The Fund s Performance Report, Part I

Transcription

1 2012 interim Report GPC Portfolio of major gold producers in the S&P/TSX 60 Index. Management Report of Fund Performance August 22, 2012 This interim management report of fund performance for Aston Hill Senior Gold Producers Income Corp. (the Fund ) contains financial highlights but does not contain the interim financial statements of the Fund. The interim financial statements follow this report. You may obtain a copy of the interim or annual financial statements, at no cost, by calling or by sending a request to Investor Relations, Aston Hill Asset Management Inc., 77 King Street West, Suite 2110, P.O. Box 92, Toronto-Dominion Centre, Toronto, Ontario, M5K 1G8, or by visiting our website at or SEDAR at Shareholders may also contact us by using one of these methods to request a copy of the Fund s proxy voting policies and procedures, proxy voting disclosure record, independent review committee s report, or quarterly portfolio disclosure. In accordance with investment fund industry practice, all figures presented in this management report of fund performance, unless otherwise noted, are based on the Fund s calculation of its Net Asset Value, which is in accordance with the terms of the Fund s constating documents. The Fund Aston Hill Senior Gold Producers Income Corp. is a mutual fund corporation managed by Aston Hill Asset Management Inc. The Fund has Class A shares outstanding which trade on the Toronto Stock Exchange ( TSX ) under the symbol GPC. The Option Advisor of the Fund is Highstreet Asset Management Inc., a quantitatively oriented investment manager with significant experience in the derivatives and options markets. Highstreet is also responsible for rebalancing the portfolio. The Fund is RRSP, DPSP, RRIF, RESP, RDSP and TFSA eligible. Investment Objectives and Strategies The Fund s investment objectives are to provide shareholders with monthly distributions, the opportunity for capital appreciation, and lower overall volatility of portfolio returns than would be experienced by owning a portfolio of gold producers directly. To this end, the Fund invests in a portfolio consisting of common shares of all the large-capitalization companies primarily engaged in the production of gold that are included in the S&P/TSX 60 Index. The current portfolio includes: Agnico-Eagle Mines Ltd. IAMGOLD Corporation Barrick Gold Corporation Kinross Gold Corporation Eldorado Gold Corporation Yamana Gold Inc. Goldcorp Inc.

2 Recent Developments Future Accounting Changes On December 12, 2011, the Canadian Accounting Standards Board ( AcSB ) announced an extension of the mandatory International Financial Reporting Standards ( IFRS ) changeover date for Canadian investment companies to January 1, The Fund has developed a plan to meet the timetable and has determined that there will be no impact to Net Assets per unit from the changeover to IFRS. Risks Risks associated with an investment in the shares of the Fund are discussed in the Fund s prospectus, which is available on the Manager s website at or on SEDAR at There were no changes to the Fund over the period ended June 30, 2012 that materially affected risks associated with an investment in the shares of the Fund. Results of Operations Inception of the Fund was February 18, 2011, so there is no fully comparative period for the period ended June 30, Distributions During the six months ended June 30, 2012, the Fund declared cash distributions of $0.38 per Class A share, compared to $0.27 for the shorter interim period in 2011 (which reflected an initial distribution of $ per Class A share in March for the period from the commencement of operations on February 18, 2011 to March 31, 2011, and then distributions at the regular monthly rate of $ per Class A share commencing in April 2011). Change in Net Assets from Operations During the six months ended June 30, 2012, the Fund received distribution income amounting to $0.06 per Class A share, compared to $0.03 per Class A share for the period from inception to June 30, Expenses per share for the first six months of 2012 were $0.06, compared to $0.05 for the shorter interim period in Net Asset Value The Net Asset Value per Class A share of the Fund was $6.26 as at June 30, 2012, down by 15.3% from $7.39 per Class A share as at December 31, 2011, reflecting declines in the security prices of holdings in the Fund s portfolio and payment of distributions during the period. The aggregate Net Asset Value of the Fund was $33.5 million at June 30, 2012, down from $39.8 million at December 31, 2011, for the reasons given above. Investment Portfolio The Fund was designed to capitalize on concerns regarding global economies, financial markets and ongoing accommodative monetary and fiscal policy that could result in continued high demand for gold as a safe haven and a hedge against currency weakness. As a result, the Fund is invested in a portfolio of the large-capitalization gold producers that are included in the S&P/TSX 60 Index. As of June 30, 2012, the Fund s investments included seven securities: Agnico-Eagle Mines Ltd., Barrick Gold Corporation, Eldorado Gold Corporation, Goldcorp Inc., IAMGOLD Corporation, Kinross Gold Corporation and Yamana Gold Inc. The common shares of these gold producers may exhibit significant price volatility; to benefit from this volatility, the Fund writes call options on up to 25% of the portfolio. During the first half of 2012, the Fund wrote call options on all companies in the portfolio and had net realized and unrealized losses of $4.2 million from options and investments. As at June 30, 2012, the Fund had call options written on all the companies in the portfolio. Portfolio Sectors Net Gains (Losses) by Sector (millions) Realized Unrealized Total Gold producers $ $ (4.8) $ (4.8) Options Total $ 0.4 $ (4.6) $ (4.2) The Fund s portfolio recorded a net loss of $4.2 million for the six months ended June 30, Liquidity and Capital Resources To provide liquidity for shareholders, Class A shares of the Fund are listed on the TSX under the symbol GPC. During the first half of 2012, Class A shares of the Fund traded at a premium of 1.5% to their Net Asset Value. 2

