
COVID-19 has impacted supply as well as demand. More than 20% of global copper, nickel, and zinc supply has been removed from markets during lockdowns. Mine disruptions announced thus far are estimated to have reduced full year output zinc by approximately 5%, copper by 2.25% and nickel and aluminium by a lesser 1-2%. While iron ore production has been reduced, most notably at Vale's Brazilian operations, the availability of seaborne iron ore has been less affected with sales volumes guidance from the big three producers little changed for 2020. Though mine disruptions to date have been relatively short in duration relative to the demand global demand shock, as discussed above, China has soaked up any short term excess units. Importantly, in sharp contrast to gold, where we note a substantial rise in equity issuance by companies seeking to expand output, base metal miners continue to exercise extreme caution in committing capital and funding to projects which should keep a lid on supply expansion.
Performance
When we wrote to shareholders at the start of 2020 the Company was modestly outperforming its composite benchmark as it benefited from a low weighting in energy stocks and a large weighting in precious metal miners. This modest outperformance was sharply corrected in March 2020 as markets plunged and the mid and small cap stocks to which the Fund is exposed were in some cases savagely sold off. The net asset value fell by 25.9% in March to a low for the year of 69.0p. We reduced our gearing a little in reaction to the market falls but kept our main positions intact as we believed they would benefit when markets recovered. Helped by our precious metals positions we saw a good recovery in the net asset value over the April to June period and it reached 98.5p on 30 June 2020. With the inclusion of dividends paid the total net asset return for the year to 30 June 2020 was a decline of 10.7 per cent.
Precious Metals
The Fund's position in gold, owned as cheap insurance, has paid handsomely during this period of uncertainty and the Fund's precious metal exposure currently stands at almost 30% (of which gold is 25%). As we write, fears of a second wave of infections are providing a further boost to gold. Following a brief initial wash out of margin calls in March, as lockdowns were rolled out across the OECD, there has been little to hold gold back and year-to-date it has registered a 27% increase and is approaching US$2000/oz.
The primary driver of the gold price is real yields, which is the return received from interest rates minus inflation. When real returns are low (or in today's world increasingly negative), gold has historically performed strongly. The fallout from COVID-19 has led to coordinated rate cuts globally, the economic impact of which is yet to be fully understood. We see no evidence to suggest any risk of an increasing rate cycle in the near term. Typically, there are two sources of inflation - either demand led or supply led. While trends are recovering demand is currently weak, though pent-up demand may surprise. It is on the supply side where the biggest impact may be seen, as the huge deflationary pressures experienced from China Inc. over the last two decades may reverse as they find themselves increasingly politically and economically alienated from the global stage. Reconfiguring supply chains, to reduce the current heavy reliance on low cost Chinese manufactured goods, may raise prices.
Driven by this the largest physically backed ETFs funds monitored by Bloomberg have added over 28 million ounces this year to take aggregate holdings to 106 million ounces. A corollary of this, however, is that gold is now far more expensive in the major demand economies such as India, China and Turkey, particularly when denominated in local currencies that have weakened against the US dollar. Similarly, central bank buying has paused as they contend with their response to COVID. Consequently, the pick-up in physical ETF buying has essentially only offset weakness from these segments. According to the World Gold Council overall gold demand was up only 1% in the first calendar quarter of 2020.
Against this helpful gold price backdrop, equities have performed extremely well. Of note, the Fund's holding in West African Resources, 7.4% of the fund as at end June, which has successfully transitioned into production within budget, has been particularly pleasing. Though the company remains attractively valued and is gaining investor traction as its size and liquidity improve, having doubled year-to-date the exposure is being managed to control concentration risk. Americas Gold and Silver, 4.1% of the fund at end June, benefitted but to a lesser extent, but after some minor delays in bringing its Relief Canyon mine in to production, looks set to reach commercial production in Q4.
Base Metals
Industrial base metals have undoubtedly experienced a demand shock, but unlike crude oil these are easily stored, so do not see the same infrastructure restrictions. They are also far more dependent on China, which constitutes approximately 50% of demand so are better placed to respond as the region, which was first affected by COVID, leads the reopening process and prices have been well supported by Chinese state owned enterprises seeking to build metal inventories into summer, ahead of an expected pick-up in economic activity. Indeed, having declined nearly 30% at one stage, the price of economic bell weather metal copper has recovered strongly and has moved above levels at the start of the calendar year. In contrast to gold, copper prices trade at a premium in Shanghai versus western exchanges.
The US election, set for November, looks likely to be supportive for base metals, with both Trump and Biden running investment heavy campaigns. This will be important as a surge in US unemployment, which stood at over 11% in June having jumped to nearly 15% in April from 3.5% earlier in the year, has been accompanied by the largest drop in consumer confidence since 1973. In addition, there is increasing speculation of a US$1trn pre-election fiscal stimulus programme, to help bolster the country's economic recovery.
Oil
Oil prices plunged during the period suffering from the twin effects of demand collapse, as a global lockdown reduced daily demand by approximately 35%, together with a shift in strategy by OPEC and Russia to defend market share rather than price. The combined effects of the demand collapse and a surge in OPEC+ output as they opened their pumps caused substantial inventory builds to levels approaching global storage limits. This dynamic had the extraordinary impact on oil for prompt delivery, driving the May WTI contract price negative for the first time in history. This price correction has prompted a sharp reduction in US on-shore rig deployment and a corresponding sharp correction in regional oil output. Nevertheless, though oil prices have recovered to the more balanced situation the industry still appears beholden to the marginal cost level of US producers which we believe to be in the US$40-50/bbl range, limiting upside potential in this sector for the time being.
The Fund continues to underweight the E&P sector and related equity exposure remains minimal at just 4% of NAV. Given the much needed and substantial US production cuts required to restore crude markets to balance, the Fund has instead increased exposure to Diversified Gas & Oil which should benefit from reduced output of gas, a by-product from onshore oil production, whilst paying a healthy 11% dividend.
Bonds and Income
There has been a reduction in the Fund's fixed income portfolio in the second half of our financial year. Following the sale of Ecclesiastical 8.625% preference shares, Lloyds 7.875% bonds and the redemption of Balfour Beatty 9.675% preference shares, fixed income securities now represent approximately 17% of assets under management. The remaining fixed income exposure is expected to contribute over a third of future expected income.
Proceeds have been reinvested into equities. These include the previously mentioned Diversified Gas & Oil, as well as Euronav. Whilst trading at a substantial discount to the net asset value of its vessels, Euronav has benefitted from supernormal day rates for an extended period of time - its modern fleet benefitted first from the introduction of new IMO2020 marine emissions standards at the turn of the year with a further boost as vessels were used as floating storage. Supporting a substantial increase in dividend in the June quarter the group has made a useful revenue contribution during the year whilst offering potential capital growth.
ESG
ESG reports are very limited for smaller capitalised companies, especially in the mining sector and we are therefore unable to provide as ESG score for the portfolio. The Manager has always applied a strong focus on how companies conduct their business, from an Environmental, Social and Governance standpoint, not least due to its importance in companies retaining their licence to operate within their given jurisdiction.
Outlook
For now, the Fund's exposure to gold has helped mitigate the impact of the virus disruption and the sector remains a safe haven while uncertainties of a second wave of virus persist and Brexit negotiations resume. However, co-ordinated and unprecedented global action to support economies has since taken place, leaving us constructive on the sector and respective equity valuations going forward. Major commodity consuming economies, particularly China, appear to be finding a more stable footing and are taking full advantage of the weakened western market demand and depressed commodity prices to buy industrial metals in expectation of a longer lasting recovery. This bodes well for a recovery in industrial metal demand as does continued capital discipline by industrial metal miners which will contain future supply growth.
In addition, Covid-19 appears to have accelerated some trends, notably demand for clean air and by extension clean electrification, highlighted by Europe's environmentally focussed stimulus. Copper, which represents over 12% of assets, remains central to this with other benefits such as its biostatic anti-germ properties offering up other, less discussed avenues of possible demand growth. In this respect the green credentials of silver are also appealing and related equities, which represent over 5% of Fund assets, are currently gaining traction having lagged behind gold.
More generally unprecedented, debt funded stimulus may raise questions over the value of fiat currencies. Recent softness of the US dollar, if sustained, may widen investor appeal of the broader commodity related asset class. We hope that effects of future virus outbreaks will diminish and continue to monitor developments for potential vaccines that will allow a return to the new normal.
At the time of writing the Fund's net asset value has continued to recover and is currently at 112.79p per share.
Ian Francis, Keith Watson, Rob Crayford
New City Investment Managers
8 September 2020
TOP TEN LARGEST HOLDINGS
|
Valuation 30 June 2019 £'000 |
Purchases £'000 |
Sales £'000 |
Appreciation/ (depreciation) £'000 |
Valuation 30 June 2020 £'000 |
First Quantum** (note 1) Primarily a copper producer with long life mines in Africa and with a large project recently brought into production in Panama. The group also has inventories of gold, nickel and cobalt. |
6,866 |
276 |
- |
(840) |
6,302 |
West African Resources The Company has transitioned into a gold producer having brought its Sanbrado discovery in Burkina Faso into production under budget and on schedule. |
3,034 |
- |
(789) |
3,434 |
5,679 |
REA Holding** (note 2) The Company cultivates oil palms and produces crude oil palm and other palm products. The group's core plantations are located in Indonesia. |
4,021 |
- |
- |
(562) |
3,459 |
Euronav NV** (note 3) The world's largest independent crude oil tanker company. |
2,214 |
2,210 |
(459) |
(478) |
3,387 |
Ero Copper A copper producer with mining assets in Brazil. |
4,620 |
- |
(257) |
(1,225) |
3,138 |
Americas Gold and Silver** (note 4) The Company mines precious metals, zinc, lead and copper. |
2,917 |
584 |
(775) |
399 |
3,125 |
Integra Resources Developing the past producing DeLamar Gold-Silver Project in Idaho, USA |
825 |
1,011 |
(591) |
1,096 |
2,341 |
TiZir 9.5% 19/07/2022 A vertically integrated producer of zircon, titanium and pig iron. |
2,205 |
- |
(210) |
31 |
2,026 |
Talon Metals A base metals explorer earning into a 51% interest on the high-grade Tamarack Nickel-Copper-Cobalt project, located in Minnesota in the US, from Rio Tinto. The group has the option to earn a larger 60% interest by 2025. |
1,999 |
347 |
(10) |
(437) |
1,899 |
2020 Bulkers An independent shipping company that owns and operates eight scrubber fitted 208,000 DWT Newcastlemax dry bulk carriers. |
- |
1,711 |
- |
84 |
1,795 |
Top ten investments |
28,701 |
6,039 |
(3,091) |
1,502 |
33,151 |
Note 1 - Includes First Quantum Minerals valued at £5,534,767 and First Quantum Minerals 7.5% 01/04/2025 valued at £767,508.
