Can I Have a Do Over?

Gamco Natural Resources, Gold & Income Trust Fund (GNT)

When you look at Gamco Natural Resources, Gold & Income Trust Fund (GNT) you have to wonder how a fund can raise its distribution by so much (33.33%) when it is so far in the hole (-188 estimated monthly distributions remaining)?

The truth is large fund families can maintain a fund into a bottomless pit as long as the investor demand is there to support it. Of course, there does reach a point of absurdity when ultimately a fund gets liquidated or absorbed into another fund within the family.

But is (GNT) one of these funds, and won't raising the distribution dig a bigger hole? Which would be ironic since (GNT) has a great deal of focus on the mining industry.

Investment Objective

The Fund’s investment objective is to provide a high level of current income. The Fund’s secondary investment objective is to seek capital appreciation consistent with the Fund’s strategy and primary objective. Under normal market conditions, the Fund will attempt to achieve its objectives by investing 80% of its assets in equity securities of companies principally engaged in natural resource and gold industries, and by writing covered call options on the underlying equity securities.

Off on the Wrong Foot

Gamco Natural Resources, Gold & Income Trust Fund (GNT) picked possibly the worst time to start. Its inception date was on January 27th, 2011, which was just prior to a prolonged bear market in the mining industry. Below is a chart of Wheaton Precious Metals (WPM), one of (GNT)'s top holdings.

Below is a chart of VanEck Gold Miners (ETF) which seeks to replicate as closely as possible, before fees and expenses, the price and yield performance of the NYSE Arca Gold Miners Index (GDMNTR), which is intended to track the overall performance of companies involved in the gold mining industry.

It had endured a nearly eight-and-a-half-year bear market before advancing but still has a long way to go to get back to its peak around 2012.

There's Still a Pulse

Things have been picking up in the mining industry over the last five years. (GDX) is up 29.87%, and (WPM) is up 111.19%. But is that enough to justify such a large distribution increase?

Let's see if there is anything fund specific that might give us insight into managements rationale for such a large increase.

Looking at the 'Balance Sheet' history of (GNT), it appears that they started to increase their debt-to-equity levels in December 2019. In June of 2020, their debt-to-equity level reached 40.1%.

Naturally, some of this increase can be attributed to declining asset prices from the crash of 2020, but (GNT) actually increased the dollar amount of their debt from $18mil+ in June of 2019 to $47mil+ in June of 2020. This is significant, and it is why I started to overlay the 'Debt/Equity' levels over the 'Assets/Liabilities.' Such moves indicate a strategy shift in the fund that will have an impact on the future of the fund beyond normal market performance. At the time, it is unknown if the strategic shift is good or bad, but in hindsight, we'll know if it worked or not.

So, what did they use that borrowed money on? On the 'CEF Mastery' 'Alerts Page,' it appears that (GNT) used some of that money to start buying back shares of their own fund.

The effect on their 'Owner's Equity' history is pretty self-evident. Share buybacks reduce equity in the fund which was a contributor (along with return of capital) to the steady decline in (GNT)'s 'Paid-In Capital' (green line) over the past five years. The net effect of this reduced the number of shareholders which also reduced the amount they had to pay out in distributions (blue line). The aforementioned increase in market conditions have materially contributed to reducing the fund's earnings deficit (purple line) from around -($134mil) in June 2019 to -($103mil) at the end of December 2023. FYI - I mentioned in yesterday's special report that Gabelli should be giving us June 2024's numbers any day now, possibly as early as today.

Things seem to be going in the right direction, however, one other concern that I as a potential investor might have regarding the 'Balance Sheet' is since both assets and liabilities are in a steady decline (assets because of buybacks), is the decline in liabilities sharper than the decline in assets. From the moving average trend lines in this chart, it kind of looks like assets are declining faster, which would concern me.

But after converting the decline rates into percentages, it's pretty obvious that liabilities are declining at a faster rate.

Show Me the Money

Finally, we want to know if the fund has enough inflows to cover the funds outflows. If you've been following me for a while, you're aware that funds have several ways to introduce new shares in order to raise funds, however, we've established that (GNT) is a net purchaser of its shares, so that leaves net investment income (NII), realized and unrealized gains as the primary source of inflows. Looking at the immediate period (before the next report due any day now) of December 2023, we see that (NII) (sliver of blue on left) just about covered the distributions from earnings portion of the total distribution (dark portion of translucent bar in the middle) and thanks to Realized Gains (maroon bar), it covered the remainder of distributions from earnings, the entirety of return of capital (ROC) (lighter translucent top portion of the distribution bar in the middle) with some to carry over into the next period.

Next, I would want to know if this is just a one-off period or has this been consistent. Doing the same thing over and over again and expecting something different is insanity but doing the same thing over and over again and getting the same thing means it's working.

Of course, here you would have to eyeball it and make a judgement for yourself if the long-term trend of distribution coverage is there or not, but other than June of 2022, it looks like the distribution is satisfactorily covered.

Does all of this convert to a sustainable 33.33% increase in the distribution? We'll get a pretty good idea when the fund makes its first report after the new distribution has been recorded.

For those of you eyeballing the above chart and choosing not to consider unrealized gains as a contributor to distribution coverage, consider this:

Even in the best of times, only about 10% of funds (8.90% currently) cover their distributions from net investment income (NII) only. Coupled with realized gains, currently only 14.72% of funds use these two categories as a primary source to fund their distributions. Add in the securitization of unrealized gains to help cover their distributions, that number jumps to 72.09%. Securitization meaning supporting other means of cash backed by unrealized gains.

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Feel free to send me questions or comments. Have a wonderful weekend.

Lee

TheDividendTimes@outlook.com

704-293-8330

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