3 Related Party Transactions Related party transactions consist of services provided by the Manager pursuant to a management agreement. See the Management Fees section below. Management Fees Pursuant to a management agreement, the Manager provides management and administrative services to the Fund, for which it is paid a management fee equal to 0.65% per annum of the Net Asset Value of the Fund, plus applicable taxes. The Manager is responsible for paying the fees of the Option Advisor. The management fee is used by the Manager to cover its costs for administering the Fund, the cost of the Option Advisor and for profit. The Fund also pays to the Manager a service fee equal to 0.50% per annum of the Net Asset Value of the Fund. The service fee is in turn paid by the Manager to the investment dealers based on the proportionate number of shares held by clients of each dealer at the end of each calendar quarter. During the six months ended June 30, 2012, management and service fees amounted to $0.1 million and $0.09 million, respectively. Financial Highlights The following tables show selected key financial information about the Fund and are intended to help readers understand the Fund s financial performance for the fiscal periods indicated. This information is derived from the Fund s audited annual and unaudited interim financial statements. The information in the following tables is presented in accordance with National Instrument ( NI ) and, as a result, does not act as a continuity of opening and closing Net Assets per Class A share. The increase (decrease) in Net Assets from operations is based on average shares outstanding during the period, and all other numbers are based on actual shares outstanding at the relevant point in time. Net Assets per Class A Share (1) For the Six For the Months Ended Year Ended June 30, 2012 Dec. 31, 2011 (2) Net Assets, beginning of period (3) $ 7.37 $ Increase (decrease) from operations: (4) Total revenue Total expenses (0.06) (0.12) Realized gain for the period Unrealized loss for the period (0.86) (1.41) Total decrease in Net Assets from operations $ (0.78) $ (1.30) Distributions to Class A shareholders (3) Net investment income $ N/A (5) $ Return of capital N/A (5) 0.65 Total distributions to Class A shareholders $ 0.38 $ 0.65 Net Assets, end of period (3) $ 6.24 $ 7.37 (1) This information is derived from the Fund s audited annual and unaudited interim financial statements. The Net Assets per share presented in the financial statements differs from the Net Asset Value calculated for weekly Net Asset Value purposes. The difference is primarily a result of investments being valued at bid prices for financial statement purposes and at closing prices for weekly Net Asset Value purposes. (2) Period from February 18, 2011 (commencement of operations) to December 31, (3) Net Assets per Class A share and distributions per Class A share are based on the actual number of shares outstanding at the relevant time. (4) The decrease in Net Assets from operations per Class A share is based on the weighted average number of shares outstanding over the fiscal period. (5) Allocations for the period ended June 30, 2012, are not determinable until year-end. 3

4 Ratios and Supplemental Data (Based on Net Asset Value) As at June 30, 2012 Dec. 31, 2011 (1) Net Asset Value (in 000s) $ 33,487 $ 39,811 Number of Class A shares outstanding (in 000s) 5,352 5,386 Management expense ratio ( MER ) (2) Class A shares 2.32% 1.63% Trading expense ratio (3) 0.08% 0.19% Portfolio turnover rate (4) 7.18% 16.21% Net Asset Value per Class A share $ 6.26 $ 7.39 Closing market price Class A shares $ 6.28 $ 7.38 (1) Annualized for the period from February 18, 2011 (commencement of operations) to December 31, (2) MER is based on the requirements of NI and includes the total expenses (excluding commissions and other portfolio transaction costs) of the Fund for the stated period, including interest expense and issuance costs, and is expressed as an annualized percentage of the average Net Asset Value of the period. Please see the Expense Ratio section following this table for further discussion of the calculation. (3) The trading expense ratio represents total commissions expressed as an annualized percentage of the daily average Net Asset Value of the Fund during the period. (4) The Fund s portfolio turnover rate indicates how actively the Fund s Option Advisor manages its portfolio investments. A portfolio turnover rate of 100% is equivalent to the Fund buying and selling all of the securities in its portfolio once in the course of the year. The higher the Fund s portfolio turnover rate in a year, the greater the trading costs payable by the Fund in the year and the greater the chance of an investor receiving taxable capital gains in the year. There is not necessarily a relationship between a high turnover rate and the performance of the Fund. Portfolio turnover rate is calculated by dividing the lesser of the cost of purchases and the proceeds of sales of portfolio securities for the period, excluding cash and short-term investments maturing in less than one year, by the average market value of investments during the period. Expense Ratio The MER per Class A share of the Fund was 2.32% for the six months ended June 30, 2012, up from 1.63% for the period from inception to December 31, 2011, reflecting the increased burden of fixed costs on the lower average Net Asset Value per share in the first half of Past Performance The following chart shows the past performance of the Fund. Past performance does not necessarily indicate how the Fund will perform in the future. The information shown is based on Net Asset Value per Class A share and assumes that distributions made by the Fund on its Class A shares in the period shown were reinvested at Net Asset Value per share in additional shares of the Fund. The bar chart shows the Fund s return for each period since inception to June 30, The chart shows, in percentage terms, how an investment held on the first day of the period would have changed by the last day of the period. Year-by-Year Returns 0% -14.6% -10.6% -5% -10% -15% 2011 (1) 2012 (2) (1) Period from February 18, 2011 (commencement of operations) to December 31, (2) Period from January 1, 2012 to June 30,