Note 2 - Includes REA Holdings 9% preference shares valued at £2,881,649, REA Finance 8.75% 31/08/2020** valued at £452,500, REA Holdings valued at £110,000 and REA Holdings warrants 15/07/2025** valued at £14,950.
Note 3 - Includes Euronav valued at £2,728,357 and Euronav Luxembourg SA 7.5% 31/05/2022 valued at £658,789.
Note 4 - Includes Americas Silver valued at £3,028,698 and Americas Silver warrants** valued at £96,516.
** Denotes a Level 2 security
COMMENTS ON LARGEST POSITIONS
First Quantum
First Quantum is primarily a copper company with core operations located in Zambia and a large new project now ramping-up in Panama. The stock remains a top holding with a leading production growth profile in a sector that should benefit from demand from investment in infrastructure and electrification globally against a backdrop of limited supply growth. With the start-up of the Cobre Panama mine the company's financial flexibility is much improved. We are more comfortable with the debt levels for this company as they have numerous options in even the worst case scenario, such as a non-core asset sales or even a proportional sell down of its core producing mines.
West African Resources
West African Resources has de-risked significantly since bringing its core mine into production. The group is unhedged and with a low cost of production will allow rapid payback on its project debt. The group recently acquired some neighbouring exploration properties from B2Gold. With 1.1Moz of resource within trucking distance of the new Sanbrado mine, the acquisition has significant potential to add shareholder value. The group is benefitting from improved liquidity and we believe the group's producer status can deliver further rerating relative to peers.
REA Holdings
We believe REA is leading contributor to responsible palm oil production globally. REA has a commitment to produce sustainably and has also received RSPO certification. Following substantial cost cutting measures the group is well placed to benefit from the recent recovery in the crude palm oil price.
Euronav NV
Crude oil shipper, with one of the largest fleets of the biggest class of Very Large Crude Carrier ('VLCC') ships. They are a key beneficiary of trade war related disruptions as it forces longer shipping routes and increases day rates. Similarly, if OPEC removes restricted production quotas, or Iran and Venezuela ever see operations improve, this would lead to a further improvement in day rates. Strong cash generation from current day rates should result in a sizeable dividend as evidenced by strong prior payout ratios. Its current valuation is around 0.8x P/NAV, which means it could accretively sell a vessel and buy back stock.
Ero Copper
This is primarily a copper miner, but also owns a gold mine. The assets are located in Brazil. This is a low capex restart of brown field facilities. The group also has development potential for nickel and platinum group metals ('PGMs'). The metal grades and expansion potential are truly world class. With 30 rigs currently drilling, Ero is one of the most active in the sector.
Americas Gold and Silver
Americas Silver has producing mines located in Mexico and the US. The recently acquired and funded heap-leach gold Relief Canyon project in Nevada and recently constructed San Rafael Mine in Mexico are both ramping-up and at full output will make Americas Gold and Silver a low-cost and diversified producer.
Integra Resources
The group is led by a management team which previously successfully grew, developed and sold the Lamaque Project, located in Canada for C$600 M in 2017. The project was owned by a company in which the fund had an investment, which established a working relationship between the parties. Since acquiring the DeLamar Project, and adjacent gold and silver deposits in late 2017, Integra has demonstrated significant resource and provided a robust economic study in its maiden Preliminary Economic Assessment. The Company is currently focused on resource growth through brownfield and greenfield exploration and the start of advanced studies designed to de-risk the DeLamar Project and move it towards a potential development decision.
TiZir 9.5%
Parent owner, Eramet, recently agreed to sell the business to US paint manufacturer Tronox for ~$300m. The sale constitutes a Mandatory Prepayment Event and the bond, which carries a 9.5% coupon, is expected to be redeemed at 103.8% of par on completion.
Talon Metals
Under the terms of the earn-in agreement Talon is the controlling operator to advance the high grade sulphide project in Minnesota, US. There is substantial opportunity to expand the resource defined on the existing Tamrak ore body and by identifying deposits on the wider prospective tenements. The Company is seeking to define a reserve and is investigating the production of both nickel and cobalt in concentrates and also producing sulphates for EV batteries for the domestic US market.
2020 Bulkers
The group owns a fleet of modern, fuel efficient vessels managed by an experienced management and board, combined with a low cost base.
As at 30 June |
2020 % of total investments |
2019 % of total investments |
Gold |
24.4 |
16.1 |
Copper |
14.1 |
15.3 |
Shipping |
9.8 |
6.2 |
Base Metals |
8.3 |
3.2 |
Silver |
5.0 |
4.8 |
Oil & Gas |
4.6 |
5.5 |
Uranium |
3.4 |
4.2 |
Zinc |
2.5 |
6.9 |
Nickel |
2.5 |
2.3 |
Rare Earth |
1.3 |
1.6 |
Lithium |
1.3 |
1.5 |
Coal |
1.0 |
2.2 |
Platinum |
0.7 |
0.3 |
Iron |
0.5 |
3.0 |
Diversified Miner |
0.3 |
- |
Palm Oil |
0.2 |
0.3 |
Agriculture |
0.1 |
0.2 |
Alternative Energy |
- |
1.2 |
Steel Securities |
- |
0.1 |
Fixed Interest Securities |
12.9 |
18.0 |
Preference Shares |
7.1 |
7.1 |
Total Investments |
100.0 |
100.0 |
CLASSIFICATION OF INVESTMENT PORTFOLIO BY STOCK MARKET QUOTATION
As at 30 June |
2020 % of total investments |
2019 % of total investments |
Canada |
40.4 |
38.1 |
Australia |
21.5 |
18.1 |
UK |
11.9 |
14.8 |
Europe |
8.5 |
6.1 |
US |
14.7 |
19.9 |
Unquoted |
3.0 |
3.0 |
Total Investments |
100.0 |
100.0 |
INVESTMENT PORTFOLIO
as at 30 June 2020
Company |
Sector |
Valuation £'000 |
Total Investments % |
|
||||
First Quantum Minerals** (Note 1) |
Copper |
6,302 |
8.2 |
|
||||
West African Resources |
Gold |
5,679 |
7.4 |
|
||||
REA Holdings** (Note 2) |
Palm Oil |
3,459 |
4.5 |
|
||||
Euronav Luxembourg** (Note 3) |
Shipping |
3,387 |
4.4 |
|
||||
Ero Copper |
Copper |
3,138 |
4.1 |
|
||||
Americas Gold and Silver (Note 4) |
Silver |
3,125 |
4.1 |
|
||||
Integra Resources |
Gold |
2,341 |
3.0 |
|
||||
TiZir 9.5% 19/07/2022** |
Mineral Sands |
2,026 |
2.6 |
|
||||
Talon Metals |
Nickel |
1,899 |
2.5 |
|
||||
2020 Bulkers |
Shipping |
1,795 |
2.3 |
|
||||
Top ten investments |
|
33,151 |
43.1 |
|
||||
Diversified Gas & Oil |
Oil & Gas |
1,793 |
2.3 |
|
||||
Roxgold |
Gold |
1,782 |
2.3 |
|
||||
BW LPG |
Shipping |
1,746 |
2.3 |
|
||||
Raven Russia ** |
Property |
1,715 |
2.2 |
|
||||
NexGen Energy |
Uranium |
1,542 |
2.0 |
|
||||
Emerald Resources |
Gold |
1,536 |
2.0 |
|
||||
Hurricane Energy ** |
Oil & Gas |
1,530 |
2.0 |
|
||||
Adventus Mining |
Base Metals |
1,512 |
2.0 |
|
||||
Trafigura Group Pte 6.875% Variable Perpetual ** |
Finance |
1,449 |
1.9 |
|
||||
Adriatic Metals |
Base metals |
1,322 |
1.7 |
|
||||
Top twenty investments |
|
49,078 |
63.8 |
|
||||
Oilflow SPV 1 DAC 12% 13/01/2022 ** |
Oil & Gas |
1,237 |
1.6 |
|
||||
Pure Gold Mining |
Gold |
1,180 |
1.5 |
|
||||
Goodbulk |
Shipping |
1,151 |
1.5 |
|
||||
Metals X |
Base metals |
1,140 |
1.5 |
|
||||
Calibre Mining |
Gold |
1,079 |
1.4 |
|
||||
Lynas Corporation |
Rare Earth |
1,075 |
1.4 |
|
||||
Sigma Lithium Resources |
Lithium |
1,072 |
1.4 |
|
||||
Central Asia Metals |
Copper |
1,070 |
1.4 |
|
||||
Trevali Mining |
Zinc |
1,058 |
1.4 |
|
||||
Westgold Resources |
Gold |
1,042 |
1.4 |
|
||||
Top thirty investments |
|
60,182 |
78.3 |
|
||||
Oklo Resources |
Gold |
930 |
1.2 |
|
||||
Ascendant Resources |
Zinc |
895 |
1.2 |
|
||||
Galiano Gold |
Gold |
891 |
1.2 |
|
||||
Balfour Beatty Preferred 9.675% 01/07/2020 |
Other Investments Mineral Sands |
833 |
1.1 |
|
||||
Base Resources |
Mineral Sands |
769 |
1.0 |
|
||||
Galena Mining |
Base Metals |
723 |
0.9 |
|
||||
Arch Resources |
Coal |
720 |
0.9 |
|
||||
Aquila Resources |
Gold |
706 |
0.9 |
|
||||
Fortuna Silver Mines NPV |
Silver |
685 |
0.9 |
|
||||
American Tanker Inc 9.25% 22/02/2022 ** |
Shipping |
673 |
0.9 |
|
||||
Top forty investments |
|
68,007 |
88.5 |
|
||||
Capstone Mining Corporation |
Copper |
639 |
0.8 |
|||||
Odyssey Energy |
Oil & Gas |
596 |
0.8 |
|||||
IGO |
Base metals |
555 |
0.7 |
|||||
Elematic Oyj 10% 30/06/2021** |
Technology |
552 |
0.7 |
|||||
Vintage Energy |
Oil & Gas invPaltestments |
518 |
0.7 |
|||||
Platinum Group Metals |
Platinum |
509 |
0.7 |
|||||
Silver Lake Resources |
Gold |
503 |
0.7 |
|||||
Ur-Energy |
Uranium |
492 |
0.6 |
|||||
Foran Mining |
Copper |
453 |
0.6 |
|||||
Jupiter Mines |
Iron |
406 |
0.5 |
|||||
Top fifty investments |
|
73,230 |
95.3 |
|||||
Lundin Mining |
Base metals |
375 |
0.5 |
|||||
Gran Colombia Gold Corp 8.25% 30/04/2024 ** |
Gold |
335 |
0.4 |
|||||
PetroTal Corp |
Oil & Gas |
315 |
0.4 |
|||||
Bluestone Resources |
Gold |
300 |
0.4 |
|||||
Cardinal Resources |
Gold |
284 |
0.4 |
|||||
NT Rig Holdco PTE 7.5% 20/12/2021 ** |
Finance |
281 |
0.4 |
|||||
Fission Uranium |
Uranium |
257 |
0.3 |
|||||
