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Back City Natural Resources for a mining bounceback

Get paid to wait for a resources bounceback with City Natural Resources
July 2, 2015

City Natural Resources High Yield (CYN) is looking battered. But long-term investors could do well to see its pain as a buying opportunity and profit from a healthy dividend while they wait for a rebound in the sector.

IC TIP: Buy at 95.75p
Tip style
Speculative
Risk rating
High
Timescale
Long Term
Bull points
  • Wide discount provides opportunity
  • Potential for rerating
  • High and increasing dividend
Bear points
  • Weak short-term performance
  • Poor sector performance

Commodities are a very high-risk and volatile investment area, but a fund that invests in resources companies can help to lower that risk through a diversified portfolio of stocks. However, this investment trust, an IC Top 100 Fund, has suffered in recent months due to plummeting price of oil which, in the six months to December 2014, resulted in a 19.3 per cent fall in net asset value to 125.9p. The trust has been facing other headwinds too including slowing growth in China hurting commodity prices and ongoing concerns over a Greek exit from the eurozone.

Since its peak in 2011, and amid hard times for the resources sector as a whole, the trust's share price has fallen by almost 75 per cent and market capitalisation now stands at only £65m. But weak performance and the prospect of relegation from the FTSE All-Share also could have contributed to the widening of the trust's discount.

Compared to a 12-month average of -15 per cent the discount now stands at -23 per cent, the widest level in over five years.

Innes Urquhart, research analyst at Winterflood Securities, believes this presents investors with an opportunity. He says: "The fund has a decent longer-term performance record. However, its focus on small- and mid-cap resource companies meant that it has struggled in terms of its absolute and relative performance over the last three years.

"Despite the recent underperformance during a difficult period for the resource sector in general, we believe that if or when there is a turnaround in fortunes for the sector that this fund is well placed to outperform, particularly given the gearing provided by its convertible unsecured loan stock, which net of cash stood at 20 per cent of net assets at the end of April. In the absence of a material recovery in sentiment towards the sector, the fund's historic dividend yield at 5.8 per cent means that investors are being paid to wait."

City Natural Resources has grown its dividend by by 11.7 per cent a year over five years according to the Association of Investment Companies (AIC).

Mr Urquhart says: "The fund's revenue earnings were negatively impacted by currency movements in 2014 and dividend cover was consequently only 97 per cent. However, the board expects the dividend to be covered over the year to 30 June 2015 and it is notable that it has now been increased for eight consecutive years."

That stands against recent losses in the share price which have underperformed the trust's benchmark - 2/3rds Euromoney Global Mining Index (sterling adjusted) and 1/3rd Credit Suisse High Yield Index (sterling adjusted). Over one and three months to June 2015 City Natural Resources returned more than the index, losing just 0.4 per cent in a month and gaining 2.3 per cent over three months, but over five years the fund's share price total return has fallen by 36.9 per cent compared with 22.6 per cent for the benchmark.

However, over the long term the trust has outperformed the sector average and has a longer track record than its peers. In 10 years it returned 56 per cent compared with a 15 per cent average for the AIC's commodities and natural resources sector.

The largest of the 159 holdings within the fund include Australian nickel producer Sirius Resources currently in the midst of a takeover bid by Independence Group. The company made headlines in 2012 for its discovery of the high quality Nova nickel and copper deposit in the Fraser Range in WA's Goldfields. Other companies developing high grade assets include Kennedy Diamonds and Continental Gold, which have both seen an uptick in share price in recent months.

The trust's manager, Will Smith, says: "Real commodity demand is growing while supply is becoming tighter. The sector is at a relative and absolute low valuation so for investors this is a respectable entry point."

City Natural Resources is doubtless a risky play. However, it looks like a good option for those expecting a re-rating in the mining sector and wanting access to resources stocks at a wide discount while taking home a solid, and growing, income. Buy.

CITY NATURAL RESOURCES HIGH YIELD TRUST (CYN)

PRICE95.75pGEARING24%
AIC SECTOR Specialist - Commodities & Natural ResourcesNAV127.52
FUND TYPEInvestment trustPRICE DISCOUNT TO NAV-23.15%
MARKET CAP£65.54mYIELD5.80%
No OF HOLDINGS159ONGOING CHARGE1.70%
SET UP DATE27 June 2003MORE DETAILSwww.ncim.co.uk

Source: Morningstar

 

Performance (% total cumulative share price return) for trust and sector

1-mth3-mth6-mth1-yr3-yr5-yr10-yr
City Natural Resources High Yield -7.25-8.36-5.2-24.1-50.5-41.956.3
AIC Commodities and natural resources sector -3.6-4.6-12.4-30.1-54.8-53.615.79

Source: FE Trustnet, as at 30 June 2015

 

Top 10 holdings (as at 30 May 2015)

Holdings% of portfolio 
REA Finance 9.5% 6.6
Plant Impact5.1
Vermillion Energy 4.0
Sirius Resources 4.0
Greencoat UK Wind3.2
Sandfire Resources NL 2.4
Central Asia Metals2.3
Antares Energy 10% 1.8
Ocean Rig 7.25% 1.7
Saracen Mineral Holdings 1.7

Source: New City Investment Managers

 

Sector split (as at 30 May 2015)

Sector split% of portfolio 
Oil & Gas23.8
Agriculture 6.9
Copper6.1
Alternative energy3.5
Diamonds2.2
Gold14.4
Treasury stock6.8
Other investments7.5
Uranium2.3
Rare earth1.7
Finance9.3
Palm oil 6.6
Nickel5.3
Silver2.2
Iron Ore1.4

Source: New City Investment Managers