5 Summary of Investment Portfolio As at June 30, 2012 Total Net Asset Value $ 33,487,388 % of % of Portfolio Composition Portfolio Net Asset Value Gold producers 98.9% 100.3% Cash and short-term investments 1.1% 1.1% Total investment portfolio 100.0% 101.4% Other net liabilities (1.4%) Total Net Asset Value 100.0% % of % of Holdings Portfolio Net Asset Value Agnico-Eagle Mines Limited 18.2% 18.5% Yamana Gold Inc. 15.1% 15.3% Eldorado Gold Corporation 15.0% 15.2% Kinross Gold Corporation 13.2% 13.4% Barrick Gold Corporation 12.8% 13.0% IAMGOLD Corporation 12.3% 12.5% Goldcorp Inc. 12.2% 12.4% Cash and short-term investments 1.1% 1.1% The investment portfolio may change due to ongoing portfolio transactions of the investment fund. Quarterly updates are available within 60 days of each quarter end. 5

6 Option Advisor Highstreet Asset Management Inc. Highstreet Asset Management Inc. is a quantitatively oriented investment manager with over $6.0 billion in assets under management as at June 30, Highstreet has significant experience in the derivatives and options markets. Highstreet uses its quantitative approach to selectively write covered call and put options from time to time to enhance potential returns. Option Advisor s Report Fund Overview Highstreet Asset Management Inc. acts as the investment manager for Aston Hill Senior Gold Producers Income Corp. The Fund maintains a diversified portfolio of the large-capitalization gold producers that are included in the S&P/TSX 60 Index. Highstreet manages an option overlay strategy that involves selling call options on up to, but not more than, 25% of the share value of the underlying holdings in the Fund. The percentage of write for each holding and the strike prices that are used are primarily a function of the Fund s income requirements. Highstreet may choose to close out option positions that are out-of-the-money prior to their expiry and will also endeavor to avoid the assignment of any in-the-money option positions, where possible, by repurchasing these options prior to expiration. The overall investment objectives of the Fund are to provide targeted monthly cash distributions, to provide the opportunity for capital appreciation, and to provide lower overall volatility of portfolio returns than would otherwise be experienced from owning the equity securities on a stand-alone basis. Market Performance For the first six months of 2012, the broad market as measured by the S&P/TSX Composite Index returned -1.6% on a total return basis. Over that same period, the S&P/TSX Gold Index declined 15.9%. The return of the underlying stocks in the portfolio during the same period was -10.9%, underperforming the broad market, although outperforming the gold sub-index in aggregate. The performance for each of the seven gold producers in the Fund was mixed during the period, with Yamana Gold and Agnico-Eagle Mines delivering positive returns, and the other five constituents delivering negative returns. Total Fund performance over the period including the option overlay was -9.0%. Relative to the return of -10.9% for the underlying stock portfolio, the value added from option writing activity equates to approximately 1.9%. Option Activity During the first six months of 2012, monthly call options were sold on the Fund s holdings expiring in each of the six months. The total net realized premium income received in the first six months of the year was $412,459. Volatility Update The overall level of 30-day realized volatility in the gold sector increased through the first six months of 2012 and is elevated compared to the average realized volatility since inception. The average level of volatility for the portfolio was 42.3% on June 29, 2012, significantly higher than the 31.8% that existed at Fund inception. Forward-Looking Statements Some of the statements contained herein including, without limitation, financial and business prospects and financial outlook may be forward-looking statements which reflect management s expectations regarding future plans and intentions, growth, results of operations, performance and business prospects and opportunities. Words such as may, will, should, could, anticipate, believe, expect, intend, plan, potential, continue and similar expressions have been used to identify these forward-looking statements. These statements reflect management s current beliefs and are based on information currently available to management. Forward-looking statements involve significant risks and uncertainties. A number of factors could cause actual results to differ materially from the results discussed in the forward-looking statements including, but not limited to, changes in general economic and market conditions and other risk factors. Although the forward-looking statements contained herein are based on what management believes to be reasonable assumptions, we cannot assure that actual results will be consistent with these forward-looking statements. Investors should not place undue reliance on forward-looking statements. These forward-looking statements are made as of the date hereof, and we assume no obligation to update or revise them to reflect new events or circumstances. 6

7 Notice The accompanying unaudited financial statements of Aston Hill Senior Gold Producers Income Corp. for the six months ended June 30, 2012 have been prepared by management and have not been reviewed by the external auditors of the Fund. Signed Signed Michael J. Killeen President Aston Hill Asset Management Inc. Larry W. Titley Chief Financial Officer Aston Hill Asset Management Inc. August 22,