Teck Resources |
Diversified Miner |
244 |
0.3 |
|||||
Castile Resources Property |
Gold |
243 |
0.3 |
|||||
Denison Mines |
Uranium |
241 |
0.3 |
|||||
Top sixty investments |
|
76,105 |
99.0 |
|||||
Sabina Gold & Silver Common |
Gold |
228 |
0.3 |
|||||
Avance Gas |
Shipping 000000eShnergy |
96 |
0.1 |
|||||
Oro Negro 7.5% 24/01/2019 ** |
Oil & Gas |
63 |
0.1 |
|||||
Petro Matad |
Oil & Gas |
62 |
0.1 |
|||||
Precision Drilling |
Oil & Gas |
60 |
0.1 |
|||||
Agriculture Investment Group |
Agriculture |
60 |
0.1 |
|||||
Manhattan Corp |
Uranium |
54 |
0.1 |
|||||
Contura Energy |
Coal |
49 |
0.1 |
|||||
Valore Metals |
Gold |
44 |
- |
|||||
Polarcus ** |
Oil & Gas |
38 |
- |
|||||
Top seventy investments |
|
76,859 |
100.0 |
|||||
Other investments |
|
57 |
- |
|||||
Total investments |
|
76,916 |
100.0 |
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 2020. It should be read in conjunction with the Chairman's Statement and the Investment Manager's Review, which give a detailed review of the investment activities for the year and look to the future.
This year, we also discuss our approach to our stakeholder responsibilities and the Board's review of the Company's purpose, culture and values during the year for the first time, and in more detail. We also discuss our approach to people, social and governance matters and the environment in the Directors' Report.
Business Model
The business model of the Company is described in more detail below.
Investment Objective
The Company seeks to provide shareholders with capital growth and income predominantly from a portfolio of mining and resource equities and of mining, resource and industrial fixed interest securities.
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 stock market 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 15 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 stock market falls.
The Company's performance in meeting its objectives is measured against key performance indicators ('KPIs') as set out above. The primary KPI against which shareholders' returns are measured is a composite benchmark weighted 80 per cent to the EMIX Global Mining Index (sterling adjusted) and twenty per cent 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 Directors confirm that they have carried out a robust assessment of the emerging and principal risks facing the Company including those that would threaten its business model, future performance, solvency or liquidity. The Board has spent considerable time analysing the global effects of the Covid-19 pandemic this year, which had resulted in a new principal risk this year, and is closely monitoring the potential impact of Brexit as part of the Company's investment risk. The Board and Investment Manager will both continue to keep developments under review.
Covid-19 Risk - The Covid pandemic has had a profound effect globally in the first half of 2020, and at the time of writing there continues to be considerable uncertainty as to when and if the situation might be resolved. The natural resource sectors of economies that the Company focuses on under its investment strategy have been materially impacted by events, having encountered reduced demand; production and supply restrictions; and increased governmental intervention and regulation at different times. The interconnectedness of the global economy in the twenty first century means there is a continuing risk of future events or disruption. The Board have therefore introduced a new principal risk as at the date of this report to reflect the events of 2020 year to date, and the possibility of future risks to the Company's investment strategy and income streams.
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 small cap 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 17 of the financial statements.
Earnings and Dividend Risk - Earnings do not underpin dividends declared on an annualised basis, with the portfolio being managed on a total return basis. This may mean that in future years annualised earnings from investments may generate insufficient income to cover dividends declared. In that event, the Directors would consider declaring dividends from retained earnings, with the risk that shareholders' capital invested then reduces over time. 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 (Scotland) Limited, whose systems and processes the 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.
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 transition period following the UK leaving the European Union will end. The Board is also receiving regular briefings regarding the increased tension around established global and regional trade arrangements and threat of sanctions. The Board will continue to monitor developments as they occur and assess the potential consequences for the Company's future activities.
Emerging Risks - During Board discussions on principal risks and uncertainties, the Board considered any risks that were not an immediate threat but could arise in the longer term and have significant impact on the ability of the Company to continue to meet its objectives. Areas discussed include longer term impacts of climate change on the Company's portfolio and returns, and any prolonged economic impact of Covid-19 on different sectors of the world economy. The Board discussed these with the Manager, and developments in both areas will be kept under review, along with the impact of Brexit as we near the end of the transition period.
Viability Statement
In accordance with the provisions of the AIC Code, the Directors have assessed the viability of the Company over a period longer than the 12 months required by the 'Going Concern' provision. The Board conducted this viability review for a period of three years, such timeframe being deemed most appropriate to the cycles within which the Company's investee companies operate and the sectors of the economy in which the portfolio is concentrated. The Board continues to consider that this period also reflects the long term objectives of the Company, being a Company with no fixed life, whilst taking into account the impact of uncertainties in the markets.
As discussed throughout the Strategic Review and this Annual Report as a whole, the Directors continue to monitor the implications of the Covid pandemic on the Company's investment strategy, outlook and financial position. This monitoring has considerably informed the Directors' viability assessment and statement this year.
However, the Directors do not expect there to be any significant change to the current principal risks facing the Company, which now include a new Macro-Event Risk relating to the effects of the Covid pandemic, nor to the adequacy of the controls in place to mitigate those risks. Furthermore, the Directors do not envisage any change in strategy which would prevent the Company from operating over the three year period.
This is based on the assumption that there are no significant changes in market conditions or the tax and regulatory environment that could not reasonably have been foreseen. The Board also considers the annual continuation vote should not be a factor to affect the three year period given the ongoing support of major shareholders.
In making this statement the Board: (i) considered the continuation vote to be proposed at the Annual General Meeting which the Board considers will be voted in favour of by shareholders; and (ii) carried out a robust assessment of the principal risks facing the Company. These risks and their mitigations are set out above.
The principal risks identified as most relevant to the assessment of the viability of the Company were those relating to a future macro-event likely to have a material impact on the financial position of the Company and the potential under-performance of the portfolio and its effect on the ability to pay dividends. When assessing these risks the Directors have considered the risks and uncertainties facing the Company in severe but reasonable scenarios, taking into account the controls in place and mitigating actions that could be taken.
When considering the risk of under-performance, the Board carried out a series of stress tests and detailed financial modelling including in particular the effects of any substantial future falls in investment value on the ability to re-pay and renegotiate borrowings, potential breaches of loan covenants and the maintenance of dividend payments.
The Board considered the Company's portfolio and concluded that the diverse nature of investments held gives stability and liquidity along with flexibility to be able to react positively to market and political forces outside of the Board's control.
The Board also considered the impact of potential regulatory change and the controls in place surrounding significant third party providers, including the fund 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 83.4%.
The Scotiabank loan facility is due to expire on 20 September 2020. It is anticipated a new facility on comparable terms will be negotiated prior to this date.
Based on the Company's processes for monitoring revenue and costs, with the use of frequent revenue forecasts, and the 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 meet its liabilities as they fall due for a period of three years from the date of approval of this Report.
