CQS Natural Resources (CYN) has released its annual results for the 12 month period ending 30 June 2023.
- Over the period CYN reported a NAV total return of 3.5% and share price total return of -0.2%, which compares to a 6.3% return of its composite benchmark, a blend of the EMIX Global Mining Index and the Credit Suisse High Yield Index. The most notable contributor to CYN’s returns was Sigma Lithium, a lithium mine in Brazil, which gained 148% in the year.
- Total dividends substantially rose over the period, thanks to a special dividend of 3.0p per share being paid in October. Quarterly dividends for the year totalled 5.6p, with the total dividend of 8.6p representing a 53.6% increase on the prior year’s. Note that the quarterly dividend was in line with 2022’s level. This increase in total pay out reflected the huge increase in CYN’s revenues, which were up 94.4% for the year, a result of a small number of their holdings substantially increasing their payout. Because of the cyclical nature of the resources industry, the board elected to use a special dividend to distribute these revenues, rather than increase the regular dividend payments.
- CYN’s discount was notably volatile over the year, ranging from 13.6% to 20.8%, though its current discount (17.3%) is in line with the level it started its financial year on.
CYN’s investment managers commented:
“Macro uncertainty remains high. Against the backdrop of already soft demand growth the synchronised tightening of central bank interest rates, to try to quell inflation, has introduced more pressure on economies. Notwithstanding lag effects, the broader demand outlook and particularly investor sentiment remains sensitive to the success of interest rate policies in taming inflation.
“Inflation is now showing signs of easing, most notably in those regions which experienced higher prior year rates. Though implied rates indicate a peak in the next year, central banks remain highly cautious on easing too soon. Unless there is a correction in general economic activity, interest rates may plateau at an elevated level. We believe market consensus of a sharp retracement may not come to fruition.
“The ongoing property crisis in China, with large developers such as Evergrande and more recently Country Garden in effective bankruptcy, represents another pocket of risk which is dampening a major source of commodity demand. It is likely China will continue to seek stimulus to support its general economy, but we still believe the effects will be felt selectively in demand for certain commodities. This is especially so for iron ore in which the fund has no investments and also contributed to the material reduction in our copper exposure, which stood at 6.4% as at the end of June 2023. Over the medium to longer term we do expect a structural shortage of copper for deployment in the energy transition given the lack of investment into large new supply projects. However, we believe some measure of this view is already implied in the premium valuations of many copper producers which contrast starkly with the discounted valuations ascribed to out of favour energy peers.
“In response to elevated risks arising from tightening OECD interest rate policy and risks around China’s financing of expected economic stimulus, we increased the fund’s precious metals exposure, which stood at 19.5% at 30 June 2023, as a direct hedge against this general uncertainty. Additionally, we believe precious metal producers have fallen further out of favour and thus trade at a discount versus historic multiples and also versus other mining peers. Though cost inflation has been a major headwind for precious metal producers, which have less ability to pass costs through to consumers, cost pressures are now easing, notably for energy and steel, while importantly labour tightness is now also showing signs of abating. It is never easy to reduce wages, so this aspect remains stickier than other inputs. We believe this can support both earnings growth and multiple expansion, while providing a useful macroeconomic hedge to the overall portfolio.
“The outlook for the sector is positive, as commodity supply remains constrained by disciplined management teams, ESG constraints and tough global government policies and whilst the energy transition provides incremental sources of demand, is perhaps more impactful in its restriction of supply of the old economy fossil fuels. The producers themselves are generally attractively valued, especially in energy, where many funds remain cautious on ownership due to ESG restrictions, whilst constrained supply supports pricing, underpinning dividends and buybacks.
“Some near-term concerns are evident, as a higher rate environment and Chinese economic slowdown weigh on demand expectations. We believe energy is less discretionary, so less affected by these aspects, whilst any investment in new supply is muted. Longer term base metals such as copper look attractive given the long lead time in bringing on new mines, as well as being required in enabling the energy transition.”