8 Statements of Financial Position (Unaudited) As at June 30, 2012 Dec. 31, 2011 Assets Investments, at fair value $ 33,523,891 $ 40,121,744 Cash and short-term investments 382, ,043 Income receivable 62,629 66,476 Other assets 1,535 4,125 Total assets 33,970,184 40,599,388 Liabilities Option contracts written, at fair value (note 9) 75, ,425 Accounts payable and accrued liabilities 142, ,718 Distributions payable to shareholders (note 6) 334, ,636 Retractions payable to shareholders 43,089 Total liabilities 552, ,868 Shareholders equity Class J shares (note 4) Class A shares (note 4) 46,541,930 46,741,615 Contributed surplus 194,885 94,154 Deficit (13,319,208) (7,115,259) Net Assets representing shareholders equity 33,417,617 39,720,520 Shares outstanding (note 4) 5,351,984 5,386,173 Net Assets per Class A share (note 3) $ 6.24 $ 7.37 The accompanying notes are an integral part of these financial statements. 8

9 Statements of Operations and Deficit (Unaudited) For the six months ended June (1) Income Dividends $ 299,749 $ 172,721 Securities lending income (note 10) Interest income 7, , ,057 Expenses Management fees (note 7) 129, ,931 Service fees (note 7) 87,929 85,993 Audit fees 11,809 12,224 Independent review committee fees 1,367 9,440 Custodial fees 3,269 3,409 Legal fees 3,435 1,405 Shareholder reporting costs 16,070 11,453 Other administrative expenses 57,835 32,446 Net investment loss 311, ,301 (11,070) (103,244) Net realized gain on foreign currency transactions 436 Net realized gain on sale of investments and options (note 8) 443, ,855 Transaction costs (note 2) (10,544) (71,090) Net change in unrealized loss on investments and options (4,610,137) (5,093,793) Decrease in Net Assets from operations (4,188,750) (4,481,836) Deficit, beginning of period (7,115,259) Distributions on Class A shares (note 6) (2,015,199) (1,510,025) Deficit, end of period $ (13,319,208) $ (5,991,861) Decrease in Net Assets from operations per Class A share (2) $ (0.78) $ (0.83) (1) Period from February 18, 2011 (commencement of operations) to June 30, 2011 (2) Based on the weighted average number of Class A shares outstanding for the period (note 4). The accompanying notes are an integral part of these financial statements. 9

10 Statement of Changes in Shareholders Equity (Unaudited) For the six months ended June (1) Net Assets, beginning of period $ 39,720,520 $ Operations: Decrease in Net Assets from operations (4,188,750) (4,481,836) Shareholder transactions: Distributions to shareholders (note 6) (2,015,199) (1,510,025) Proceeds from issuance of Class A shares (note 4) 51,362,500 Proceeds from issuance of shares upon exercise of warrants, net 131,135 Proceeds from distribution reinvestment plan (note 6) 29,594 1,343 Redemption of shares (1,199) Retraction of Class A shares (258,484) Net (decrease) increase in shareholders equity (6,302,903) 45,371,982 Shareholders equity, end of period $ 33,417,617 $ 45,371,982 Distributions per Class A share $ 0.38 $ 0.27 (1) Period from February 18, 2011 (commencement of operations) to June 30, 2011 The accompanying notes are an integral part of these financial statements. 10

11 Statement of Investments (Unaudited) % of As at June 30, 2012 Cost Fair Value Portfolio No. of Shares Gold Producers 150,000 Agnico-Eagle Mines Limited $ 8,913,622 $ 6,178, ,380 Barrick Gold Corporation 5,692,889 4,340, ,400 Eldorado Gold Corporation 6,766,430 5,088, ,520 Goldcorp Inc. 4,852,556 4,153, ,000 IAMGOLD Corporation 7,396,042 4,179, ,397 Kinross Gold Corporation 8,299,341 4,471, ,080 Yamana Gold Inc. 4,001,865 5,112,934 Embedded Broker Commission (59,222) 45,922,745 33,523, % Total $ 45,863,523 $ 33,523, % The accompanying notes are an integral part of these financial statements. 11