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 tables and data above show how the Company has performed against those KPIs, and a glossary of terms and alternative performance measures is included in the Annual Report. The key performance indicators (KPIs) used to measure progress and performance over time, and which are comparable to those reported by other investment trusts are as follows:
Investment Performance
To assess investment performance, the Board monitors the net asset value (NAV) performance of the ordinary shares relative to that of its benchmark index. The Company invests principally in equity-related investments in companies, usually mid and small cap companies, with a wide range of commodity exposures as well as a number of fixed interest securities. After investigation the Board has concluded that there are no indices truly representative of the Company's diversified small and mid-cap commodities equity focus or its high-yielding securities portfolio. It has therefore chosen an approximate composite proxy, being 80 per cent of the EMIX Global Mining Index (sterling adjusted) and twenty per cent of the Credit Suisse High Yield Index (sterling adjusted). Given that only a very small proportion of the Company's portfolio overlaps with the composite benchmark, Shareholders should expect a significant degree of convergence away from the benchmark return.
The performance of the NAV and composite benchmark are shown in the graphs on the inside cover of the Annual Report with statistics also shown on page 2.
NAV and Share Price Price Performance
· 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. During the year under review dividends per share totalling 5.60 pence per share were declared (2019: 5.60 pence).
· 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. For the year under review ongoing charges were 1.8% (2019: 1.9%).
These KPIs fall within the definition of "Alternative Performance Measures" (APMs) under guidance issued by the European Securities and Markets Authority (ESMA) and additional information explaining how these are calculated is set out in the Glossary.
The Directors have carefully selected these KPIs as in their view these combine to provide the most appropriate measures of performance, both in terms of managing the business and presentation to shareholders and stakeholders. The Board is satisfied that performance against each measure has been satisfactory in the context of the events in the financial year. Further information regarding forward looking assessments for the KPIs can be found in the Chairman's Review and Investment Manager's Report.
Future Prospects
The Chairman's Statement and the Investment Manager's Report include a review of developments during the year as well as information on investment activity within the Company's portfolio and the factors likely to affect the future performance of the Company.
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 all 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, to access capital they now 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. The Investment Manager is increasingly expected to engage with investee companies around these themes, in line with the expectations of the UK Stewardship Code.
The Company's Investment Manager, CQS (UK) LLP, has in turn stated that they view environmental, social and governance ("ESG") factors as a key driver of financing costs, valuations and performance, while also being capable of acting as a lever to shape and influence the world for generations to come. The integration and assessment of ESG factors is a crucial part of this commitment, and a key factor in their decision-making. Through embedding ESG into the investment process the Investment Manager seeks to enhance their ability to identify value, investment opportunities and, critically, to generate the best possible returns for their clients. CQS (UK) LLP is signatory to the internationally recognised Principles for Responsible Investment ("PRI"), fully supporting all of the PRIs.
As an investment trust with its current structure the Company has no direct social, community, employee or environmental responsibilities of its own.
Modern Slavery Act 2015
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.
Board Diversity
Details of the Directors of the Company on 30 June 2020, all of whom held office throughout the year are set out on pages 16 and 17 of the Annual Report. The Board consists of three male Directors and two female Directors, which represents a gender diversity ratio of 40% and means composition of the Board already exceeds the expectations of Lord Davies's 'Women on Boards' review.
The Board acknowledges that diversity in the Boardroom and the workplace is also an increasingly important area of focus today for UK business, and also a key theme of the latest update of the Code. Whilst the current composition of the Board, which is very stable, is very diverse in terms of experience and background, it is not ethnically diverse. The Board is committed to keeping this under review when considering future board appointments, whilst always basing any recruitment on merit. The Company has no directly employed staff, however, the Board is kept informed of and monitors diversity based policies at each of its principal third party advisors.
By order of the Board
Richard Prickett
Chairman
8 September 2020
STATEMENT OF COMPREHENSIVE INCOME
|
|
Year ended 30 June 2020 |
Year ended 30 June 2019 |
||||
|
Notes |
Revenue £'000 |
Capital £'000 |
Total £'000 |
Revenue £'000 |
Capital £'000 |
Total £'000 |
Losses on investments |
9 |
- |
(9,524) |
(9,524) |
- |
(13,967) |
(13,967) |
Exchange (losses)/gains |
|
- |
(9) |
(9) |
- |
176 |
176 |
Income |
2 |
3,070 |
- |
3,070 |
2,839 |
- |
2,839 |
Investment management fee |
3 |
(206) |
(617) |
(823) |
(234) |
(702) |
(936) |
Other expenses |
4 |
(463) |
- |
(463) |
(578) |
- |
(578) |
Net return before finance costs and taxation |
|
2,401 |
(10,150) |
(7,749) |
2,027 |
(14,493) |
(12,466) |
Interest payable and similar charges |
5 |
(62) |
(184) |
(246) |
(123) |
(588) |
(711) |
Net return on ordinary activities before taxation |
|
2,339 |
(10,334) |
(7,995) |
1,904 |
(15,081) |
(13,177) |
Tax on ordinary activities |
6 |
(101) |
70 |
(31) |
(117) |
106 |
(11) |
Net return attributable to equity shareholders |
|
2,238 |
(10,264) |
(8,026) |
1,787 |
(14,975) |
(13,188) |
Return per ordinary share |
8 |
3.35p |
(15.35)p |
(12.00)p |
2.67p |
(22.39)p |
(19.72)p |
The 'total' column of this statement represents the Company's profit and loss account, prepared in accordance with UK GAAP.
All revenue and capital items in this statement derive from continuing operations. All of the profit/(loss) for the year is attributable to the owners of the Company.
No operations were acquired or discontinued in the year.
A statement of other comprehensive income is not presented as all gains and losses of the Company have been reflected in the above Statement of Comprehensive Income.
The accompanying notes are an integral part of the financial statements.
BALANCE SHEET
|
Notes |
As at 30 June 2020 £'000 |
As at 30 June 2019 £'000 |
Fixed assets |
|
|
|
Investments |
9 |
76,916 |
87,547 |
Current assets |
|
|
|
Debtors |
10 |
402 |
414 |
Cash and cash equivalent |
|
1,027 |
1,466 |
|
|
1,429 |
1,880 |
Creditors: amounts falling due within one year |
11 |
(368) |
(678) |
Loan: amount falling due within one year |
12 |
(12,000) |
- |
Net current liabilities/assets |
|
(12,368) |
1,202 |
Loan |
12 |
- |
(11,000) |
Net assets |
|
65,977 |
77,749 |
Capital and reserves |
|
|
|
Called-up share capital |
14 |
16,722 |
16,722 |
Special distributable reserve |
|
30,386 |
30,386 |
Share premium |
|
4,851 |
4,851 |
Capital reserve |
|
13,861 |
24,125 |
Revenue reserve |
|
157 |
1,665 |
Equity shareholders' funds |
|
65,977 |
77,749 |
Net asset value per share |
15 |
98.64p |
116.24p |
Company number: 02978531
The financial statements were approved by the Board of Directors and authorised for issue on 8 September 2020 and were signed on its behalf by:
Richard Prickett
Chairman
The accompanying notes are an integral part of the financial statements.
STATEMENT OF CHANGES IN EQUITY
For the year to 30 June 2020
|
Share capital £'000 |
Share premium account £'000 |
Special distributable reserve £'000 |
Capital Reserve £'000 |
Revenue Reserve £'000 |
Total £'000 |
|||
Balance at 30 June 2019 |
16,722 |
4,851 |
30,386 |
24,125 |
1,665 |
77,749 |
|||
Return on ordinary activities after taxation |
- |
- |
- |
(10,264) |
2,238 |
(8,026) |
|||
Dividends paid (see note 7) |
- |
- |
- |
- |
(3,746) |
(3,746) |
|||
Balance at 30 June 2020 |
16,722 |
4,851 |
30,386 |
13,861 |
157 |
65,977 |
|||
For the year ended 30 June 2019
|
|
|
|
|
|||||
|
Share capital |
Share premium account |
Special distributable reserve
|
Capital reserve |
Revenue reserve |
Total |
|||
|
£'000 |
£'000 |
£'000 |
£'000 |
£'000 |
£'000 |
|||
Balance at 30 June 2018 |
16,722 |
4,850 |
30,386 |
39,100 |
4,159 |
95,217 |
|||
Return on ordinary activities after taxation |
- |
- |
- |
(14,975) |
1,787 |
(13,188) |
|||
Dividends paid (see note 7) |
- |
- |
- |
- |
(4,281) |
(4,281)
|
|||
Issue of Shares |
- |
1 |
- |
- |
- |
1 |
|||
Balance at 30 June 2019 |
16,722 |
4,851 |
30,386 |
24,125 |
1,665 |
77,749 |
|||
The revenue reserve represents the amount of the Company's reserves distributable by way of dividend.
The accompanying notes are an integral part of the financial statements.
CASH FLOW STATEMENT
|
Notes |
Year ended 30 June 2020 £'000
|
Year ended 30 June 2019 £'000
|
Operating activities |
|
|
|
Investment income received |
|
3,112 |
3,056 |
Deposit interest received |
|
2 |
19 |
Investment management fees paid |
|
(781) |
(957) |
Other payments |
|
(484) |
(516) |
Net cash inflow from operating activities |
16 |
1,849 |
1,602 |
Investing activities |
|
|
|
Purchases of investments |
|
(18,616) |
(24,368) |
Disposals of investments |
|
19,329 |
44,918 |
Net cash inflow from investing activities |
|
713 |
20,550 |
Financing activities |
|
|
|
Equity dividends paid |
|
(3,746) |
(4,281) |
Repayment of 3.5% Convertible Unsecured Loan Stock 2019 |
|
- |
(606) |
Loan funding |
|
1,000 |
11,000 |
Loan interest |
|
(246) |
(187) |
Convertible Unsecured Loan Stock repaid |
|
- |
(34,510) |
Net cash outflow from financing activities |
|
(2,992) |
(28,584) |
Decrease in net cash |
|
(430) |
(6,432) |
Reconciliation of net cash flow to movement in net cash |
|
|
|
Decrease in cash in the year |
|
(430) |
(6,432) |
Exchange (losses)/gains |
|
(9) |
176 |
Movement in net cash in the year |
|
(439) |
(6,256) |
Opening net cash at 1 July |
|
1,466 |
7,722 |
Closing net cash at 30 June |
|
1,027 |
1,466 |
The accompanying notes are an integral part of the financial statements.
