CQS Natural Resources Growth and Income has published results for the year ended 30 June 2024. It delivered an NAV total return in the year under review of 7.2%. This is similar to the return of 7.3% produced by the MSCI World Metals and Mining Index (sterling adjusted) but lagged the 17.4% return from the MSCI World Energy Index (sterling adjusted). Fortunately, the share price return for the period was 17.1% as the discount narrowed from about 17% to 9.8%. During the year under review the company bought back a total of 728,557 shares (1.1% of the shares in issue) into treasury at a cost of approximately £1.4m and at an average discount of 13.5%. Since the year end, a further 1,823,322 shares were bought back into treasury at a cost of £3.3m.
The total dividend has been reduced to 6.6p from 8.6p as revenue earnings per share fell 36%. However, these numbers are distorted by special dividends.
Extract from the manager’s report
The energy sector was lifted by a rise in crude price premium resulting from Middle East tensions, particularly after the Hamas-Israel conflict began in October 2023 and in which Iran has a significant hand. While this helped drive performance of E&P investments, even more notable was the performance of energy shippers which have seen a marked improvement in day rates as they undertake lengthier routes to avoid hot spots such as the Strait of Hormuz that in the first 10 months of 2023 accounted for around 30% of seaborne crude oil traffic.
Against a backdrop of still sluggish GDP growth and rising international trade friction, exposure to less discretionary energy remains preferred over industrial metals which we feel will stay subdued. The energy sector appears to have absorbed the prospect of rising OPEC+ output, as production quota restrictions unwind, while the potential for more meaningful replenishment of the US Strategic Petroleum Reserve may offer support for incremental demand in future.
In a broader context, alternative energy, including nuclear power which has seen a wholesale shift in government and public opinion, also offers significant recovery potential. Its low carbon credentials have seen it brought back into the fold and embraced as a core part of global energy transition ambitions, as illustrated by the widespread international backing at COP28 at which a tripling of nuclear power generating capacity was targeted. After a decade of underinvestment in new developments, this sector continues to offer huge leverage to a sustainable increase in uranium prices. Representing only a small proportion of electricity generating costs, utility demand is largely insensitive to price moves. Despite the recent jump in prices, the outlook remains very positive for related mining equities, with Tier 1 development asset NexGen Energy remaining a top portfolio holding.
Exposure to precious metal mining stocks has risen as a result of recent performance and also incremental investment. The attractively valued equities remain a preferred sector for investment allocations as a beneficiary of ongoing geopolitical friction, together with unproductive and irresponsible fiscal spending. In an environment of inward looking, nationalistic government, policy geopolitical risks are, if anything, rising. Against a backdrop of limited aggregate demand, disinflation trends have also been evident to varying degrees and a synchronised cycle of monetary easing appears to be approaching. This factor may encourage investment by physically-backed funds which have typically been an important indicator of metal prices as they transition from seller to buyer.
This contrasts with industrial metals which will have to contend with moderate growth prospects, especially as China continues to struggle with a weak property sector. In addition, industrial metal mining equities, to an extent, already discount an improved metal pricing environment arising from fiscal spending.
The Company’s gearing has also been somewhat pared and, as at 21 October 2024, stands at 9.8%, providing flexibility to take advantage of any potential opportunities that arise. For example, despite a cautious view on near-term copper prices, copper development projects have increasingly moved into focus, appearing hugely discounted in comparison to the high ratings currently ascribed to copper producers.
Reflecting the above, the largest individual performance contributors were LPG shipper, BW LPG, followed by gold producer, Emerald Resources, and uranium mine developer, NextGen, in joint second place. The most significant detractors to performance were developer, Leo Lithium, followed by lead producer, Galena Mining, both of which have been suspended from trading: the former following a Mali coup which has subsequently seen control of the asset pass to the Chinese joint venture partner, Gangfeng, and the latter which is attempting to arrange a financial restructuring.
CYN : CQS City Natural Resources benefits from substantial discount narrowing