12 Notes to the Financial Statements (Unaudited) June 30, 2012 and OPERATIONS Aston Hill Senior Gold Producers Income Corp. (the Fund ) (formerly Senior Gold Producers Income Corp.) is a mutual fund corporation established under the laws of the Province of Ontario on December 9, Aston Hill Asset Management Inc. (the Manager ) is responsible for managing the affairs of the Fund. Highstreet Asset Management Inc. is the Option Advisor and manages the Fund s portfolio. RBC Investor Services Trust is the custodian of the Fund s assets and prepares the daily valuations of the Fund. The Fund is listed on the Toronto Stock Exchange and commenced operations on February 18, On July 27, 2011, by way of an assignment to an affiliate, BFML Management Limited (at the time, an affiliate of Brompton Funds Management Limited) was sold to Aston Hill Financial Inc. BFML Management Limited was then renamed Aston Hill Management Limited and became the manager. On December 30, 2011, Aston Hill Management Limited, along with six other subsidiaries of Aston Hill Financial Inc., amalgamated to form Aston Hill Asset Management Inc., the current Manager of the Fund. 2. SIGNIFICANT ACCOUNTING POLICIES These financial statements have been prepared in accordance with Canadian generally accepted accounting principles ( GAAP ), and they include estimates and assumptions made by management that affect the reported amounts of assets and liabilities at the date of these financial statements and the reported amounts of income and expenses during the periods for which the financial statements report. Actual results could differ from these estimates. These financial statements should be read in conjunction with the annual financial statements for the year ended December 31, a) Valuation of Investments Investments are deemed held for trading in accordance with Canadian Institute of Chartered Accountants ( CICA ) Handbook Section The Fund s investments are valued at estimated fair value. Investments held long that are publicly traded are valued at their bid price on the valuation date. Investments with no available bid price are valued at their closing price. Short-term investments and bonds held long (short) are valued at the average bid (ask) quotations from recognized investment dealers. The cost of investments is based on their average cost. Written options are valued at ask price and purchased options are valued at bid price as reported on recognized exchanges. b) Cash and Short-Term Investments Cash and short-term investments consist of cash on hand and short-term debt investments with maturities of less than three months on acquisition. Cash and short-term investments are deemed held for trading and therefore are carried at fair value. c) Investment Transactions and Income Recognition Investment transactions are recorded on the trade date and any realized and unrealized gains or losses are recognized using the average cost of the investments. Interest income is recognized on an accrual basis. Dividend income is recognized on the ex-dividend date. Net realized and unrealized gains or losses on investments include net realized and unrealized gains or losses from foreign currency changes. Option premiums paid or received by the Fund are, so long as the options are outstanding, reflected as an asset or liability, respectively, in the Statement of Financial Position and are valued at an amount equal to the current market value of an option that would have the effect of closing the position, which, for options written, is at asking price. Gains or losses realized upon expiration, repurchase or exercise of the option are included in net realized gains or losses on options. Option contracts written are classified as held for trading in accordance with CICA Handbook Section d) Transaction Costs Transaction costs, such as brokerage commissions, incurred in the purchase and sale of securities are expensed and are recognized in the Statement of Operations and Deficit. e) Income Taxes The Fund is a mutual fund corporation as defined in the Income Tax Act (Canada) (the Tax Act ) and is subject to tax in respect of its net realized capital gains. This tax is refundable in certain circumstances. Also, the Fund is generally subject to tax of 33 1 / 3 % under Part IV of the Tax Act on taxable dividends received from Canadian corporations in the year. This tax is fully refundable upon payment by the Fund of sufficient dividends. The Fund qualifies as a financial intermediary corporation (as defined in the Tax Act) and, thus, is not subject to tax under Part IV.1 of the Tax Act on dividends received by the Fund. Given the investment and dividend policy of the Fund and taking into account the deduction of expenses and taxable dividends on shares of taxable Canadian corporations, the Fund does not expect to be subject to any appreciable amount of non-refundable Canadian income tax. Accordingly, no income tax provision has been recorded. 12

13 Temporary differences between the carrying values of assets and liabilities for accounting and income tax purposes give rise to future income tax assets and liabilities. The most significant temporary difference is that between the reported fair value of the investment portfolio and its adjusted cost base ( AcB ) for income tax purposes. To the extent that the fair value of the portfolio exceeds its AcB, a future tax liability arises. Since capital gains taxes payable by the Fund are refundable under the relevant provisions of the Tax Act, the future tax liability is fully offset by these refundable taxes. Conversely, when the AcB exceeds the fair value of the portfolio, a future tax asset is generated. In such cases, a full valuation allowance is taken to offset this asset given the uncertainty that such future tax assets will ultimately be realized. f) Securities Lending The Fund may enter into securities lending transactions. These transactions involve the temporary exchange of securities as collateral with a commitment to deliver the same securities on a future date. Income is earned from these transactions in the form of fees paid by the counterparty and, in certain circumstances, interest paid on securities held as collateral. Income earned from these transactions is recognized on an accrual basis and included in the Statement of Operations and Deficit. g) Other Assets and Liabilities For the purposes of categorization in accordance with Section 3855, income receivable and other assets are designated as loans and receivables and recorded at amortized cost. Similarly, retractions payable to shareholders, distributions payable to shareholders, and accounts payable and accrued liabilities are designated as financial liabilities and reported at amortized cost. For purposes of categorization in accordance with Section 3862, amortized cost approximates fair value for these assets and liabilities due to their short-term nature. h) International Financial Reporting Standards On February 13, 2008, the Canadian Accounting Standards Board ( AcSB ) confirmed that the use of International Financial Reporting Standards ( IFRS ) will be required for all publicly accountable, profit oriented enterprises for interim and annual financial statements relating to fiscal years beginning on or after January 1, On December 12, 2011, the AcSB confirmed deferral of the IFRS changeover date for investment funds. Based on the AcSB decision, IFRS will become effective for interim and annual financial statements relating to fiscal years beginning on or after January 1, Based on the Manager s current evaluation of the differences between IFRS and Canadian GAAP, the Manager currently does not expect any impact to Net Asset Value or Net Asset Value per share, at this time, as a result of the transition to IFRS, and expects that the main impact will be on the financial statements, where additional disclosures or changes in presentation will be required. Further updates on the progress in the implementation of the IFRS transition plan and any changes to reporting will be provided during the implementation period leading up to the transition date. 3. RECONCILIATION OF NET ASSETS TO NET ASSET VALUE In accordance with National Instrument ( NI ) , a reconciliation is required between the Net Assets for financial reporting purposes (the Net Assets ) and the Net Asset Value for reporting other than in the financial statements (the Net Asset Value ). The reconciliation is as follows: As at June 30, 2012 December 31, 2011 Total Per Share Total Per Share Net Asset Value $ 33,487,388 $ 6.26 $ 39,810,925 $ 7.39 Section 3855 adjustment (1) (69,771) (0.02) (90,405) (0.02) Net Assets $ 33,417,617 $ 6.24 $ 39,720,520 $ 7.37 (1) The Section 3855 adjustment relates to the valuation of investments at bid price for Net Assets and at closing price for Net Asset Value. 13