NOTES TO THE FINANCIAL STATEMENTS
for the year to 30 June 2020
1 Accounting Policies
CQS Natural Resources Growth and Income PLC is a company limited by shares, it was incorporated in accordance with the Laws of England and Wales, details of the registered office are included on page 58 of the Annual Report and Financial Statements.
A summary of the principal accounting policies adopted is set out below.
(a) Basis of Accounting
The financial statements have been prepared in accordance with Financial Reporting Standard 102 and the Statement of Recommended Practice (SORP) for "Financial Statements of Investment Trust Companies and Venture Capital Trusts" issued by the Association of Investment Companies dated October 2019. They have also been prepared on a going concern basis and on the assumption in that approval as an investment trust will continue to be granted. These financial statements have been prepared in line with the Board's analysis of the impact of Covid-19 on the Company detailed on page 12 of the Annual Report.
The revised SORP issued in October 2019 is applicable for accounting periods beginning on or after 1 January 2019. As a result, the presentations of gains and losses arising from disposals of investments and gains and losses on revaluation of investments have now been combined, as shown in note 9. The result of this change has no impact on the net asset value or total return for both the current year and prior year. No other accounting policies or disclosures have changed as a result of the revised SORP.
The Directors have, at the time of approving the financial statements, a reasonable expectation that the Company has adequate resources to continue in operational existence for at least twelve months from the date of approval of these financial statements. Thus they continue to adopt the going concern basis of accounting in preparing the financial statements. Further detail is included in the Directors' Report on page 19.
Presentation of the Statement of Comprehensive Income
In order to reflect better the activities of an investment trust company and in accordance with the SORP, supplementary information which analyses the Statement of Comprehensive Income between items of a revenue and capital nature has been presented alongside the Income Statement. The net revenue return is the measure the Directors believe to be appropriate in assessing the Company's compliance with certain requirements set out in Chapter 4 of Part 24 of the Corporation Tax Act 2010 (previously Section 842 of the Income and Corporation Taxes Act 1988).
The notes and financial statements are presented in pounds sterling and are rounded to the nearest thousand except where otherwise indicated.
(b) Financial assets
All financial assets are initially recognised at fair value net of transactions costs incurred. All financial assets are recorded at the date on which the Company became party to the contractual requirements of the financial asset. Subsequently, they are measured at fair value through profit or loss.
Cash and cash equivalents
Cash and cash equivalents comprise cash balances that are readily convertible to a known amount of cash and are subject to an insignificant risk of changes in value.
(c) Financial liabilities
All financial liabilities are initially recognised at fair value net of transaction costs incurred. All financial liabilities are recorded on the date on which the Company becomes party to the contractual requirements of the financial liability.
Non-derivative financial liabilities such as loan equivalents, trade and other payables with fixed and determinable payments and not quoted in an active market, are intially recognised at fair value (which is equivalent to cost) plus transaction costs that are directly attributable to the acquisition and are subsequently carried at amortised cost.
Bank loans are recognised at cost, being the fair value of the consideration received. Any issue costs will be charged in the year in which they are incurred. The amounts falling due for repayment within one year are included under "Loan: amount falling due within one year" in the Statement of Financial Position and amounts falling due after one year are included under "Loan: amount falling due after more than one year" in the Statement of Financial Position.
(d) Fixed asset investments
Financial assets which comprise equity shares, convertible bonds and fixed income securities, are classified as held at fair value through profit or loss as the financial assets are managed and their performance evaluated on a fair value basis in accordance with the Company's investment strategy and this is also the basis on which information about investments is provided internally to the Board.
Purchases or sales of financial assets are recognised/derecognised on the date the Company trades the investments. On initial recognition investments are classified as fair value through profit or loss with any resultant gain or loss, including any gain or loss arising from a change in exchange rates, recognised in the Statement of Comprehensive Income. For listed securities this is either the bid price or last traded price, depending on the convention of the exchange on which the investment is listed, adjusted for accrued income where it is reflected in the market price.
Financial assets which are not listed or where trading in the securities of an investee company is suspended are valued at the Board's estimate of fair value in accordance with International Private Equity and Venture Capital (IPEV) valuation guidance. Unquoted financial assets are valued by the Directors on the basis of all the information available to them at the time of valuation. This includes a review of the financial and trading information of the Company, covenant compliance, ability to pay the interest due and cash held. For convertible bonds this also includes consideration of their discounted cash flows and underlying equity value based on information provided by the Investment Manager.
(e) Income
Dividends receivable on equity shares are recognised as income on the date that the related investments are marked ex-dividend. Dividends receivable on equity shares where no ex-dividend date is quoted are recognised as income when the Company's right to receive payment is established.
Fixed interest returns on non-equity shares are recognised on a time apportioned basis so as, if material, to reflect the effective interest rate on those instruments. Any difference between acquisition cost and maturity value is recognised as revenue over the life of the security using the effective yield basis of calculating amortisation. Other returns on non-equity shares are recognised when the right to the return is established.
The fixed return on a debt security is recognised on a time apportioned basis so as to reflect the effective interest rate on each such security. Income from deposit interest and underwriting commission is recognised on an accruals basis.
(f) Taxation
The charge for taxation is based on net revenue for the year. The tax effect of different items of income/gain and expenditure/loss is allocated between capital and revenue on the same basis as the particular item to which it relates.
Deferred tax balances are recognised in respect of all timing differences that have originated but not reversed by the balance sheet date, except:
- The recognition of deferred tax assets is limited to the extent that it is probable that they will be recovered against the reversal of deferred tax liabilities or other future taxable profits; and
- Any deferred tax balances are reversed if and when all conditions for retaining associated tax allowances have been met.
Deferred tax balances are not recognised in respect of permanent differences.
Deferred income tax is determined using tax rates and laws that have been enacted or substantively enacted by the reporting date.
Because the Company intends each year to qualify as an investment trust under Chapter 4 of Part 24 of the Corporation Tax Act 2010 (previously S842 of the Income and Corporation Taxes Act 1988), no provision is made for deferred taxation in respect of the capital gains that have been realised, or are expected in the future to be realised, on the sale of fixed asset investments.
(g) Expenses
All expenses are accounted for on an accruals basis. Expenses are charged through the Statement of Comprehensive Income as a revenue item except the following which are charged to capital:
- expenses which are incidental to the disposal of an investment are deducted from the disposal proceeds of the investment; and
- the Company charges 75 per cent of investment management fees to capital, in line with the Board's expected long term return in the form of capital gains and income respectively from the investment portfolio of the Company. For further details refer to note 3.
(h) Dividend Payments
Dividends paid by the Company on its shares are recognised in the financial statements in the period in which they are paid and are shown in the Statement of Changes in Equity.
(i) Foreign currency
Transactions denominated in foreign currencies are recorded in the local currency at actual exchange rates at the date of the transaction. Overseas assets and liabilities denominated in foreign currencies at the year end are reported at the rates of exchange prevailing at the year end. Instruments held at fair value are translated at the rate prevailing at the time the fair value is determined. Any gain or loss arising from a change in exchange rates subsequent to the date of a transaction and before the settlement date is included as an exchange gain or loss in capital reserves. The functional currency of the Company, being its statutory reporting currency, is sterling.
(j) Finance costs
Finance costs are accounted for on an accruals basis. Finance costs of debt, insofar as they relate to the financing of the Company's investments or to financing activities aimed at maintaining or enhancing the value of the Company's investments, are allocated between revenue and capital in accordance with the Board's expected long-term split of returns, in the form of income and capital gains respectively, from the Company's investment portfolio. For further details refer to note 5.
(k) 3.5% Convertible Unsecured Loan Stock 2019
3.5% Convertible Unsecured Loan Stock 2019 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 nonconvertible 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 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 actual 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.
The CULS were repaid on 28 September 2018.
(l) Reserves
(a) Share capital - represents the nominal value of authorised and allocated, called-up and fully paid shares issued. The reserve is non-distributable.
(b) Share premium - the surplus of net proceeds received from the issuance of new shares over their par value is credited to this account and the related issue costs are deducted from this account. The reserve is non-distributable.
(c) Capital reserve - The following are accounted for in this reserve:
- gains and losses on the realisation of investments;
- realised and unrealised exchange differences on transactions of a capital nature;
- capitalised expenses and finance costs, together with the related taxation effect; and
- increases and decreases in the valuation of investments held. The reserve is non-distributable.
(d) Special reserve - created from the Court cancellation of the share premium account which had arisen from premiums paid at launch. Available as distributable profits.
(e) Revenue reserve - the net profit/(loss) arising in the revenue column of the Statement of Comprehensive Income is added to or deducted from this reserve. Available for paying dividends.
(m) Single Segmental Reporting
The company is engaged in a Single Segment of business, being investment business, consequently no business segmental analysis is provided.
(n) Critical accounting estimates and judgements
The preparation of the financial statements necessarily requires the exercise of judgement both in application of accounting policies which are set out above and in the selection of assumptions used in the calculation of estimates. These estimates and judgements are reviewed on an ongoing basis and are continually evaluated based on historical experience and other factors. However, actual results may differ from these estimates. The only significant accounting estimate and judgement is the valuation of the unquoted and level 2 investments which is described in note 1(d) above.