14 Notes to the Financial Statements (Unaudited) (continued) June 30, 2012 and SHARE CAPITAL Class J Shares Authorized The Fund is authorized to issue an unlimited number of Class J shares. Class J shares are not entitled to receive dividends but are entitled to one vote per share. The Class J shares are redeemable and retractable at a price of $1.00 per share. The Class J shares rank subsequent to the Class A shares with respect to distributions on the dissolution, liquidation or winding-up of the Fund. As at June 30, 2012, 10 Class J shares (December 31, Class J shares) were outstanding. Class A Shares Authorized The Fund is authorized to issue an unlimited number of Class A shares. The Fund intends to pay monthly distributions. The amount of distributions may fluctuate from month to month and there can be no assurance that the Fund will make any distribution in any particular month. Each Class A share is entitled to one vote on certain shareholder matters. Shares may be redeemed at the option of shareholders by tendering shares of the Fund by the last business day of July for redemptions on the second last business day of August ( Redemption Valuation Date ) commencing in Redemption of tendered shares will be settled based on the Net Asset Value per share on the Redemption Valuation Date, less associated costs of the redemption, including brokerage costs. Shares tendered for redemption will be redeemed effective the Redemption Valuation Date of each year and will be settled on or before the tenth business day in September. Shares may also be redeemed at the option of shareholders at least 10 business days prior to the second last business day of each month except for the month of August. Shareholders whose shares are redeemed will receive a redemption price per share equal to the lesser of (i) 96% of the closing market price of the shares for the 10 trading days immediately preceding the redemption date and (ii) 100% of the closing market price of the shares, less any costs associated with the redemption, including brokerage costs. Issued June 30, 2012 December 31, 2011 (1) Number Number of Shares Amount of Shares Amount Shares, beginning of period 5,386,173 $ 46,741,625 $ Initial issuance, net 131,135 5,000,000 46,625,000 Over-allotment of shares 500,000 4,737,500 Repurchase of shares (38,400) (358,557) (110,300) (1,030,042) Redemption of shares (200) (1,867) (5,000) (46,693) Reinvestment plan 4,411 29,594 1,473 13,222 Return of capital (3,557,362) Shares, end of period 5,351,984 $ 46,541,930 5,386,173 $ 46,741,625 (1) For the period from February 18, 2011 (commencement of operations) to December 31, On February 18, 2011, the Fund issued 5,000,000 shares at a price of $10.00 per share for proceeds, net of agents fees and issuance costs, of $46,625,000. On March 8, 2011, the Fund completed its over-allotment for 500,000 shares at a price of $10.00 per share for proceeds, net of agents fees and issuance costs, of $4,737,500. During the period ended June 30, 2012, 38,400 ( ,300) shares were repurchased for cancellation at an average price of $6.73 (2011 $8.52) per share. Pursuant to the monthly redemption option, 200 (2011 5,000) shares were redeemed at an average price per share of $6.00 (2011 $8.62) during the period. The weighted average number of Class A shares outstanding for the period ended June 30, 2012 was 5,376,281 (2011 5,432,332). For the year ended December 31, 2011, there were $131,135 in set up fees payable relating to the issuance of warrants that, at June 30, 2012, were no longer considered payable, resulting in an adjustment to issuance costs. 14

15 5. CAPITAL MANAGEMENT The Fund considers its capital to consist of shareholders equity. The Fund s objectives in managing its capital are to provide a high level of monthly distributions, the opportunity for capital appreciation, and lower overall volatility of portfolio returns than would be experienced by owning a portfolio of common shares of gold producers directly. The Fund manages its capital taking into consideration the risk characteristics of its holdings. In order to manage its capital structure, the Fund may repurchase shares for cancellation, adjust the amount of distributions paid to shareholders or return capital to shareholders. 6. DISTRIBUTIONS TO SHAREHOLDERS Distributions, as declared by the Manager, are made on a monthly basis to shareholders of record on the last business day of each month. Distributions are payable no later than the tenth business day of the following month. For the period ended June 30, 2012, the Fund declared distributions of $0.38 (2011 $0.27) per Class A share, which amounted to $2,015,199 (2011 $1,510,025). Under the Fund s distribution reinvestment plan, shareholders may elect to reinvest monthly distributions in additional shares of the Fund, which may be issued from treasury or purchased on the open market. For the period ended June 30, 2012, 4,411 ( ) shares were issued by the Fund pursuant to the reinvestment plan. 7. MANAGEMENT AND SERVICE FEES Pursuant to a management agreement, the Manager provides management and administrative services to the Fund, for which it is paid a management fee equal to 0.65% per annum of the Net Asset Value of the Fund, plus applicable taxes, calculated and payable monthly. The Net Asset Value of the Fund is determined by taking the total assets of the Fund and deducting the Fund s liabilities. The Manager is responsible for paying fees to Highstreet Asset Management Inc., the Option Advisor for the Fund. These fees are calculated and payable monthly. The Fund also pays to the Manager a service fee equal to 0.50% per annum of the Net Asset Value of the Class A shares, plus applicable taxes. The service fee is in turn paid by the Manager to the registered dealers based on the number of shares held by clients of such registered dealers at the end of each calendar quarter. The Fund is responsible for all other operating expenses incurred in connection with its operation and administration, such as custodian valuation, Trustee, reporting, audit and legal fees. 8. INVESTMENT TRANSACTIONS Investment transactions for the periods ended June 30 were as follows: Proceeds from sale of investments and options $ 6,424,556 $ 4,951,317 Less cost of investments sold: Investments at cost, beginning of period 47,524,361 Investments purchased during the period 4,125,724 54,738,755 Investments at cost, end of period (45,668,530) (50,573,293) Cost of investments sold and options written during the period 5,981,555 4,165,462 Net realized gain on sale of investments $ 443,001 $ 785,855 For the periods ended June 30, 2012 and 2011, there were no soft dollar amounts paid. 15

16 Notes to the Financial Statements (Unaudited) (continued) June 30, 2012 and OPTION CONTRACTS The Fund may write covered call and cash covered put options to generate additional income. As at June 30, 2012, the Fund had the following option contracts outstanding. Option Contracts Written Underlying No. of Option Expiration Strike Price Current Price Premium Fair Interest Contracts Type Date per contract per Contract Received Value Agnico-Eagle Mines Ltd. 230 Call July 2012 $ $ 0.47 $ (19,690) $ (7,050) Agnico-Eagle Mines Ltd. 290 Call July (18,290) (2,900) Barrick Gold 50 Call July (2,250) (2,450) Barrick Gold 170 Call July (15,810) (3,060) Eldorado Gold 595 Call July (29,864) (18,445) Eldorado Gold 215 Call July (7,740) (2,795) Goldcorp Inc. 160 Call July (10,385) (2,415) Goldcorp Inc. 105 Call July (9,660) (1,470) IAMGOLD Corp. 405 Call July (17,087) (6,480) IAMGOLD Corp. 285 Call July (8,550) (2,280) Kinross Gold Corp. 1,075 Call July (27,482) (15,050) Yamana Gold Inc. 160 Call July (4,800) (5,760) Yamana Gold Inc. 195 Call July (13,650) (2,730) Yamana Gold Inc. 295 Call July (9,735) (2,655) $ (194,993) $ (75,540) 10. Securities Lending The Fund has entered into a securities lending program with its custodian, RBC Investor Services Trust. The aggregate market value of all securities loaned by the Fund cannot exceed 50% of the assets of the Fund. The Fund will receive collateral of at least 102% of the value of the securities on loan. Collateral will generally be comprised of cash and obligations of, or guaranteed by, the Government of Canada or a province thereof, or the United States Government or its agencies, or a permitted supranational agency as defined in NI The market values of the Fund s securities on loan and the related collateral at June 30, 2012 were $1.5 million and $1.5 million (December 31, 2011 $1.7 million and $1.7 million), respectively. 11. FINANCIAL RISK MANAGEMENT The Fund s investment activities expose it to a variety of financial risks. The Statement of Investment Portfolio presents the securities held by the Fund as June 30, 2012, and groups the securities by market segment. Significant risks that are relevant to the Fund are discussed below. The Manager attempts to minimize the potential adverse effects of these risks on the Fund s performance by employing a professional, experienced option advisor. To assist in managing risks, the Manager also maintains a governance structure that oversees the Fund s investment activities and monitors compliance with the Fund s stated investment strategy and restrictions, internal guidelines, and securities regulations. The investment portfolio is primarily comprised of Canadian dollar denominated equity securities. 16