The main judgements and estimates used in calculating the price of the Warrants are:
Firstly, the derivative valuation model used to value the warrants. The Investment Manager has selected the Black Scholes Model to value the unlisted warrants as this is a widely accepted warrant valuation model to use.
Secondly, the inputs into the Black-Scholes model as outlined below.
For any unlisted securities the time to maturity to estimate the historic volatility required in the calculations underpinning the Black Scholes Pricing Model is used. The volatility of the underlying equity is obtained, and if this is not available or is not reflective, due to a lack of liquidity etc., then we will look to use the volatility of the parent company or an appropriate proxy.
For any securities with a maturity greater than 1 year the 90 day Volatility is used and for any securities with a maturity less than 1 year the 60 days Volatility is used. These have been deemed appropriate periods to use, as often using the time to expiry has captured market or firm events that have artificially inflated the volatility which has in turn inflated the valuation. If the period used still yields an unreflective level of volatility, then the volatility period used is overridden. When appropriate to extend the period the time to maturity is used, up to a maximum of 400 days, which is in line with Bloomberg's option and warrant valuation model assumptions.
In determining the risk free rate, the swap price discount curve is used for the relevant currency which is derived from data retrieved from Bloomberg. The swap curve in the Warrant Currency is deemed an appropriate method for approximating the yield curve for the following reasons:
- There is sufficient liquidity and depth of pricing to provide reliable valuations for the Swap curves for the points and currencies that we currently require.
- Using Swaps allows for the same discount rate methodology to be used across the range of maturities of our Warrant portfolio, whereas using other instruments to construct a yield curve would typically be more limited across different tenors. This is relevant to our current portfolio as there is a wide range of time-to-maturities.
- Using Swaps allows for the same discount rate methodology to be used across different currencies, which is applicable to our current portfolio which contain Warrants listed and traded in a range of currencies.
2 Income
|
2020 £'000 |
2019 £'000 |
Income from investments* |
|
|
UK dividend income |
53 |
143 |
UK fixed income |
109 |
239 |
Preference share dividend income |
285 |
579 |
Overseas dividend income |
1,633 |
625 |
Overseas fixed interest |
988 |
1,234 |
|
3,068 |
2,820 |
Other income† |
|
|
Deposit interest |
2 |
19 |
|
2 |
19 |
Total income |
3,070 |
2,839 |
Total income comprises: |
|
|
Dividends |
1,971 |
1,347 |
Fixed interest securities |
1,097 |
1,473 |
Deposit interest |
2 |
19 |
|
3,070 |
2,839 |
*All investment income arises on investments valued at fair value through Profit or Loss.
†Other income on financial assets not valued at fair value through Profit or Loss.
3 Investment Management Fee
|
2020 Revenue £'000 |
2020 Capital £'000 |
2020 Total £'000 |
2019 Revenue £'000 |
2019 Capital £'000 |
2019 Total £'000 |
Investment management fee |
206 |
617 |
823 |
234 |
702 |
936 |
The Company's Investment Manager is CQS which in turn has delegated this function to NCIM. The contract between the Company and CQS may be terminated by either party giving not less than six months' notice of termination.
The Company's annual management fee is 1.2 per cent on net assets up to £150m; 1.1 per cent on net assets above £150m and up to £200m;
1.0 per cent on net assets above £200m and up to £250m; and, 0.9 per cent on net assets above £250m.
The balance due to CQS for management fees at the year end was £114,877 (2019: £73,313).
Investment management fees have been allocated 75 per cent to capital and 25 per cent to revenue (2019: 75% capital, and 25% revenue).
4 Other Expenses (including irrecoverable VAT)
|
2020 Revenue |
2020 Capital |
2020 Total |
2019 Revenue |
2019 Capital |
2019 Total |
|
£'000 |
£'000 |
£'000 |
£'000 |
£'000 |
£'000 |
Secretarial and administration fees |
78 |
- |
78 |
106 |
- |
106 |
Directors' fees |
120 |
- |
120 |
105 |
- |
105 |
Directors' NI |
5 |
- |
5 |
4 |
- |
4 |
Auditor remuneration for statutory audit |
30 |
- |
30 |
24 |
- |
24 |
Tax advisor remuneration for tax services |
10 |
- |
10 |
24 |
- |
24 |
Directors' and Officers' liability insurance |
9 |
- |
9 |
11 |
- |
11 |
Registrar fees |
13 |
- |
13 |
25 |
- |
25 |
Custody fees |
36 |
- |
36 |
33 |
- |
33 |
Depositary fees |
15 |
- |
15 |
21 |
- |
21 |
Other |
147 |
- |
147 |
225 |
- |
225 |
|
463 |
- |
463 |
578 |
- |
578 |
The Company has an agreement with Maitland Administration Services (Scotland) Limited ("Maitland") for the provision of secretarial and administration services. During the year the total fees paid and payable were £78,182 (2019: £104,406). The balance due to Maitland for secretarial services at the year end was £19,981 (2019: £21,542).
No pension contributions were payable in respect of any of the Directors.
The Company does not have any employees.
5 Interest Payable and Similar Charges
|
2020 Revenue £'000 |
2020 Capital £'000 |
2020 Total £'000 |
2019 £'000 |
2019 Capital £'000 |
2019 Total £'000 |
Interest on 3.5% Convertible Unsecured Loan Stock 2018 |
- |
- |
- |
75 |
227 |
302 |
Interest on bank loan |
62 |
184 |
246 |
47 |
140 |
187 |
Amortisation of issue expenses |
- |
- |
- |
- |
221 |
221 |
Bank overdraft |
- |
- |
- |
1 |
- |
1 |
|
62 |
184 |
246 |
123 |
588 |
711 |
Interest payable on the CULS has been allocated 75 per cent to capital and 25 per cent to revenue (2019: 75% capital, and 25% revenue).
6 Tax on Ordinary Activities
|
2020 Revenue |
2020 |
2020 |
2019 Revenue |
2019 |
2019 Total |
|
£'000 |
£'000 |
£'000 |
£'000 |
£'000 |
£'000 |
Corporation tax |
70 |
(70) |
- |
106 |
(106) |
- |
Overseas taxation |
31 |
- |
31 |
11 |
- |
11 |
Total tax charge/(credit) |
101 |
(70) |
31 |
117 |
(106) |
11 |
Reconciliation of Tax Charge
The tax assessed for the year is the current standard rate of corporation tax in the UK. A reconciliation of the total tax charge is set out below:
|
2020 Total £'000 |
2019 Total £'000 |
Return on ordinary activities before taxation |
(7,995) |
(13,177) |
Corporation tax at standard rate of 19.00% (2019: 19.00%) |
(1,519) |
(2,504) |
Effects of: |
|
|
Non taxable income |
(374) |
(256) |
Non taxable losses |
1,810 |
2,654 |
Overseas withholding tax |
31 |
11 |
Excess management expenses (deferred tax not recognised) |
81 |
139 |
Non taxable exchange gains |
2 |
(33) |
Current year tax charge |
31 |
11 |
Due to the Company's status as an Investment Trust, and the intention to continue meeting the conditions required to obtain approval in the foreseeable future, the Company has not provided for deferred tax on capital gains and losses arising on the revaluation or disposal of investments.
At 30 June 2020 the Company had surplus management expenses of £8,144,000 (2019: £7,716,000) on which no deferred tax asset has been recognised.
7 Dividends |
2020 Revenue £'000 |
2019 Revenue £'000 |
Amounts recognised as distributions to equity holders in the year: |
|
|
- Fourth interim dividend for the year ended 30 June 2019 of 1.82p (2018 - 2.62p) per ordinary share |
1,217 |
1,752 |
- First interim dividend for the year ended 30 June 2020 of 1.26p (2018 - 1.26p) per ordinary share |
843 |
843 |
- Second interim dividend for the year ended 30 June 2020 of 1.26p (2019 - 1.26p) per ordinary share |
843 |
843 |
- Third interim dividend for the year ended 30 June 2020 of 1.26p (2019 - 1.26p) per ordinary share |
843 |
843 |
|
3,746 |
4,281 |
Amounts relating to the year but not paid at the year end: |
|
|
- Fourth interim dividend for the year ended 30 June 2020 of 1.82p (2019 - 1.82p) per ordinary share |
1,217 |
1,217 |
In accordance with FRS 102 the fourth interim dividend has not been included as a liability in these accounts and will be recognised in the period in which it is paid.
8 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 2020 £'000 |
Year ended 30 June 2019 £'000 |
Revenue return |
2,238 |
1,787 |
Capital return |
(10,264) |
(14,975) |
Total return |
(8,026) |
(13,188) |
|
Number |
Number |
Weighted average ordinary shares in issue |
66,888,408 |
66,884,094 |
Revenue return per ordinary share (pence) |
3.35 |
2.67 |
Capital return per ordinary share (pence) |
(15.35) |
(22.39) |
Total return per ordinary share (pence) |
(12.00) |
(19.72) |
For the years ended 30 June 2020 and 30 June 2019 there was no dilution to the revenue return per ordinary share. Additionally, for the year ended 30 June 2020 and 30 June 2019 there was no dilution to the capital return per ordinary share.
9 Investments
|
2020 £'000 |
2019 £'000 |
|
Equity shares |
61,238 |
64,347 |
|
Fixed income securities |
9,886 |
15,583 |
|
Preference shares |
5,430 |
6,257 |
|
Placings |
1 |
902 |
|
Warrants |
361 |
458 |
|
|
76,916 |
87,547 |
|
|
|
||
Included above are unquoted investments of value £2,137,701 (2019: £2,664,186).
The Company does not intend to acquire securities that are unquoted or unlisted at the time of investment with the exception of securities which, at the time of acquisition, are intending to list on a stock exchange or securities which are convertible into quoted securities. However, the Company may continue to hold securities that cease to be quoted or listed if the Investment Manager considers this to be appropriate.
All investments are designated fair value through profit or loss at initial recognition, therefore all gains and losses arise on investments designated at fair value through profit or loss.
FRS 102 The Financial Reporting Standard Applicable in the UK and Republic of Ireland requires an analysis of investments valued at fair value based on the reliability and significance of information used to measure their fair value. The level is determined by the lowest (that is the least reliable or independently observable) level of input that is significant to the fair value measurement for the individual investment in its entirety as follows:
· Level 1 - investments quoted in an active market;
· Level 2 - investments whose fair value is based directly on observable current market prices or indirectly being derived from market prices; and
· Level 3 - investments whose fair value is determined using a valuation technique based on assumptions that are not supported by observable current market prices or based on observable market data.
If the market value of the Level 3 investments fell by 5 per cent, the impact on the profit or loss and the net asset value would have been negative £0.107 million (2019: negative £0.133 million). If the value of the Level 3 investments rose by the same amount, the effect would have been equal and opposite. 5% has been selected as this level of change is considered to be reasonable based on observations of current market conditions.
|
Level 1 Listed in UK |
Level 1 Listed overseas |
Level 2* |
Level 3 |
2020 Total |
2019 Total |
|
£'000 |
£'000 |
£'000 |
£'000 |
£'000 |
£'000 |
Opening book cost |
12,224 |
59,609 |
15,667 |
11,509 |
99,009 |
126,395 |
Opening fair value adjustment |
(1,476) |
(1,253) |
112 |
(8,845) |
(11,462) |
(2,975) |
Opening valuation |
10,748 |
58,356 |
15,779 |
2,664 |
87,547 |
123,420 |
Purchases at cost |
1,460 |
16,231 |
589 |
- |
18,280 |
23,907 |
Conversions/transfers |
- |
(648) |
- |
648 |
- |
- |
Sales - proceeds |
(1,460) |
(15,240) |
(2,629) |
- |
(19,329) |
(45,819) |
Effective yield |
- |
- |
(58) |
- |
(58) |
13 |
Gains on investments |
(2,810) |
(2,483) |
(3,057) |
(1,174) |
(9,524) |
(13,974) |
Closing valuation |
7,938 |
56,216 |
10,624 |
2,138 |
76,916 |
87,547 |
Closing book cost |
12,309 |
61,925 |
13,152 |
12,157 |
99,543 |
99,009 |
Closing fair value adjustment |
(4,371) |
(5,709) |
(2,528) |
(10,019) |
(22,627) |
(11,462) |
Closing valuation |
7,938 |
56,216 |
10,624 |
2,138 |
76,916 |
87,547 |
In line with the revised SORP issued in October 2019, the presentations of gains and losses arising from disposals of investments and gains and losses on revaluation of investments have now been combined. Please see Accounting Policies note 1(a) on page 38. The company received £19,328,963 (2019: £45,818,410) from investments sold in the year. The book cost of these investments when they were purchased was £17,688,111 (2019: £50,404,760).
The fair value of Level 3 financial assets has been determined by reference to valuation techniques described in note 1(d) of these financial statements. Judgement has been exercised in each of these valuations in determining the most appropriate valuation methodology and inputs into the valuation models used
The Level 3 investments at the year end, along with the respective valuation methods utilised are as follows:
Agriculture Investment Group Corp Common, which has been valued to the July 2019 rights issue price of $0.5. The company has a 0.13% interest.
Goodbulk Ltd Common USD, which due to illiquidity, has been valued at a discount of 44% to the last traded price of NOK135. The company has a 0.61% interest.
Odyssey Energy Ltd Common NPV, which due to illiquidity, has been valued at a discount of 20% to the last price (cash) available before suspension of AUD 0.043. The company has a 9.49% interest.
All other level 3 securities have been price at nil, in the absence of any indicators of higher value. There are normal voting rights attached to all level 3 equity holdings which are directly proportionate to the % holding in the company. The respective interests in these holdings are detailed above.
*These securities are priced using evaluated prices from a third party vendor, together with a price comparison made to secondary and tertiary evaluated third party sources. Evaluated prices are in turn based on a variety of sources, including broker quotes and benchmarks.
As a result these investments are disclosed as Level 2 - recognising that the fair values of these investments are not as visible as quoted equity investments and their higher inherent pricing risk. However, this does not mean that the fair values shown in the portfolio valuation are not achievable at point of sale.
The gains and losses included in the above table have all been recognised within gains/(losses) on investments in the Statement of Comprehensive Income on page 34. The Directors believe that the use of reasonable possible alternative assumptions for its Level 3 holdings would not result in a valuation significantly different from the valuation included in these financial statements.
Gains/(losses) on investments |
2020 £'000 |
2019 £'000 |
Realised gains/(losses) on sale |
1,641 |
(5,487) |
Unrealised gains'(losses) on investments |
(11,165) |
(8,487) |
Realised other |
- |
(6) |
Effective yield |
- |
13 |
Gains on investments |
(9,524) |
(13,967) |
During the year the Company incurred transaction costs on the purchases of £13,136 (2019: £8,930) and transaction costs on sales of £15,820 (2019: £17,598).
10 Debtors
|
2020 £'000 |
2019 £'000 |
|
|||||||||
Prepayments and accrued income |
276 |
404 |
|
|||||||||
Overseas tax recoverable |
115 |
- |
|
|||||||||
VAT recoverable |
11 |
10 |
|
|||||||||
|
402 |
414 |
|
|||||||||
|
|
|
|
|
||||||||
11 Creditors: Amounts Falling Due Within One Year |
|
|
|
|||||||||
|
2020 £'000 |
2019 £'000 |
|
|||||||||
Amounts due to brokers |
- |
336 |
|
|||||||||
Corporation tax |
163 |
163 |
|
|||||||||
Other creditors |
205 |
179 |
|
|||||||||
|
368 |
678 |
|
|||||||||
Included within other creditors is £114,878 (2019: £73,313) due to CQS in respect of management fees. |
||||||||||||
12 Bank Loan Facility
|
|
|||||||||||
|
2020 |
2019 |
|
|||||||||
|
£'000 |
£'000 |
|
|||||||||
Bank loan facility |
12,000 |
11,000 |
|
|||||||||
The Company has a short term unsecured loan facility with Scotiabank Europe Plc ("Scotiabank"). The facility is due to expire on 20 September 2020 after which it is anticipated the Company will take out a new facility on comparable terms.
As at the year end the unsecured loan facility had a limit of £20 million of which £12 million was drawn down at the year end at an interest rate of 1.18439%.
During the year the covenants of the loan facility have been met. The following are the covenants for the facility:
· the borrower shall not permit the adjusted asset coverage to be less than 3.5 to 1
· the borrower shall not permit the net asset value to be less than £30,000,000
· the loan facility is rolled over every three months and can be cancelled at any time
As at 31 March 2020 there was a minor breach where the net asset value of the Company fell below the minimum covenanted. This was resolved with the bank. In light of this, on 6 May the minimum net asset value covenant was adjusted from £45,000,000 to £30,000,000.
Reconciliation of Bank loan facility (excluding interest
|
At 30 June 2019 £'000 |
Cash flow £'000 |
Currency movements £'000 |
At 30 June 2020 £'000
|
Bank facility |
11,000 |
1,000 |
- |
12,000
|
13 3.5% Convertible Unsecured Loan Stock 2019
|
|
|
||||
|
Nominal number of CULS £'000 |
Liability Component £'000 |
Equity Component £'000 |
|
||
Balance at 30 June 2019 |
- |
- |
- |
|
||
Balance at 30 June 2020 |
- |
- |
- |
|
||
Balance at 30 June 2018 |
34,511 |
34,292 |
- |
|
||
Amortisation of discount on issue and issue expenses |
- |
219 |
- |
|
||
Transfer of CULS liability discount amortisation |
- |
- |
- |
|
||
Conversion during the year |
(1) |
(1) |
- |
|
||
3.5% CULS Repayment |
(34,510) |
(34,510) |
- |
|
||
Balance at 30 June 2019 |
- |
- |
- |
|
||
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.
14 Share Capital |
|
|
2020 Shares |
2020 £'000 |
|
Allotted, called up and fully-paid
|
|
|
Total issued ordinary shares of 25p each as at 1 July 2019 |
66,888,509
|
16,722
|
Total issued ordinary shares of 25p each as at 30 June 2020 |
66,888,509 |
16,722 |
Capital management policies and procedures
The Company's capital management objectives are:
- to ensure that the Company will be able to continue as a going concern; and
- to maximise the capital return to its equity shareholders through an appropriate balance of equity capital and debt. The Board normally seeks to limit gearing to 25% of net assets.
The Board monitors and reviews the broad structure of the Company's capital on an ongoing basis. This review includes the nature and planned level of gearing, which takes account of the Investment Manager's views on the market, and the extent to which revenue in excess of that which is required to be distributed should be retained. The Company has no externally imposed capital requirements.
The capital of the Company is managed in accordance with its investment policy detailed in the Strategic Review.
15 Net Asset Value per Ordinary Share
The net asset value per ordinary share is based on net assets of £66.0 million (2019: £77.7 million) and on 66,888,509 (2019: 66,888,509) ordinary shares, being the number of ordinary shares in issue at the year end.
16 Reconciliation of Net Return before Finance Costs and Taxation, to Net Cash Inflow from Operating Activities
|
2020 £'000 |
2019 £'000 |
Net return before finance costs and taxation |
(7,749) |
(12,466) |
Gains on investments |
9,524 |
13,967 |
Effective yield |
58 |
(13) |
Withholding tax suffered |
(146) |
(11) |
Decrease in accrued income |
132 |
260 |
(Increase)/Decrease in other debtors |
(5) |
7 |
Increase in other creditors |
26 |
27 |
Other realised gains |
- |
7 |
Exchange losses/(gains) |
9 |
(176) |
Net cash inflow from operating activities |
1,849 |
1,602 |
17 Financial Instruments
The Company's financial instruments comprise its investment portfolio, cash balances, bank facilities and 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 can make use of flexible borrowings for short term purposes to achieve improved performance in rising markets and to seek to enhance the returns to shareholders, when considered appropriate by the Investment Manager. The downside risk of borrowings may be reduced by raising the level of cash balances held.
Financial assets designated at fair value through profit or loss (see note 9) are held at fair value. For listed securities trading actively, fair value is considered to be equivalent to the most available recent bid price. Where listed securities are not trading actively, multiple broker quotes are referencing to estimate fair value. For unlisted securities, this is determined by the Board using valuation techniques based on unobservable inputs. The fair value of other receivables cash and cash equivalent and other payables is represented by their carrying value in the Balance Sheet shown on page 35. These are short term financial assets and liabilities whose carrying value approximate fair value.
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 a 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 a loan or that the Company may not be able to quickly liquidate its investments.
The Company held the following categories of financial instruments as at 30 June 2020:
|
|
2019 £'000 |
2020 £'000 |
||
Financial assets |
|
|
Investment portfolio |
76,916 |
18,547 |
Cash at bank and on deposit |
1,027 |
1,466 |
Accrued income |
266 |
398 |
Other debtors |
136 |
16 |
Financial liabilities |
|
|
Loan |
12,000 |
11,000 |
Amounts due to brokers |
- |
336 |
Other creditors |
205 |
179 |
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.
Investment and portfolio performance are discussed in more detail in the Investment Manager's Review and
further information on the investment portfolio is set out on pages 5 to 6.
If the investment portfolio valuation fell by 10 per cent at 30 June 2020, the impact on the profit or loss and the net asset value would have been negative £7.7 million (2019: negative £8.8 million). If the investment portfolio valuation rose by 10 per cent the impact would have been equal and opposite. The calculations are based on the portfolio valuation as at the respective balance sheet dates and are not representative of the year as a whole, and may not be reflective of future market conditions.
10% sensitivity has been selected as this level of change is considered to be reasonable based on observations of current market conditions.
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.
The Company's exposure to floating interest rates gives rise to cash flow interest rate risk and its exposure to fixed interest rates gives rise to fair value interest rate risk. Interest rate risk on fixed rate interest instruments is considered to be part of market price risk as disclosed above.
If the bank base rate had increased by 0.5 per cent, the impact on the profit or loss would have been a loss of £54,863 (2019: £48,000). If the bank base rate had decreased by 0.5 per cent, the impact on the profit or loss would have been equal and opposite. The calculations are based on borrowings as at the respective balance sheet dates and are not representative of the year as a whole.
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.
Fixed rate
The Company holds fixed interest investments and has fixed interest liabilities. The fixed interest liabilities are disclosed in note 12.
|
|
|
2020 Weighted |
|
|
2019 Weighted |
|
|
2020 |
average |
|
2019 |
average |
|
|
Weighted |
period for |
|
Weighted |
period for |
|
|
average |
which the |
|
average |
which the |
|
2020 |
interest |
rate is fixed |
2019 |
interest |
rate is fixed |
|
£'000 |
rate (%)* |
(years) |
£'000 |
rate(%)* |
(years) |
Assets: |
|
|
|
|
|
|
Fixed income and convertible securities |
9,886 |
8.5 |
5.9 |
15,583 |
8.0 |
5.9 |
Preference shares |
5,430 |
4.5 |
n/a |
6,257 |
9.6 |
n/a |
* The "weighted average interest rate" is based on the current yield of each asset, weighted by their market value.
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 Investment 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.
Foreign currency exposure at 30 June was as follows:
|
|
|
|
|
Sensitivity Impact |
||
30 June 2020 |
Investments £'000 |
Cash £'000 |
Net current assets £'000 |
Total £'000 |
+5% £'000 |
-5% £'000 |
|
Canadian Dollar |
31,002 |
4 |
- |
31,006 |
1,550 |
(1,550) |
|
US Dollar |
11,675 |
33 |
242 |
11,950 |
598 |
(598) |
|
Australian Dollar |
17,396 |
1 |
- |
17,397 |
870 |
(870) |
|
Norwegian Krone |
4,788 |
1 |
- |
4,789 |
239 |
(239) |
|
European Euro |
2,912 |
20 |
92 |
3,024 |
151 |
(151) |
|
Hong Kong Dollar |
- |
- |
- |
- |
- |
- |
|
Swiss Franc |
- |
- |
- |
- |
- |
- |
|
Brazilian Real |
- |
15 |
- |
15 |
1 |
(1) |
|
|
67,773 |
74 |
334 |
68,181 |
3,409 |
(3,409) |
|
30 June 2019 |
|
|
Net |
|
Sensitivity |
||
|
|
|
current |
|
Impact |
||
|
Investments |
Cash |
assets |
Total |
+5% |
-5% |
|
|
£'000 |
£'000 |
£'000 |
£'000 |
£'000 |
£'000 |
|
Canadian Dollar |
33,345 |
1 |
(333) |
33,013 |
1,650 |
(1,650) |
|
US Dollar |
17,487 |
13 |
231 |
17,731 |
886 |
(886) |
|
Australian Dollar |
16,607 |
52 |
- |
16,659 |
833 |
(833) |
|
Norwegian Krone |
5,537 |
- |
- |
5,537 |
277 |
(277) |
|
European Euro |
1,650 |
5 |
- |
1,655 |
83 |
(83) |
|
Hong Kong Dollar |
- |
- |
- |
- |
- |
- |
|
Swiss Franc |
- |
- |
- |
- |
- |
- |
|
Brazilian Real |
- |
14 |
- |
14 |
1 |
(1) |
|
|
74,626 |
85 |
(102) |
74,609 |
3,730 |
(3,730) |
|
If the value of the currencies had strengthened against the pound in the portfolio by 5 per cent, the impact on the profit or loss and the net asset value would have been negative £3.4 million (2019: positive £3.7 million). If the value of sterling had strengthened by the same amount the effect would have been equal and opposite. The calculations are based on the portfolio valuation, cash balances and net current assets/(liabilities) as at the respective balance sheet dates and are not representative of the year as a whole, and may not be reflective of future market conditions.
5% sensitivity has been selected as this level of change is considered to be reasonable based on observations of current market conditions. The Investment 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 Investment 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 represents the maximum credit risk exposure at the balance sheet date.
At the reporting date, the Company's financial assets exposed to credit risk amounted to the following:
|
|||
|
2020 |
2019 |
|
|
£'000 |
£'000 |
|
Fixed interest investments |
9,886 |
15,583 |
|
Cash and cash equivalents |
1,027 |
1,466 |
|
Balances due from brokers |
- |
- |
|
Interest, dividends and other receivables |
402 |
414 |
|
|
11,315 |
17,463 |
|
Credit risk on fixed interest investments is considered to be part of market price risk. As at 30 June 2020 and as at 7 September 2020 there were no debtors that were past due.
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 2020 and as at 30 June 2019. No individual investment exceeded 9.6 per cent of net assets as at 30 June 2020 (2019: 16.4 per cent).
As at 30 June 2019, for equity investments representing >1% of the total investments, the Company held 3 per cent or more of issued share capital of the following companies:
|
Value per CQS £ |
Percentage held |
REA Holdings 9% 31/12/49 |
2,882 |
6.84% |
Ascendant Resources |
895 |
15.1% |
Talon Metals |
1,899 |
3.99% |
Liquidity risk
The Company's liquidity risk is managed on an ongoing basis by the Investment Manager in accordance with policies and procedures in place as described in the Directors' Report. The Company's overall liquidity risks are monitored on a quarterly basis by the Board.
The Company maintains sufficient cash and readily realisable securities to pay accounts payable and accrued expenses.
The contractual maturities of the financial liabilities at each Balance Sheet date, based on the earliest date on which payment can be required, were as follows:
30 June 2020 |
Three months or less £'000 |
More than three months but less than one year £'000 |
More than one year £'000 |
Total £'000 |
Current liabilities |
205 |
_ |
163 |
368 |
Loan |
12,000 |
- |
- |
12,000 |
|
12,205 |
- |
163 |
12,368 |
30 June 2019 |
|
More than three |
|
|
|
Three months |
months but less |
More than |
|
|
or less |
than one year |
one year |
Total |
|
£'000 |
£'000 |
£'000 |
£'000 |
Current liabilities |
515 |
- |
163 |
678 |
Loan |
- |
- |
(11,000) |
(11,000) |
|
515 |
- |
(10,837) |
(10,322) |
18 Related Party Transactions
The following are considered related parties: the Board of Directors ('the Board') and CQS/New City Investment Managers ('the Investment Manager').
Details of the fee arrangement with the Investment Manager is included within the Directors' Report under the heading Management and Management Fees and is disclosed in note 3.
There are no other transactions with the Board other than aggregated remuneration for services as Directors as disclosed in the Directors' Remuneration Report on pages 28 and 29 of the Annual Report and Financial Statements, and as set out in the note 4 to the accounts. The beneficial interests of the Directors in the ordinary shares of the Company are disclosed on page 29 of the Annual Report and Financial Statements.
The balance due to Directors for fees at the year end was £14,349 (2019: £12,791).
19 Post Balance Sheet Events
With effect from 15 September 2020, BNP Paribas Securities Services ("BNP") will replace Maitland Administration Services (Scotland) Limited as Company Secretary and Administrator. BNP will also replace HSBC Bank plc as the Company's Depositary, Custodian and Banker from the same date.
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