17 a) Other Price Risk Other price risk is the risk that the value of financial instruments will fluctuate as a result of changes in market prices (other than those arising from interest rate risk or currency risk), whether caused by factors specific to an individual investment, its issuer, or all factors affecting all instruments traded in a market or market segment. All securities present a risk of loss of capital. The Option Advisor attempts to moderate this risk through the careful management of securities within the parameters of the investment strategy. Except for options written, the maximum risk of loss resulting from financial instruments is equivalent to their fair value. There were no cash covered put options outstanding as at June 30, No additional risk is introduced by covered call options written. The Fund is exposed to other price risk from its investment in equity securities. As at June 30, 2012, had the prices on the respective stock exchanges for these securities increased by 10% (December 31, %), with all other variables held constant, Net Assets would have increased by approximately $3.6 million or 8.3% (December 31, 2011 approximately $4.0 million or 10.1%) of Net Assets attributable to Class A shares. Similarly, had the prices on the respective stock exchange for these securities decreased by 10% (December 31, %), with all other variables held constant, Net Assets would have decreased by approximately $4.2 million or 9.3% (December 31, 2011 approximately $4.0 million or 10.1%) of Net Assets attributable to class A shares. In practice, the actual trading results may differ, and the difference could be material. b) 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 Fund. The Fund did not have a significant credit risk exposure as at June 30, The carrying amount of income receivable represents the maximum credit risk exposure as it will be settled in the short term. All transactions in securities are settled/paid for upon delivery. The risk of default is considered minimal as delivery of securities sold is only made once the Fund has received payment. The trade will fail if either party fails to meet its obligation. The Fund has entered a securities lending program with its custodian; see note 10. Credit risk associated with these transactions is considered minimal as all counterparties have a sufficient, approved credit rating and the value of cash or securities held as collateral must be at least 102% of the fair value of the securities loaned. c) Liquidity Risk Liquidity risk is the risk that the Fund may not be able to settle or meet its obligations on time or at a reasonable price. The Fund is exposed to liquidity risk through its monthly and annual redemptions of Class A shares. For the annual redemptions of Class A shares, the Fund receives notice at least 10 business days prior to the redemption date, which gives the Option Advisor time to sell securities, although there may not be sufficient time to sell the securities at a reasonable price. The Option Advisor manages liquidity risk by investing in equities that are readily redeemable. The table below lists the Fund s financial liabilities by relevant maturity groupings based on the remaining period between the financial statement date and the contractual maturity date. Less Than As at June 30, Months Total Option contracts written, at fair value (note 9) $ 75,540 $ 75,540 Accounts payable and accrued liabilities 142, ,528 Distributions payable to shareholders 334, ,499 Short-term and fixed income investments $ 552,567 $ 552,567 Less Than As at December 31, Months Total Option contracts written, at fair value $ 207,425 $ 207,425 Accounts payable and accrued liabilities 291, ,718 Retractions payable to shareholders 43,089 43,089 Distributions payable to shareholders 336, ,636 Total $ 878,868 $ 878,868 17

18 Notes to the Financial Statements (Unaudited) (continued) June 30, 2012 and FAIR VALUE DISCLOSURES The Fund s assets and liabilities recorded at fair value have been categorized in accordance with CICA Handbook Section 3862, Financial Instruments Disclosure. Section 3862 requires the Fund to classify its investments and derivative assets/liabilities into three categories based on the nature of the inputs used to determine their fair value. The categories and the nature of the inputs used in each category are as follows: Level 1: Inputs that reflect unadjusted quoted prices in active markets for identical assets or liabilities. Level 2: Inputs, other than quoted prices, that are observable for the asset or liability, either directly or indirectly, including inputs in markets that are not considered to be active. Level 3: Inputs that are unobservable. There is little if any market activity. Inputs into the determination of fair value require significant management judgement or estimation. A financial instrument s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Cash and short-term investment are classified as level 2. Assets at fair value as at June 30, 2012 Level 1 Level 2 Level 3 Total Equities $ 33,523,891 $ $ $ 33,523,891 Total $ 33,523,891 $ $ $ 33,523,891 Liabilities at fair value as at June 30, 2012 Level 1 Level 2 Level 3 Total Option contracts written $ (75,540) $ $ $ (75,540) Total $ (75,540) $ $ $ (75,540) Assets at fair value as at December 31, 2011 Level 1 Level 2 Level 3 Total Equities $ 40,121,744 $ $ $ 40,121,744 Total $ 40,121,744 $ $ $ 40,121,744 Liabilities at fair value as at December 31, 2011 Level 1 Level 2 Level 3 Total Option contracts written $ (207,425) $ $ $ (207,425) Total $ (207,425) $ $ $ (207,425) There were no transfers of financial assets between the levels during the periods ended June 30, 2012 and December 31,

19 Corporate Information Independent Review Committee John Crow Chairman Robert Falconer C. Scott Browning Directors and Officers of the Manager Eric Tremblay Director and Chief Executive Officer Michael J. Killeen Director and President Larry Titley Director and Chief Financial Officer Ben Cheng (1) Chief Investment Officer Sasha Rnjak Chief Compliance Officer Theresa Devost Secretary Joanne Hruska Vice President and Portfolio Manager Andrew Hamlin Vice President and Portfolio Manager Jeffrey Burchell Vice President and Portfolio Manager Sandy Liang Vice President and Portfolio Manager Vivian Lo Vice President and Portfolio Manager Transfer Agent Equity Financial Trust Company Manager Aston Hill Asset Management Inc. Custodian RBC Investor Services Trust Auditors PricewaterhouseCoopers LLP Website Sales and Marketing Support Sean Stansfield Senior Vice President, Sales and Marketing Jessica Bradley Vice President, Sales, Western Canada Michael Hirshfeld Vice President, Sales Paul Ng Vice President, Sales Lindsay Artkin Vice President, Marketing Jennifer Latta Inside Sales Associate Larissa Kokosky Inside Sales Associate (1) Mr. Cheng acts as a portfolio manager exclusively to investment funds managed by IA Clarington Investments Inc., and to two other investment funds, not including the fund in this document. See for details. Mailing Address 77 King Street West Suite 2110, PO Box 92 Toronto-Dominion Centre Toronto, ON M5K 1G8 General Inquiries: Website: