UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT
INVESTMENT COMPANIES
Investment Company Act file number 811-04282
Name of Fund: Merrill Lynch Natural Resources Trust
Fund Address: P.O. Box 9011
Princeton, NJ 08543-9011
Name and address of agent for service: Robert C. Doll, Jr., Chief Executive
Officer, Merrill Lynch Natural Resources Trust, 800 Scudders Mill Road,
Plainsboro, NJ 08536. Mailing address: P.O. Box 9011, Princeton, NJ
08543-9011
Registrant's telephone number, including area code: (609) 282-2800
Date of fiscal year end: 07/31/06
Date of reporting period: 08/01/05 - 07/31/06
Item 1 - Report to Stockholders
Annual Report
July 31, 2006
Merrill Lynch
Natural Resources Trust
Merrill Lynch Natural Resources Trust
Announcement to Shareholders
On February 15, 2006, BlackRock, Inc. ("BlackRock") and Merrill Lynch & Co.,
Inc. ("Merrill Lynch") entered into an agreement to contribute Merrill Lynch's
investment management business, Merrill Lynch Investment Managers, L.P. and
certain affiliates (including Fund Asset Management, L.P. and Merrill Lynch
Investment Managers International Limited), to BlackRock to create a new
independent company ("New BlackRock") that will be one of the world's largest
asset management firms with over $1 trillion in assets under management (based
on combined assets under management as of June 30, 2006) (the "Transaction").
The Transaction is expected to close around the end of the third quarter of
2006, at which time the new company will operate under the BlackRock name. The
Trust's Board of Trustees and shareholders have approved a new investment
advisory agreement with BlackRock Advisors, Inc. or its successor on
substantially the same terms and for the same advisory fee as the current
investment advisory agreement with the Investment Adviser. BlackRock Advisors,
Inc. or its successor to become the investment adviser of the Trust upon the
closing of the Transaction.
Portfolio Information as of July 31, 2006
Percent of
Ten Largest Equity Holdings Net Assets
- --------------------------------------------------------------------------------
EOG Resources, Inc. .................................................. 3.6%
EnCana Corp. ......................................................... 3.2
Murphy Oil Corp. ..................................................... 2.9
Devon Energy Corp. ................................................... 2.8
ConocoPhillips ....................................................... 2.4
Talisman Energy, Inc. ................................................ 2.3
Baker Hughes, Inc. ................................................... 2.1
Transocean, Inc. ..................................................... 2.1
Apache Corp. ......................................................... 2.0
Exxon Mobil Corp. .................................................... 2.0
- --------------------------------------------------------------------------------
Percent of
Geographic Allocation Total Investments
- --------------------------------------------------------------------------------
United States ........................................................ 59.9%
Canada ............................................................... 23.8
France ............................................................... 2.2
Italy ................................................................ 1.1
Australia ............................................................ 0.9
China ................................................................ 0.8
United Kingdom ....................................................... 0.6
Hong Kong ............................................................ 0.6
Brazil ............................................................... 0.5
South Africa ......................................................... 0.4
Other* ............................................................... 9.2
- --------------------------------------------------------------------------------
* Includes portfolio holdings in short-term investments.
Important Tax Information
Merrill Lynch Natural Resources Trust distributed long-term capital gains of
$.329940 per share to shareholders of record on December 5, 2005.
Availability of Quarterly Schedule of Investments
The Trust files its complete schedule of portfolio holdings with the Securities
and Exchange Commission ("SEC") for the first and third quarters of each fiscal
year on Form N-Q. The Trust's Forms N-Q are available on the SEC's Web site at
http://www.sec.gov. The Trust's Forms N-Q may also be reviewed and copied at the
SEC's Public Reference Room in Washington, DC. Information on the operation of
the Public Reference Room may be obtained by calling 1-800-SEC-0330.
2 MERRILL LYNCH NATURAL RESOURCES TRUST JULY 31, 2006
A Letter From the President
Dear Shareholder
By now, you have probably heard of the important changes unfolding at Merrill
Lynch Investment Managers ("MLIM"). We have been communicating with
shareholders, via letters like this and in a detailed proxy mailing, about
MLIM's impending union with another highly regarded investment manager --
BlackRock, Inc. ("BlackRock"). This transaction marks the next chapter in MLIM's
growth story and, we believe, will be a benefit to our investors.
MLIM, a division of Merrill Lynch with over $583 billion in assets under
management, is a leading investment manager offering more than 100 investment
strategies in vehicles ranging from mutual funds to institutional portfolios.
BlackRock, with $464.1 billion in assets under management, is one of the largest
publicly traded investment management firms in the United States managing assets
on behalf of institutional and individual investors worldwide through a variety
of equity, fixed income, liquidity and alternative investment products. At the
completion of the transaction, which is expected around the end of the third
quarter of 2006, the resultant firm will be a top-10 investment manager
worldwide with over $1 trillion in assets under management.*
The combined company, to be known as BlackRock, will provide a wide selection of
high-quality investment solutions across a range of asset classes and investment
styles. The organization will have over 4,500 employees in 18 countries and a
major presence in key markets worldwide. MLIM and BlackRock possess
complementary capabilities that together create a well-rounded organization
uniting some of the finest money managers in the industry. The firms share
similar values and beliefs -- each strives for excellence in all areas, and both
make investment performance their single most important mission. As such, our
combination only reinforces our commitment to shareholders.
Most of MLIM's investment products -- including mutual funds, separately managed
accounts, annuities and variable insurance funds -- eventually will carry the
"BlackRock" name. This will be reflected in newspaper and online information
sources beginning in October. Your account statements will reflect the BlackRock
name beginning with the October month-end reporting period. Unless otherwise
communicated via a proxy statement, your funds will maintain the same investment
objectives that they do today. Importantly, the MLIM/BlackRock union will not
affect your brokerage account or your relationship with your financial advisor.
If you are a client of Merrill Lynch, you will remain a client of Merrill Lynch.
As always, we thank you for entrusting us with your investment assets. We look
forward to continuing to serve your investment needs with even greater strength
and scale as the new BlackRock.
Sincerely,
/s/ Robert C. Doll, Jr.
Robert C. Doll, Jr.
President and Chief Investment Officer
Merrill Lynch Investment Managers
* $1.047 trillion in assets under management as of June 30, 2006.
Data, including assets under management, are as of June 30, 2006.
MERRILL LYNCH NATURAL RESOURCES TRUST JULY 31, 2006 3
A Discussion With Your Fund's Portfolio Manager
Trust returns considerably outpaced those of the broad-market S&P 500
Index for the fiscal year given significant outperformance in the first half,
which more than offset modest declines in the second half.
How did the Trust perform during the fiscal year in light of the existing market
conditions?
For the 12-month period ended July 31, 2006, Merrill Lynch Natural Resources
Trust's Class A, Class B, Class C and Class I Shares posted total returns of
+24.77%, +23.82%, +23.84% and +25.10%, respectively. (Fund results shown do not
reflect sales charges and would be lower if sales charges were included.
Complete performance information can be found on pages 6 and 7 of this report to
shareholders.) For the same period, the Trust's benchmark, the Standard & Poor's
500 (S&P 500) Index, returned +5.38%, and its comparable Lipper category of
Natural Resources Funds had an average return of +27.74%. (Funds in this Lipper
category invest their equity assets primarily in natural resources stocks.)
The Trust's outperformance of the S&P 500 Index is attributed to strong
performance in the first half of the fiscal year. After January 31, 2006, the
record warm winter temperatures had negative implications for our investments in
exploration and production companies leveraged to North American natural gas
production. In fact, many of the equities that were leading contributors to
Trust results in the first half and in prior fiscal years, such as EOG
Resources, Inc., accounted for negative returns in the latter half of the year.
The record warm winter left natural gas storage at historically high levels and
raised the risk that storage would reach full capacity prior to the start of the
2006 - 2007 winter heating season. Should this occur, natural gas producers
would be forced to shut in production (that is, set a production cap lower than
the available output), and natural gas prices could temporarily fall to below
$6.00 per thousand cubic feet, a price not seen since 2004 and far below the
record high prices following Hurricanes Katrina and Rita.
In addition to the challenges faced by our oil and gas producers, the Trust's
positions in oil drillers also hindered portfolio results in the second half of
the fiscal year, with companies such as Transocean, Inc., ENSCO International,
Inc., Pride International, Inc. and Todco all posting share price declines
despite generally strong drilling day rates and the signing of long-term
contracts. We continue to believe the drillers will appreciate given the strong
earnings visibility from sign contracts as we enter 2007.
The Trust's underperformance of its comparable Lipper category of Natural
Resources Funds for the fiscal year is attributed primarily to the weak relative
performance of production companies leveraged to natural gas following last
winter's record warm temperatures.
What changes were made to the portfolio during the period?
As we saw the potential natural gas storage surplus materialize, we began to
shift the portfolio's holdings into oil service and offshore drilling companies.
Simultaneously, we de-emphasized oil and gas production companies, especially
those leveraged to North American natural gas. We added to oil-leveraged names,
including Occidental Petroleum Corp. and Mission Oil & Gas, Inc., both of which
made positive contributions to returns in the latter six months of the fiscal
year. We also added to our holdings of the major oil service companies,
including Halliburton Co., Baker Hughes, Inc., Schlumberger Ltd. and Weatherford
International Ltd. These companies, with less exposure to U.S. drilling markets,
are expected to enjoy strong earnings from rising international oil spending. We
also invested in the equities of deep-water drilling companies, which have seen
rapidly rising prices for their drilling rigs. The valuations for these stocks
seem very reasonable given their ability to sign long-term contracts for their
fleets.
We continue to believe that earnings momentum will shift significantly from the
oil and gas producers into oil service stocks. Barring another year of record
hurricane activity and high oil and gas prices, earnings comparisons for the oil
and gas producers may be difficult for the remainder of 2006. In addition,
higher oil service and drilling costs most likely will have a negative effect on
the oil producers' profit margins. However, given the strong long-term
fundamentals for natural gas, continued geopolitical risks and the potential for
increased merger-and-acquisition activity, we intend to maintain a significant
exposure to oil and natural gas producers.
4 MERRILL LYNCH NATURAL RESOURCES TRUST JULY 31, 2006
How would you characterize the Trust's position at the close of the period?
The Trust remains leveraged to the capacity-constrained energy markets,
particularly to North American natural gas companies. While last winter's record
warm temperatures led to lower natural gas prices, we have already seen many of
our holdings begin to recover since the recent summer heat wave throughout the
United States resulted in the unprecedented withdrawal of gas from storage to
power electrical generators in an effort to meet air conditioning needs. Given
the increasingly rapid depletion rates of new drilling fields, we believe that
natural gas prices should recover during the upcoming heating season.
Overall, the Trust continues to be highly focused on energy investments, still
led by oil and gas producers, but with an increasing emphasis on oil service
companies and those producers more weighted to oil production. In addition, the
introduction of regulations for cleaner gasoline during the past year has seen
the refining industry operating at close to full capacity utilization. To
capitalize on this trend, we increased our holdings of independent refiners and
major integrated companies leveraged to the refining sector.
We continue to believe that oil prices should remain high as demand continues to
increase amid the limits of available world production capacity. Given the
lingering damage from last summer's hurricanes, periodic disruptions in Iraq and
Nigerian production, and the recent pipeline corrosion issues in the Prudhoe Bay
oil field in Alaska, we believe oil prices will be biased higher given that any
one disruption could result in shortages.
At period-end, approximately 85% of the portfolio's net assets was invested in
energy-related companies, with the remaining equity holdings in metals and
mining, utilities, paper and forest products, and chemicals.
Robert M. Shearer
Vice President and Portfolio Manager
August 28, 2006
MERRILL LYNCH NATURAL RESOURCES TRUST JULY 31, 2006 5
Performance Data
About Fund Performance
Investors are able to purchase shares of the Trust through multiple pricing
alternatives:
o Class A Shares incur a maximum initial sales charge (front-end load) of
5.25% and an account maintenance fee of 0.25% per year (but no
distribution fee).
o Class B Shares are subject to a maximum contingent deferred sales charge
of 4% declining to 0% after six years. In addition, Class B Shares are
subject to a distribution fee of 0.75% per year and an account maintenance
fee of 0.25% per year. These shares automatically convert to Class A
Shares after approximately eight years. (There is no initial sales charge
for automatic share conversions.) All returns for periods greater than
eight years reflect this conversion.
o Class C Shares are subject to a distribution fee of 0.75% per year and an
account maintenance fee of 0.25% per year. In addition, Class C Shares are
subject to a 1% contingent deferred sales charge if redeemed within one
year of purchase.
o Effective December 28, 2005, Class I Shares are no longer subject to any
front-end sales charge. Class I Shares bear no ongoing distribution or
account maintenance fees and are available only to eligible investors. Had
the sales charge been included, the Fund's Class I Shares' performance
would have been lower.
None of the past results shown should be considered a representation of future
performance. Current performance may be lower or higher than the performance
data quoted. Refer to www.mlim.ml.com to obtain performance data current to the
most recent month-end. Performance results do not reflect the deduction of taxes
that a shareholder would pay on fund distributions or the redemption of fund
shares. Figures shown in each of the following tables assume reinvestment of all
dividends and capital gain distributions, if any, at net asset value on the
ex-dividend date. Investment return and principal value of shares will fluctuate
so that shares, when redeemed, may be worth more or less than their original
cost. Dividends paid to each class of shares will vary because of the different
levels of account maintenance, distribution and transfer agency fees applicable
to each class, which are deducted from the income available to be paid to
shareholders.
Recent Performance Results
6-Month 12-Month 10-Year
As of July 31, 2006 Total Return Total Return Total Return
==========================================================================================
ML Natural Resources Trust Class A Shares* -3.87% +24.77% +275.04%
- ------------------------------------------------------------------------------------------
ML Natural Resources Trust Class B Shares* -4.24 +23.82 +252.05
- ------------------------------------------------------------------------------------------
ML Natural Resources Trust Class C Shares* -4.23 +23.84 +246.89
- ------------------------------------------------------------------------------------------
ML Natural Resources Trust Class I Shares* -3.76 +25.10 +284.41
- ------------------------------------------------------------------------------------------
S&P 500(R) Index** +0.67 + 5.38 +134.08
- ------------------------------------------------------------------------------------------
* Investment results shown do not reflect sales charges; results would be
lower if a sales charge was included. Cumulative total investment returns
are based on changes in net asset values for the periods shown, and assume
reinvestment of all dividends and capital gains distributions at net asset
value on the ex-dividend date.
** This unmanaged Index covers the 500 industrial, utility, transportation
and financial companies of the U.S. markets (mostly NYSE issues),
representing about 75% of NYSE market capitalization and 30% of NYSE
issues.
S&P 500 is a registered trademark of the McGraw-Hill Companies.
6 MERRILL LYNCH NATURAL RESOURCES TRUST JULY 31, 2006
Performance Data (concluded)
Total Return Based on a $10,000 Investment
A line graph depicting the growth of an investment in the Trust's Class A, Class
B, Class C & Class I Shares compared to growth of an investment in the S&P 500
Index. Values are from July 1996 to July 2006:
ML Natural Resources ML Natural Resources ML Natural Resources ML Natural Resources
Trust +-- Trust +-- Trust +-- Trust +-- S&P 500
Class A Shares* Class B Shares* Class C Shares* Class I Shares* Index++
7/96 $ 9,475 $10,000 $10,000 $10,000 $10,000
7/97 $11,148 $11,672 $11,677 $11,795 $15,214
7/98 $ 8,122 $ 8,432 $ 8,433 $ 8,611 $18,148
7/99 $ 9,954 $10,258 $10,261 $10,583 $21,814
7/00 $10,925 $11,161 $11,170 $11,640 $23,772
7/01 $12,435 $12,604 $12,613 $13,281 $20,366
7/02 $11,709 $11,780 $11,791 $12,543 $15,554
7/03 $13,534 $13,508 $13,515 $14,533 $17,209
7/04 $18,565 $18,393 $18,405 $19,984 $19,476
7/05 $28,481 $28,216 $28,012 $30,728 $22,212
7/06 $35,535 $35,205 $34,689 $38,441 $23,408
* Assuming maximum sales charge, transaction costs and other operating
expenses, including advisory fees.
+ The Trust invests primarily in equity securities of domestic and foreign
companies with substantial natural resource assets.
++ This unmanaged Index covers the 500 industrial, utility, transportation
and financial companies of the U.S. markets (mostly NYSE issues),
representing about 75% of NYSE market capitalization and 30% of NYSE
issues.
Past performance is not indicative of future results.
Average Annual Total Return
Return Without Return With
Sales Charge Sales Charge**
================================================================================
Class A Shares*
================================================================================
One Year Ended 7/31/06 +24.77% +18.22%
- --------------------------------------------------------------------------------
Five Years Ended 7/31/06 +23.37 +22.05
- --------------------------------------------------------------------------------
Ten Years Ended 7/31/06 +14.13 +13.52
- --------------------------------------------------------------------------------
Return Return
Without CDSC With CDSC+++
================================================================================
Class B Shares+
================================================================================
One Year Ended 7/31/06 +23.82% +19.82%
- --------------------------------------------------------------------------------
Five Years Ended 7/31/06 +22.43 +22.25
- --------------------------------------------------------------------------------
Ten Years Ended 7/31/06 +13.41 +13.41
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Return Return
Without CDSC With CDSC+++
================================================================================
Class C Shares++
================================================================================
One Year Ended 7/31/06 +23.84% +22.84%
- --------------------------------------------------------------------------------
Five Years Ended 7/31/06 +22.43 +22.43
- --------------------------------------------------------------------------------
Ten Years Ended 7/31/06 +13.25 +13.25
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Class I Shares Return
================================================================================
One Year Ended 7/31/06 +25.10%
- --------------------------------------------------------------------------------
Five Years Ended 7/31/06 +23.68
- --------------------------------------------------------------------------------
Ten Years Ended 7/31/06 +14.41
- --------------------------------------------------------------------------------
* Maximum sales charge is 5.25%.
** Assuming maximum sales charge.
+ Maximum contingent deferred sales charge is 4% and is reduced to 0% after
six years.
++ Maximum contingent deferred sales charge is 1% and is reduced to 0% after
one year.
+++ Assuming payment of applicable contingent deferred sales charge.
MERRILL LYNCH NATURAL RESOURCES TRUST JULY 31, 2006 7
Disclosure of Expenses
Shareholders of this Trust may incur the following charges: (a) expenses related
to transactions, including sales charges, redemption fees and exchange fees; and
(b) operating expenses including advisory fees, distribution fees including
12b-1 fees, and other Trust expenses. The following example (which is based on a
hypothetical investment of $1,000 invested on February 1, 2006 and held through
July 31, 2006) is intended to assist shareholders both in calculating expenses
based on an investment in the Trust and in comparing these expenses with similar
costs of investing in other mutual funds.
The first table below provides information about actual account values and
actual expenses. In order to estimate the expenses a shareholder paid during the
period covered by this report, shareholders can divide their account value by
$1,000 and then multiply the result by the number in the first line under the
heading entitled "Expenses Paid During the Period."
The second table below provides information about hypothetical account values
and hypothetical expenses based on the Trust's actual expense ratio and an
assumed rate of return of 5% per year before expenses. In order to assist
shareholders in comparing the ongoing expenses of investing in this Trust and
other funds, compare the 5% hypothetical example with the 5% hypothetical
examples that appear in other funds' shareholder reports.
The expenses shown in the table are intended to highlight shareholders' ongoing
costs only and do not reflect any transactional expenses, such as sales charges,
redemption fees or exchange fees. Therefore, the second table is useful in
comparing ongoing expenses only, and will not help shareholders determine the
relative total expenses of owning different funds. If these transactional
expenses were included, shareholder expenses would have been higher.
Expenses Paid
Beginning Ending During the Period*
Account Value Account Value February 1, 2006
February 1, 2006 July 31, 2006 to July 31, 2006
===================================================================================================================
Actual
===================================================================================================================
Class A $1,000 $ 961.30 $5.25
- -------------------------------------------------------------------------------------------------------------------
Class B $1,000 $ 957.60 $8.98
- -------------------------------------------------------------------------------------------------------------------
Class C $1,000 $ 957.70 $8.98
- -------------------------------------------------------------------------------------------------------------------
Class I $1,000 $ 962.40 $4.04
===================================================================================================================
Hypothetical (5% annual return before expenses)**
===================================================================================================================
Class A $1,000 $1,019.44 $5.41
- -------------------------------------------------------------------------------------------------------------------
Class B $1,000 $1,015.63 $9.25
- -------------------------------------------------------------------------------------------------------------------
Class C $1,000 $1,015.63 $9.25
- -------------------------------------------------------------------------------------------------------------------
Class I $1,000 $1,020.68 $4.16
- -------------------------------------------------------------------------------------------------------------------
* For each class of the Trust, expenses are equal to the annualized expense
ratio for the class (1.08% for Class A, 1.85% for Class B, 1.85% for Class
C and .83% for Class I), multiplied by the average account value over the
period, multiplied by 181/365 (to reflect the one-half year period shown).
** Hypothetical 5% annual return before expenses is calculated by pro-rating
the number of days in the most recent fiscal half year divided by 365.
8 MERRILL LYNCH NATURAL RESOURCES TRUST JULY 31, 2006
Schedule of Investments (in U.S. dollars)
Shares
Country Industry Common Stocks Held Value
===============================================================================
Australia--0.9%
Metals & Mining--0.9%
Alumina Ltd. 153,800 $ 750,750
BHP Billiton Ltd. 60,500 1,287,451
Newcrest Mining Ltd. 120,000 1,761,880
------------
3,800,081
-------------------------------------------------------------------
Total Common Stocks in Australia 3,800,081
===============================================================================
Brazil--0.5%
Metals & Mining--0.5%
Companhia Vale do Rio Doce (a) 87,000 2,018,400
-------------------------------------------------------------------
Total Common Stocks in Brazil 2,018,400
===============================================================================
Canada--23.9%
Canadian Independents--18.8%
Atlas Energy Ltd. (c) 254,000 1,044,990
Bear Ridge Resources Ltd. (c) 47,200 187,923
Canadian Natural Resources Ltd. 119,700 6,364,937
Chamaelo Exploration Ltd. (c) 286,800 1,375,321
Clear Energy, Inc. (c) 120,000 435,302
Compton Petroleum Corp. (c) 262,100 3,478,434
Crew Energy, Inc. (c) 249,700 3,402,238
Cyries Energy, Inc. (c) 88,928 1,088,144
Dual Exploration, Inc. (c) 54,750 82,349
DualEx Energy International, Inc. (c) 27,375 10,899
Ember Resources, Inc. (c) 74,288 251,077
EnCana Corp. 261,122 14,102,090
Grand Petroleum, Inc. (c) 140,000 584,649
Husky Energy, Inc. 53,200 3,617,741
Kereco Energy Ltd. (c) 74,900 828,357
Mission Oil & Gas, Inc. (c) 304,961 4,017,580
Nexen, Inc. 59,300 3,473,267
Niko Resources Ltd. 21,800 1,221,109
Oilexco, Inc. (c) 82,000 504,950
Pan Orient Energy Corp. (c) 190,000 670,737
Paramount Resources Ltd. (c) 75,000 2,415,395
Petro-Canada 126,000 5,638,646
ProEx Energy Ltd. (c) 92,653 1,261,606
Real Resources, Inc. (c) 90,100 1,793,630
Rider Resources Ltd. (c) 231,918 2,971,177
Suncor Energy, Inc. 101,300 8,178,390
TUSK Energy Corp. (c) 413,500 1,276,810
TUSK Energy Corp. (c)(g) 40,000 123,513
Talisman Energy, Inc. 601,800 10,238,986
TriStar Oil & Gas Ltd. (c) 208,000 1,361,823
Zenas Energy Corp. (c) 212,581 742,929
------------
82,744,999
-------------------------------------------------------------------
Gold--1.4%
Barrick Gold Corp. 51,800 1,592,154
Eldorado Gold Corp. (c) 404,500 1,911,108
Glamis Gold Ltd. (c) 67,800 2,490,649
------------
5,993,911
-------------------------------------------------------------------
Metals & Mining--2.1%
Alcan, Inc. 30,200 1,381,952
HudBay Minerals, Inc. (c) 183,500 2,542,455
Northern Orion Resources, Inc. (c) 211,000 1,043,566
SXR Uranium One, Inc. (c) 100,000 769,741
Teck Cominco Ltd. Class B 49,500 3,280,292
------------
9,018,006
-------------------------------------------------------------------
Oil & Gas Drilling--0.9%
Ensign Resource Service Group 104,600 2,296,989
Western Lakota Energy Services, Inc.
(c) 138,800 1,843,298
------------
4,140,287
-------------------------------------------------------------------
Oil & Gas Equipment &
Services--0.7%
Calfrac Well Services Ltd. 40,000 998,009
Tesco Corp. (c) 106,300 2,170,674
------------
3,168,683
-------------------------------------------------------------------
Total Common Stocks in Canada 105,065,886
===============================================================================
China--0.8%
Metals & Mining--0.8%
Aluminum Corp. of China Ltd. (a) 54,200 3,647,118
-------------------------------------------------------------------
Total Common Stocks in China 3,647,118
===============================================================================
France--2.2%
Chemicals--0.0%
Arkema (a)(c) 2,270 87,890
-------------------------------------------------------------------
Integrated Oil & Gas--1.4%
Total SA (a) 90,800 6,195,284
-------------------------------------------------------------------
Oil & Gas Equipment &
Services--0.8%
Technip SA (a) 64,975 3,510,599
-------------------------------------------------------------------
Total Common Stocks in France 9,793,773
===============================================================================
Hong Kong--0.6%
Oil & Gas Exploration &
Production--0.6%
CNOOC Ltd. (a) 31,400 2,696,004
-------------------------------------------------------------------
Total Common Stocks in Hong Kong 2,696,004
===============================================================================
Italy--1.1%
Integrated Oil & Gas--0.2%
ENI SpA (a) 19,250 1,181,565
-------------------------------------------------------------------
Oil & Gas Drilling--0.9%
Saipem SpA 164,500 3,788,322
-------------------------------------------------------------------
Total Common Stocks in Italy 4,969,887
===============================================================================
South Africa--0.4%
Paper--0.4%
Sappi Ltd. (a) 128,500 1,807,995
-------------------------------------------------------------------
Total Common Stocks in South Africa 1,807,995
===============================================================================
United Kingdom--0.7%
Integrated Oil & Gas--0.3%
BP Plc (a) 18,600 1,348,872
-------------------------------------------------------------------
Oil, Gas & Consumable
Fuels--0.4%
Acergy SA (a)(c) 85,000 1,459,450
-------------------------------------------------------------------
Total Common Stocks
in the United Kingdom 2,808,322
===============================================================================
MERRILL LYNCH NATURAL RESOURCES TRUST JULY 31, 2006 9
Schedule of Investments (continued) (in U.S. dollars)
Shares
Country Industry Common Stocks Held Value
===============================================================================
United States--60.3%
Chemicals--0.5%
E.I. du Pont de Nemours & Co. 33,400 $ 1,324,644
Praxair, Inc. 18,000 987,120
Tronox, Inc. Class B 2,478 32,586
------------
2,344,350
-------------------------------------------------------------------
Energy Equipment &
Services--3.9%
Cameron International Corp. (c) 75,100 3,785,791
Dresser-Rand Group, Inc. (c) 163,800 3,729,726
Dril-Quip, Inc. (c) 28,000 2,365,720
Hanover Compressor Co. (c) 1,605 30,495
National Oilwell Varco, Inc. (c) 109,433 7,336,388
------------
17,248,120
-------------------------------------------------------------------
Integrated Oil & Gas--11.3%
Alon USA Energy, Inc. 30,200 1,157,566
Chevron Corp. 113,091 7,439,125
ConocoPhillips 152,675 10,479,612
Exxon Mobil Corp. 129,328 8,760,678
Marathon Oil Corp. 71,200 6,453,568
Murphy Oil Corp. 247,400 12,731,204
Williams Cos., Inc. 100,500 2,437,125
------------
49,458,878
-------------------------------------------------------------------
Metals & Mining--3.4%
Alcoa, Inc. 22,900 685,855
Arch Coal, Inc. 36,000 1,365,840
Consol Energy, Inc. 68,200 2,807,112
James River Coal Co. (c) 21,800 473,932
Newmont Mining Corp. 9,100 466,193
Peabody Energy Corp. 139,200 6,946,080
Southern Copper Corp. 22,900 2,209,850
------------
14,954,862
-------------------------------------------------------------------
Oil & Gas Drilling--10.7%
Diamond Offshore Drilling, Inc. 21,800 1,720,674
ENSCO International, Inc. 107,300 4,959,406
GlobalSantaFe Corp. 145,022 7,966,058
Helmerich & Payne, Inc. 95,200 2,635,136
Hercules Offshore, Inc. (c) 115,000 4,110,100
Nabors Industries Ltd. (c) 56,600 1,999,112
Noble Corp. (e) 70,900 5,087,075
Pride International, Inc. (c) 70,700 2,111,809
Rowan Cos., Inc. 50,000 1,693,500
Todco Class A (c) 123,000 4,687,530
Transocean, Inc. (c)(e) 117,100 9,043,633
Union Drilling, Inc. (c) 50,000 753,000
------------
46,767,033
-------------------------------------------------------------------
Oil & Gas Equipment &
Services--11.6%
BJ Services Co. 201,600 7,312,032
Baker Hughes, Inc. 113,400 9,066,330
FMC Technologies, Inc. (c) 94,300 5,942,786
Grant Prideco, Inc. (c) 34,000 1,547,340
Halliburton Co. 145,400 4,850,544
Lone Star Technologies, Inc. (c) 24,600 1,158,660
Oil States International, Inc. (c) 95,800 3,080,928
Schlumberger Ltd. 75,800 5,067,230
Smith International, Inc. 97,400 4,341,118
Superior Well Services, Inc. (c) 10,300 257,191
Weatherford International Ltd. (c) 174,726 8,184,165
------------
50,808,324
-------------------------------------------------------------------
Oil & Gas Exploration &
Production--13.3%
Apache Corp. 126,760 8,932,777
Bill Barrett Corp. (c) 10,600 327,752
Cabot Oil & Gas Corp. Class A 44,100 2,326,275
CanArgo Energy Corp. (c) 235,500 176,625
Carrizo Oil & Gas, Inc. (c) 59,100 1,749,951
Cimarex Energy Co. 21,094 861,268
Devon Energy Corp. 186,898 12,081,087
EOG Resources, Inc. 210,900 15,638,235
Forest Oil Corp. (c) 45,800 1,534,758
Kerr-McGee Corp. 24,586 1,725,937
Newfield Exploration Co. (c) 69,000 3,200,220
Noble Energy, Inc. 63,800 3,228,918
Pioneer Natural Resources Co. 22,900 1,038,515
Range Resources Corp. 156,900 4,410,459
Southwestern Energy Co. (c) 31,000 1,066,400
------------
58,299,177
-------------------------------------------------------------------
Oil, Gas & Consumable
Fuels--1.7%
Complete Production Services, Inc.
(c) 62,100 1,279,260
Mariner Energy, Inc. (c) 37,065 667,541
Occidental Petroleum Corp. 52,300 5,635,325
------------
7,582,126
-------------------------------------------------------------------
Refining, Marketing &
Transportation--2.9%
Sunoco, Inc. 25,400 1,766,316
Valero Energy Corp. 121,000 8,159,030
Western Refining, Inc. 114,100 2,623,159
------------
12,548,505
-------------------------------------------------------------------
10 MERRILL LYNCH NATURAL RESOURCES TRUST JULY 31, 2006
Schedule of Investments (concluded) (in U.S. dollars)
Shares
Country Industry Common Stocks Held Value
===============================================================================
United States (concluded)
Transportation--0.2%
PHI, Inc. (c) 34,200 $ 1,079,352
-------------------------------------------------------------------
Utilities--0.8%
Equitable Resources, Inc. 102,000 3,673,020
-------------------------------------------------------------------
Total Common Stocks in the
United States 264,763,747
-------------------------------------------------------------------
Total Common Stocks
(Cost--$186,203,106)--91.4% 401,371,213
-------------------------------------------------------------------
Short-Term Beneficial
Securities Interest
===============================================================================
Merrill Lynch Liquidity Series, LLC
Cash Sweep Series I, 5.07% (b)(d) $38,042,890 38,042,890
-------------------------------------------------------------------
Merrill Lynch Liquidity Series, LLC
Money Market Series, 5.33%
(b)(d)(f) 2,597,400 2,597,400
-------------------------------------------------------------------
Total Short-Term Securities
(Cost--$40,640,290)--9.3% 40,640,290
===============================================================================
Total Investments (Cost--$226,843,396*)--100.7% 442,011,503
Liabilities in Excess of Other Assets--(0.7%) (2,973,492)
------------
Net Assets--100.0% $439,038,011
============
* The cost and unrealized appreciation (depreciation) of investments as of
July 31, 2006, as computed for federal income tax purposes, were as
follows:
Aggregate cost ................................... $ 226,946,280
=============
Gross unrealized appreciation .................... $ 216,477,842
Gross unrealized depreciation .................... (1,412,619)
-------------
Net unrealized appreciation ...................... $ 215,065,223
=============
(a) Depositary receipts.
(b) Investments in companies considered to be an affiliate of the Trust, for
purposes of Section 2(a)(3) of the Investment Company Act of 1940, were as
follows:
--------------------------------------------------------------------------
Net Interest
Affiliate Activity Income
--------------------------------------------------------------------------
Merrill Lynch Liquidity Series, LLC
Cash Sweep Series I $19,791,044 $1,385,728
Merrill Lynch Liquidity Series, LLC
Money Market Series $(9,848,900) $ 15,005
--------------------------------------------------------------------------
(c) Non-income producing security.
(d) Represents the current yield as of July 31, 2006.
(e) Security, or a portion of security, is on loan.
(f) Security was purchased with the cash proceeds from securities loans.
(g) The security may be offered and sold to "qualified institutional buyers"
under Rule 144A of the Securities Act of 1933.
o For Trust compliance purposes, the Trust's industry classifications refer
to any one or more of the industry sub-classifications used by one or more
widely recognized market indexes or ratings group indexes, and/or as
defined by Trust management. This definition may not apply for purposes of
this report, which may combine such industry sub-classifications for
reporting ease. Industries are shown as a percentage of net assets. These
industry and geographic classifications are unaudited.
See Notes to Financial Statements.
MERRILL LYNCH NATURAL RESOURCES TRUST JULY 31, 2006 11
Statement of Assets and Liabilities
As of July 31, 2006
===================================================================================================================================
Assets
- -----------------------------------------------------------------------------------------------------------------------------------
Investments in unaffiliated securities, at value (including securities
loaned of $2,571,759) (identified cost--$186,203,106) ......................... $ 401,371,213
Investments in affiliated securities, at value (identified cost--$40,640,290) .. 40,640,290
Cash ........................................................................... 77,542
Receivables:
Beneficial interest sold .................................................... $ 651,883
Dividends ................................................................... 186,272
Securities lending .......................................................... 1,297 839,452
-------------
Prepaid expenses and other assets .............................................. 15,578
-------------
Total assets ................................................................... 442,944,075
-------------
===================================================================================================================================
Liabilities
- -----------------------------------------------------------------------------------------------------------------------------------
Collateral on securities loaned, at value ...................................... 2,597,400
Payables:
Beneficial interest redeemed ................................................ 800,837
Investment adviser .......................................................... 217,931
Distributor ................................................................. 171,702
Other affiliates ............................................................ 37,036 1,227,506
-------------
Accrued expenses ............................................................... 81,158
-------------
Total liabilities .............................................................. 3,906,064
-------------
===================================================================================================================================
Net Assets
- -----------------------------------------------------------------------------------------------------------------------------------
Net assets ..................................................................... $ 439,038,011
=============
===================================================================================================================================
Net Assets Consist of
- -----------------------------------------------------------------------------------------------------------------------------------
Class A Shares of beneficial interest, $.10 par value, unlimited number
of shares authorized .......................................................... $ 380,004
Class B Shares of beneficial interest, $.10 par value, unlimited number
of shares authorized .......................................................... 110,900
Class C Shares of beneficial interest, $.10 par value, unlimited number
of shares authorized .......................................................... 187,903
Class I Shares of beneficial interest, $.10 par value, unlimited number
of shares authorized .......................................................... 135,052
Paid-in capital in excess of par ............................................... 209,155,585
Undistributed realized capital gains--net ...................................... $ 13,899,908
Unrealized appreciation--net ................................................... 215,168,659
-------------
Total accumulated earnings--net ................................................ 229,068,567
-------------
Net Assets ..................................................................... $ 439,038,011
=============
===================================================================================================================================
Net Asset Value
- -----------------------------------------------------------------------------------------------------------------------------------
Class A--Based on net assets of $208,788,621 and 3,800,039 shares of
beneficial interest outstanding ............................................... $ 54.94
=============
Class B--Based on net assets of $57,925,543 and 1,109,003 shares of
beneficial interest outstanding ............................................... $ 52.23
=============
Class C--Based on net assets of $96,894,880 and 1,879,026 shares of
beneficial interest outstanding ............................................... $ 51.57
=============
Class I--Based on net assets of $75,428,967 and 1,350,516 shares of
beneficial interest outstanding ............................................... $ 55.85
=============
See Notes to Financial Statements.
12 MERRILL LYNCH NATURAL RESOURCES TRUST JULY 31, 2006
Statement of Operations
For the Year Ended July 31, 2006
===================================================================================================================================
Investment Income
- -----------------------------------------------------------------------------------------------------------------------------------
Dividends (net of $125,733 foreign withholding tax) ............................ $ 3,027,251
Interest from affiliates ....................................................... 1,385,728
Securities lending--net ........................................................ 15,005
-------------
Total income ................................................................... 4,427,984
-------------
===================================================================================================================================
Expenses
- -----------------------------------------------------------------------------------------------------------------------------------
Investment advisory fees ....................................................... $ 2,354,783
Account maintenance and distribution fees--Class C ............................. 829,809
Account maintenance and distribution fees--Class B ............................. 585,136
Account maintenance fees--Class A .............................................. 455,202
Transfer agent fees--Class A ................................................... 178,724
Accounting services ............................................................ 169,071
Transfer agent fees--Class C ................................................... 95,889
Registration fees .............................................................. 79,590
Transfer agent fees--Class I ................................................... 67,581
Transfer agent fees--Class B ................................................... 66,160
Professional fees .............................................................. 56,646
Printing and shareholder reports ............................................... 52,037
Trustees' fees and expenses .................................................... 50,778
Custodian fees ................................................................. 50,575
Pricing fees ................................................................... 5,145
Other .......................................................................... 29,221
-------------
Total expenses ................................................................. 5,126,347
-------------
Investment loss--net ........................................................... (698,363)
-------------
===================================================================================================================================
Realized & Unrealized Gain (Loss)--Net
- -----------------------------------------------------------------------------------------------------------------------------------
Realized gain on:
Investments--net ............................................................ 17,225,748
Foreign currency transactions--net .......................................... 57,592 17,283,340
-------------
Change in unrealized appreciation on:
Investments--net ............................................................ 59,982,657
Foreign currency transactions--net .......................................... (82,123) 59,900,534
---------------------------------
Total realized and unrealized gain ............................................. 77,183,874
-------------
Net Increase in Net Assets Resulting from Operations ........................... $ 76,485,511
=============
See Notes to Financial Statements.
MERRILL LYNCH NATURAL RESOURCES TRUST JULY 31, 2006 13
Statements of Changes in Net Assets
For the Year Ended July 31,
---------------------------------
Increase (Decrease) in Net Assets: 2006 2005
===================================================================================================================================
Operations
- -----------------------------------------------------------------------------------------------------------------------------------
Investment loss--net ........................................................... $ (698,363) $ (966,508)
Realized gain--net ............................................................. 17,283,340 7,834,309
Change in unrealized appreciation--net ......................................... 59,900,534 90,243,170
---------------------------------
Net increase in net assets resulting from operations ........................... 76,485,511 97,110,971
---------------------------------
===================================================================================================================================
Distributions to Shareholders
- -----------------------------------------------------------------------------------------------------------------------------------
Realized gain--net:
Class A ..................................................................... (1,128,384) --
Class B ..................................................................... (386,717) --
Class C ..................................................................... (529,184) --
Class I ..................................................................... (415,609) --
---------------------------------
Net decrease in net assets resulting from distributions to shareholders ........ (2,459,894) --
---------------------------------
===================================================================================================================================
Beneficial Interest Transactions
- -----------------------------------------------------------------------------------------------------------------------------------
Net increase in net assets derived from beneficial interest transactions ....... 67,397,447 23,287,190
---------------------------------
===================================================================================================================================
Net Assets
- -----------------------------------------------------------------------------------------------------------------------------------
Total increase in net assets ................................................... 141,423,064 120,398,161
Beginning of year .............................................................. 297,614,947 177,216,786
---------------------------------
End of year* ................................................................... $ 439,038,011 $ 297,614,947
=================================
* Accumulated investment loss--net .......................................... -- $ (79,289)
=================================
See Notes to Financial Statements.
14 MERRILL LYNCH NATURAL RESOURCES TRUST JULY 31, 2006
Financial Highlights
Class A
The following per share data ------------------------------------------------------------------
and ratios have been derived For the Year Ended July 31,
from information provided in ------------------------------------------------------------------
the financial statements. 2006 2005 2004 2003 2002
==============================================================================================================
Per Share Operating Performance
- --------------------------------------------------------------------------------------------------------------
Net asset value, beginning of year ....... $ 44.32 $ 28.89 $ 21.06 $ 18.22 $ 19.35
------------------------------------------------------------------
Investment income (loss)--net** .......... .03 (.07) (.06) (.03) (.03)
Realized and unrealized gain (loss)--net . 10.92 15.50 7.89 2.87 (1.10)
------------------------------------------------------------------
Total from investment operations ......... 10.95 15.43 7.83 2.84 (1.13)
------------------------------------------------------------------
Less distributions from realized gain--net (.33) -- -- -- --
------------------------------------------------------------------
Net asset value, end of year ............. $ 54.94 $ 44.32 $ 28.89 $ 21.06 $ 18.22
==================================================================
==============================================================================================================
Total Investment Return*
- --------------------------------------------------------------------------------------------------------------
Based on net asset value per share ....... 24.77% 53.41% 37.18% 15.59% (5.84%)
==================================================================
==============================================================================================================
Ratios to Average Net Assets
- --------------------------------------------------------------------------------------------------------------
Expenses ................................. 1.07% 1.16% 1.25% 1.38% 1.45%
==================================================================
Investment income (loss)--net ............ .05% (.20%) (.23%) (.17%) (.14%)
==================================================================
==============================================================================================================
Supplemental Data
- --------------------------------------------------------------------------------------------------------------
Net assets, end of year (in thousands) ... $208,789 $136,740 $ 77,035 $ 56,094 $ 52,946
==================================================================
Portfolio turnover ....................... 10.39% 11.14% 10.96% 18.26% 49.77%
==================================================================
Class B
The following per share data ----------------------------------------------------------------
and ratios have been derived For the Year Ended July 31,
from information provided in ----------------------------------------------------------------
the financial statements. 2006 2005 2004 2003 2002
============================================================================================================
Per Share Operating Performance
- ------------------------------------------------------------------------------------------------------------
Net asset value, beginning of year ....... $ 42.47 $ 27.90 $ 20.49 $ 17.87 $ 19.12
----------------------------------------------------------------
Investment income (loss)--net** .......... (.35) (.32) (.25) (.18) (.17)
Realized and unrealized gain (loss)--net . 10.44 14.89 7.66 2.80 (1.08)
----------------------------------------------------------------
Total from investment operations ......... 10.09 14.57 7.41 2.62 (1.25)
----------------------------------------------------------------
Less distributions from realized gain--net (.33) -- -- -- --
----------------------------------------------------------------
Net asset value, end of year ............. $ 52.23 $ 42.47 $ 27.90 $ 20.49 $ 17.87
================================================================
============================================================================================================
Total Investment Return*
- ------------------------------------------------------------------------------------------------------------
Based on net asset value per share ....... 23.82% 52.22% 36.16% 14.66% (6.54%)
================================================================
============================================================================================================
Ratios to Average Net Assets
- ------------------------------------------------------------------------------------------------------------
Expenses ................................. 1.84% 1.93% 2.02% 2.16% 2.23%
================================================================
Investment income (loss)--net ............ (.71%) (.97%) (1.00%) (.96%) (.91%)
================================================================
============================================================================================================
Supplemental Data
- ------------------------------------------------------------------------------------------------------------
Net assets, end of year (in thousands) ... $ 57,926 $ 52,595 $ 35,399 $ 23,829 $ 24,468
================================================================
Portfolio turnover ....................... 10.39% 11.14% 10.96% 18.26% 49.77%
================================================================
* Total investment returns exclude the effect of sales charges.
** Based on average shares outstanding.
See Notes to Financial Statements.
MERRILL LYNCH NATURAL RESOURCES TRUST JULY 31, 2006 15
Financial Highlights (concluded)
Class C
The following per share data ----------------------------------------------------------------
and ratios have been derived For the Year Ended July 31,
from information provided in ----------------------------------------------------------------
the financial statements. 2006 2005 2004 2003 2002
============================================================================================================
Per Share Operating Performance
- ------------------------------------------------------------------------------------------------------------
Net asset value, beginning of year ....... $ 41.93 $ 27.55 $ 20.23 $ 17.65 $ 18.88
----------------------------------------------------------------
Investment income (loss)--net** .......... (.35) (.32) (.25) (.18) (.17)
Realized and unrealized gain (loss)--net . 10.32 14.70 7.57 2.76 (1.06)
----------------------------------------------------------------
Total from investment operations ......... 9.97 14.38 7.32 2.58 (1.23)
----------------------------------------------------------------
Less distributions from realized gain--net (.33) -- -- -- --
----------------------------------------------------------------
Net asset value, end of year ............. $ 51.57 $ 41.93 $ 27.55 $ 20.23 $ 17.65
================================================================
============================================================================================================
Total Investment Return*
- ------------------------------------------------------------------------------------------------------------
Based on net asset value per share ....... 23.84% 52.20% 36.18% 14.62% (6.51%)
================================================================
============================================================================================================
Ratios to Average Net Assets
- ------------------------------------------------------------------------------------------------------------
Expenses ................................. 1.84% 1.93% 2.02% 2.16% 2.24%
================================================================
Investment income (loss)--net ............ (.71%) (.97%) (1.01%) (.96%) (.93%)
================================================================
============================================================================================================
Supplemental Data
- ------------------------------------------------------------------------------------------------------------
Net assets, end of year (in thousands) ... $ 96,895 $ 56,131 $ 29,695 $ 11,789 $ 8,129
================================================================
Portfolio turnover ....................... 10.39% 11.14% 10.96% 18.26% 49.77%
================================================================
Class I
The following per share data -------------------------------------------------------------
and ratios have been derived For the Year Ended July 31,
from information provided in -------------------------------------------------------------
the financial statements. 2006 2005 2004 2003 2002
=========================================================================================================
Per Share Operating Performance
- ---------------------------------------------------------------------------------------------------------
Net asset value, beginning of year ....... $ 44.93 $ 29.22 $ 21.25 $ 18.34 $ 19.42
-------------------------------------------------------------
Investment income (loss)--net** .......... .16 .02 --+ .01 .02
Realized and unrealized gain (loss)--net . 11.09 15.69 7.97 2.90 (1.10)
-------------------------------------------------------------
Total from investment operations ......... 11.25 15.71 7.97 2.91 (1.08)
-------------------------------------------------------------
Less distributions from realized gain--net (.33) -- -- -- --
-------------------------------------------------------------
Net asset value, end of year ............. $ 55.85 $ 44.93 $ 29.22 $ 21.25 $ 18.34
=============================================================
=========================================================================================================
Total Investment Return*
- ---------------------------------------------------------------------------------------------------------
Based on net asset value per share ....... 25.10% 53.76% 37.51% 15.87% (5.56%)
=============================================================
=========================================================================================================
Ratios to Average Net Assets
- ---------------------------------------------------------------------------------------------------------
Expenses ................................. .82% .91% 1.00% 1.12% 1.20%
=============================================================
Investment income (loss)--net ............ .31% .05% .02% .07% .12%
=============================================================
=========================================================================================================
Supplemental Data
- ---------------------------------------------------------------------------------------------------------
Net assets, end of year (in thousands) ... $ 75,429 $ 52,148 $ 35,088 $ 23,981 $ 18,405
=============================================================
Portfolio turnover ....................... 10.39% 11.14% 10.96% 18.26% 49.77%
=============================================================
* Total investment returns exclude the effect of sales charges. Effective
December 28, 2005, Class I Shares are no longer subject to any front-end
sales charge.
** Based on average shares outstanding.
+ Amount is less than $.01 per share.
See Notes to Financial Statements.
16 MERRILL LYNCH NATURAL RESOURCES TRUST JULY 31, 2006
Notes to Financial Statements
1. Significant Accounting Policies:
Merrill Lynch Natural Resources Trust (the "Trust") is registered under the
Investment Company Act of 1940, as amended, as a non-diversified, open-end
management investment company. The Trust's financial statements are prepared in
conformity with U.S. generally accepted accounting principles, which may require
the use of management accruals and estimates. Actual results may differ from
these estimates. The Trust offers multiple classes of shares. Effective December
28, 2005, Class I Shares are no longer subject to any front-end sales charge.
Class A Shares are sold with a front-end sales charge. Shares of Class B and
Class C may be subject to a contingent deferred sales charge. Class I Shares are
sold only to certain eligible investors. All classes of shares have identical
voting, dividend, liquidation and other rights and the same terms and
conditions, except that Class A, Class B and Class C Shares bear certain
expenses related to the account maintenance of such shares, and Class B and
Class C Shares also bear certain expenses related to the distribution of such
shares. Each class has exclusive voting rights with respect to matters relating
to its account maintenance and distribution expenditures (except that Class B
shareholders may vote on certain changes to the Class A distribution plan).
Income, expenses (other than expenses attributable to a specific class) and
realized and unrealized gains and losses are allocated daily to each class based
on its relative net assets. The following is a summary of significant accounting
policies followed by the Trust.
(a) Valuation of investments -- Equity securities that are held by the Trust
that are traded on stock exchanges or the Nasdaq National Market are valued at
the last sale price or official close price on the exchange, as of the close of
business on the day the securities are being valued or, lacking any sales, at
the last available bid price for long positions, and at the last available asked
price for short positions. In cases where equity securities are traded on more
than one exchange, the securities are valued on the exchange designated as the
primary market by or under the authority of the Board of Trustees of the Trust.
Long positions traded in the over-the-counter ("OTC") market, Nasdaq Small Cap
or Bulletin Board are valued at the last available bid price or yield equivalent
obtained from one or more dealers or pricing services approved by the Board of
Trustees of the Trust. Short positions traded in the OTC market are valued at
the last available asked price. Portfolio securities that are traded both in the
OTC market and on a stock exchange are valued according to the broadest and most
representative market.
Options written are valued at the last sale price in the case of exchange-traded
options or, in the case of options traded in the OTC market, the last asked
price. Options purchased are valued at their last sale price in the case of
exchange-traded options or, in the case of options traded in the OTC market, the
last bid price. Swap agreements are valued based upon quoted fair valuations
received daily by the Trust from a pricing service or counterparty. Financial
futures contracts and options thereon, which are traded on exchanges, are valued
at their last sale price as of the close of such exchanges. Obligations with
remaining maturities of 60 days or less are valued at amortized cost unless the
Investment Adviser believes that this method no longer produces fair valuations.
Valuation of other short-term investment vehicles is generally based on the net
asset value of the underlying investment vehicle or amortized cost.
Repurchase agreements are valued at cost plus accrued interest. The Trust
employs pricing services to provide certain securities prices for the Trust.
Securities and assets for which market quotations are not readily available are
valued at fair value as determined in good faith by or under the direction of
the Board of Trustees of the Trust, including valuations furnished by the
pricing services retained by the Trust, which may use a matrix system for
valuations. The procedures of a pricing service and its valuations are reviewed
by the officers of the Trust under the general supervision of the Trust's Board
of Trustees. Such valuations and procedures will be reviewed periodically by the
Board of Trustees of the Trust.
Generally, trading in foreign securities, as well as U.S. government securities,
money market instruments and certain fixed income securities, is substantially
completed each day at various times prior to the close of business on the New
York Stock Exchange ("NYSE"). The values of such securities used in computing
the net asset value of the Trust's shares are determined as of such times.
Foreign currency exchange rates also are generally determined prior to the close
of business on the NYSE. Occasionally, events affecting the values of such
securities and such exchange rates may occur between the times at which they are
determined and the close of business on the NYSE that may not be reflected in
the computation of the Trust's net asset value. If events (for example, a
company announcement, market volatility or a natural disaster) occur during such
periods that are expected to materially affect the value of such securities,
those securities may be valued at their fair value as determined in good faith
by the Trust's Board of Trustees or by the Investment Adviser using a pricing
service and/or procedures approved by the Trust's Board of Trustees.
MERRILL LYNCH NATURAL RESOURCES TRUST JULY 31, 2006 17
Notes to Financial Statements (continued)
(b) Derivative financial instruments -- The Trust may engage in various
portfolio investment strategies both to increase the return of the Trust and to
hedge, or protect, its exposure to interest rate movements and movements in the
securities markets. Losses may arise due to changes in the value of the contract
or if the counterparty does not perform under the contract.
o Forward foreign exchange contracts -- The Trust may enter into forward
foreign exchange contracts as a hedge against either specific transactions
or portfolio positions. The contract is marked-to-market daily and the
change in market value is recorded by the Trust as an unrealized gain or
loss. When the contract is closed, the Trust records a realized gain or
loss equal to the difference between the value at the time it was opened
and the value at the time it was closed.
o Options -- The Trust may purchase and write covered call options and put
options. When the Trust writes an option, an amount equal to the premium
received by the Trust is reflected as an asset and an equivalent
liability. The amount of the liability is subsequently marked-to-market to
reflect the current market value of the option written. When a security is
purchased or sold through an exercise of an option, the related premium
paid (or received) is added to (or deducted from) the basis of the
security acquired or deducted from (or added to) the proceeds of the
security sold. When an option expires (or the Trust enters into a closing
transaction), the Trust realizes a gain or loss on the option to the
extent of the premiums received or paid (or gain or loss to the extent the
cost of the closing transaction is less than or greater than the premiums
paid or received).
Written and purchased options are non-income producing investments.
(c) Foreign currency transactions -- Transactions denominated in foreign
currencies are recorded at the exchange rate prevailing when recognized. Assets
and liabilities denominated in foreign currencies are valued at the exchange
rate at the end of the period. Foreign currency transactions are the result of
settling (realized) or valuing (unrealized) assets or liabilities expressed in
foreign currencies into U.S. dollars. Realized and unrealized gains or losses
from investments include the effects of foreign exchange rates on investments.
The Trust invests in foreign securities, which may involve a number of risk
factors and special considerations not present with investments in securities of
U.S. corporations.
(d) Income taxes -- It is the Trust's policy to comply with the requirements of
the Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its taxable income to its shareholders.
Therefore, no federal income tax provision is required. Under the applicable
foreign tax law, a withholding tax may be imposed on interest, dividends, and
capital gains at various rates.
(e) Recent accounting pronouncement -- In July 2006, the Financial Accounting
Standards Board ("FASB") issued Interpretation No. 48 ("FIN 48") entitled
"Accounting for Uncertainty in Income Taxes -- an interpretation of FASB
Statement No. 109." FIN 48 prescribes the minimum recognition threshold a tax
position must meet in connection with accounting for uncertainties in income tax
positions taken or expected to be taken by an entity including mutual funds
before being measured and recognized in the financial statements. FIN 48 is
effective for fiscal years beginning after December 15, 2006. The Trust will
adopt FIN 48 during the fiscal 2008 year and the impact on the Trust's financial
statements, if any, is currently being assessed.
(f) Security transactions and investment income -- Security transactions are
recorded on the dates the transactions are entered into (the trade dates).
Realized gains and losses on security transactions are determined on the
identified cost basis. Dividend income is recorded on the ex-dividend dates.
Dividends from foreign securities where the ex-dividend date may have passed are
subsequently recorded when the Trust has determined the ex-dividend dates.
Interest income is recognized on the accrual basis.
(g) Prepaid registration fees -- Prepaid registration fees are charged to
expense as the related shares are issued.
(h) Dividends and distributions -- Dividends and distributions paid by the Trust
are recorded on the ex-dividend dates.
(i) Securities lending -- The Trust may lend securities to financial
institutions that provide cash or securities issued or guaranteed by the U.S.
government as collateral, which will be maintained at all times in an amount
equal to at least 100% of the current market value of the loaned securities. The
market value of the loaned securities is determined at the close of business of
the Trust and any additional required collateral is delivered to the Trust on
the next business day. Where the Trust receives securities as collateral for the
loaned securities, it collects a fee from the borrower. The Trust typically
receives the income on the loaned securities but does not receive the income on
the collateral. Where the Trust receives cash collateral, it may invest such
collateral and
18 MERRILL LYNCH NATURAL RESOURCES TRUST JULY 31, 2006
Notes to Financial Statements (continued)
retain the amount earned on such investment, net of any amount rebated to the
borrower. Loans of securities are terminable at any time and the borrower, after
notice, is required to return borrowed securities within five business days. The
Trust may pay reasonable finder's, lending agent, administrative and custodial
fees in connection with its loans. In the event that the borrower defaults on
its obligation to return borrowed securities because of insolvency or for any
other reason, the Trust could experience delays and costs in gaining access to
the collateral. The Trust also could suffer a loss where the value of the
collateral falls below the market value of the borrowed securities, in the event
of borrower default or in the event of losses on investments made with cash
collateral.
(j) Reclassification -- U.S. generally accepted accounting principles require
that certain components of net assets be adjusted to reflect permanent
differences between financial and tax reporting. Accordingly, during the current
year, $777,652 has been reclassified between undistributed net realized capital
gains and accumulated net investment loss as a result of permanent differences
attributable to net operating losses, gains from the sale of stock of passive
foreign investment companies, and foreign currency transactions. This
reclassification has no effect on net assets or net asset values per share.
2. Investment Advisory Agreement and Transactions with Affiliates:
The Trust has entered into an Investment Advisory Agreement with Merrill Lynch
Investment Managers, L.P. ("MLIM"). The general partner of MLIM is Princeton
Services, Inc. ("PSI"), an indirect, wholly-owned subsidiary of Merrill Lynch &
Co., Inc. ("ML & Co."), which is the limited partner of MLIM. The Trust has also
entered into a Distribution Agreement and Distribution Plans with FAM
Distributors, Inc. ("FAMD" or the "Distributor"), which is a wholly-owned
subsidiary of Merrill Lynch Group, Inc.
MLIM is responsible for the management of the Trust's portfolio and provides the
necessary personnel, facilities, equipment and certain other services necessary
to the operations of the Trust. For such services, the Trust pays a monthly fee
of .60%, on an annual basis, of the average daily value of the Trust's net
assets. MLIM has entered into a Sub-Advisory Agreement with Merrill Lynch Asset
Management U.K. Limited ("MLAM U.K."), an affiliate of MLIM, pursuant to which
MLAM U.K. provides investment advisory services to MLIM with respect to the
Trust. There was no increase in the aggregate fees paid by the Trust for these
services.
Pursuant to the Distribution Plans adopted by the Trust in accordance with Rule
12b-1 under the Investment Company Act of 1940, the Trust pays the Distributor
ongoing account maintenance and distribution fees. The fees are accrued daily
and paid monthly at annual rates based upon the average daily net assets of the
shares as follows:
- --------------------------------------------------------------------------------
Account Distribution
Maintenance Fee Fee
- --------------------------------------------------------------------------------
Class A ........................................ .25% --
Class B ........................................ .25% .75%
Class C ........................................ .25% .75%
- --------------------------------------------------------------------------------
Pursuant to a sub-agreement with the Distributor, Merrill Lynch, Pierce, Fenner
& Smith Incorporated ("MLPF&S"), an affiliate of MLIM, also provides account
maintenance and distribution services to the Trust. The ongoing account
maintenance fee compensates the Distributor and MLPF&S for providing account
maintenance services to Class A, Class B and Class C shareholders. The ongoing
distribution fee compensates the Distributor and MLPF&S for providing
shareholder and distribution-related services to Class B and Class C
shareholders.
For the year ended July 31, 2006, FAMD earned underwriting discounts and MLPF&S
earned dealer concessions on sales of the Trust's Class A and Class I Shares as
follows:
- --------------------------------------------------------------------------------
FAMD MLPF&S
- --------------------------------------------------------------------------------
Class A .............................................. $30,737 $400,197
Class I .............................................. $ 174 $ 2,666
- --------------------------------------------------------------------------------
For the year ended July 31, 2006, MLPF&S received contingent deferred sales
charges of $98,839 and $42,632 relating to transactions in Class B and Class C
Shares, respectively.
Furthermore, MLPF&S received contingent deferred sales charges of $68 relating
to transactions subject to front-end sales charge waivers in Class A Shares.
The Trust has received an exemptive order from the Securities and Exchange
Commission permitting it to lend portfolio securities to MLPF&S or its
affiliates. Pursuant to that order, the Trust also has retained Merrill Lynch
Investment Managers, LLC ("MLIM, LLC"), an affiliate of MLIM, as the securities
lending agent for a fee based on a share of the returns on investment of cash
collateral. MLIM, LLC may, on behalf of the Trust, invest cash collateral
received by the Trust for such loans, among other things, in a private
investment company managed by MLIM, LLC or in registered money market funds
advised by MLIM. For the year ended July 31, 2006, MLIM, LLC received $6,440 in
securities lending agent fees.
MERRILL LYNCH NATURAL RESOURCES TRUST JULY 31, 2006 19
Notes to Financial Statements (continued)
In addition, MLPF&S received $4,608 in commissions on the execution of portfolio
security transactions for the Trust for the year ended July 31, 2006.
For the year ended July 31, 2006, the Trust reimbursed MLIM $8,220 for certain
accounting services.
Financial Data Services, Inc. ("FDS"), a wholly-owned subsidiary of ML & Co., is
the Trust's transfer agent.
Certain officers and/or trustees of the Trust are officers and/or directors of
MLIM, PSI, MLAM U.K., FDS, FAMD, ML & Co., and/or MLIM, LLC.
In February 2006, ML & Co. and BlackRock, Inc. entered into an agreement to
contribute ML & Co.'s investment management business, including MLIM, to the
investment management business of BlackRock, Inc. The transaction is expected to
close around the end of the third quarter of 2006.
On August 31, 2006, shareholders of the Trust approved a new Investment Advisory
Agreement with BlackRock Advisors, Inc., a subsidiary of BlackRock, Inc., as
well as a contingent sub-advisory agreement with BlackRock Advisors, Inc. The
new advisory agreement will become effective upon the closing of the BlackRock
transaction described above and the investment advisory fee will be unchanged.
3. Investments:
Purchases and sales of investments, excluding short-term securities, for the
year ended July 31, 2006 were $82,372,449 and $37,547,814, respectively.
4. Beneficial Interest Transactions:
Net increase in net assets derived from beneficial interest transactions was
$67,397,447 and $23,287,190 for the year ended July 31, 2006 and the year ended
July 31, 2005, respectively.
Transactions in shares of beneficial interest for each class were as follows:
- -------------------------------------------------------------------------------
Class A Shares for the Year Dollar
Ended July 31, 2006 Shares Amount
- -------------------------------------------------------------------------------
Shares sold .............................. 1,528,514 $ 78,148,165
Automatic conversion of shares ........... 91,386 4,530,597
Shares issued to shareholders in
reinvestment of distributions .......... 17,894 907,754
-------------------------------
Total issued ............................. 1,637,794 83,586,516
Shares redeemed .......................... (923,188) (46,739,124)
-------------------------------
Net increase ............................. 714,606 $ 36,847,392
===============================
- -------------------------------------------------------------------------------
Class A Shares for the Year Dollar
Ended July 31, 2005 Shares Amount
- -------------------------------------------------------------------------------
Shares sold .............................. 925,625 $ 33,818,955
Automatic conversion of shares ........... 82,089 2,927,622
-------------------------------
Total issued ............................. 1,007,714 36,746,577
Shares redeemed .......................... (588,367) (20,666,239)
-------------------------------
Net increase ............................. 419,347 $ 16,080,338
===============================
- -------------------------------------------------------------------------------
Class B Shares for the Year Dollar
Ended July 31, 2006 Shares Amount
- -------------------------------------------------------------------------------
Shares sold .............................. 379,178 $ 18,366,346
Shares issued to shareholders in
reinvestment of distributions .......... 6,962 337,481
-------------------------------
Total issued ............................. 386,140 18,703,827
-------------------------------
Shares redeemed .......................... (419,900) (20,018,647)
Automatic conversion of shares ........... (95,720) (4,530,597)
-------------------------------
Total redeemed ........................... (515,620) (24,549,244)
-------------------------------
Net decrease ............................. (129,480) $ (5,845,417)
===============================
- -------------------------------------------------------------------------------
Class B Shares for the Year Dollar
Ended July 31, 2005 Shares Amount
- -------------------------------------------------------------------------------
Shares sold .............................. 448,297 $ 15,295,260
-------------------------------
Shares redeemed .......................... (393,176) (13,224,923)
Automatic conversion of shares ........... (85,373) (2,927,622)
-------------------------------
Total redeemed ........................... (478,549) (16,152,545)
-------------------------------
Net decrease ............................. (30,252) $ (857,285)
===============================
- -------------------------------------------------------------------------------
Class C Shares for the Year Dollar
Ended July 31, 2006 Shares Amount
- -------------------------------------------------------------------------------
Shares sold .............................. 1,006,111 $ 48,795,773
Shares issued to shareholders in
reinvestment of distributions .......... 10,006 478,791
-------------------------------
Total issued ............................. 1,016,117 49,274,564
Shares redeemed .......................... (475,718) (22,936,185)
-------------------------------
Net increase ............................. 540,399 $ 26,338,379
===============================
- -------------------------------------------------------------------------------
Class C Shares for the Year Dollar
Ended July 31, 2005 Shares Amount
- -------------------------------------------------------------------------------
Shares sold .............................. 675,082 $ 23,177,778
Shares redeemed .......................... (414,335) (14,289,502)
-------------------------------
Net increase ............................. 260,747 $ 8,888,276
===============================
- -------------------------------------------------------------------------------
Class I Shares for the Year Dollar
Ended July 31, 2006 Shares Amount
- -------------------------------------------------------------------------------
Shares sold .............................. 652,585 $ 34,313,325
Shares issued to shareholders in
reinvestment of distributions .......... 7,457 383,896
-------------------------------
Total issued ............................. 660,042 34,697,221
Shares redeemed .......................... (470,102) (24,640,128)
-------------------------------
Net increase ............................. 189,940 $ 10,057,093
===============================
- -------------------------------------------------------------------------------
Class I Shares for the Year Dollar
Ended July 31, 2005 Shares Amount
- -------------------------------------------------------------------------------
Shares sold .............................. 367,722 $ 13,764,449
Shares redeemed .......................... (407,861) (14,588,588)
-------------------------------
Net decrease ............................. (40,139) $ (824,139)
===============================
20 MERRILL LYNCH NATURAL RESOURCES TRUST JULY 31, 2006
Notes to Financial Statements (concluded)
5. Short-Term Borrowings:
The Trust, along with certain other funds managed by MLIM and its affiliates, is
a party to a $500,000,000 credit agreement with a group of lenders, which
expires November 2006. The Trust may borrow under the credit agreement to fund
shareholder redemptions and for other lawful purposes other than for leverage.
The Trust may borrow up to the maximum amount allowable under the Trust's
current prospectus and statement of additional information, subject to various
other legal, regulatory or contractual limits. The Trust pays a commitment fee
of .07% per annum based on the Trust's pro rata share of the unused portion of
the credit agreement. Amounts borrowed under the credit agreement bear interest
at a rate equal to, at each Trust's election, the federal funds rate plus .50%
or a base rate as defined in the credit agreement. The Trust did not borrow
under the credit agreement during the year ended July 31, 2006.
6. Distributions to Shareholders:
The tax character of distributions paid during the fiscal years ended July 31,
2006 and July 31, 2005 was as follows:
- --------------------------------------------------------------------------------
7/31/2006 7/31/2005
- --------------------------------------------------------------------------------
Distributions paid from:
Net long-term capital gains ...................... $2,459,894 $ --
--------------------------
Total taxable distributions ........................ $2,459,894 $ --
==========================
As of July 31, 2006, the components of accumulated earnings on a tax basis were
as follows:
- -------------------------------------------------------------------------------
Undistributed ordinary income -- net ...................... $ 340,662
Undistributed long-term capital gains -- net .............. 13,662,130
------------
Total undistributed earnings -- net ....................... 14,002,792
Capital loss carryforward ................................. --
Unrealized gains -- net ................................... 215,065,775*
------------
Total accumulated earnings -- net ......................... $229,068,567
============
* The difference between book-basis and tax-basis net unrealized gains is
attributable primarily to the tax deferral of losses on wash sales.
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Trustees of Merrill Lynch Natural Resources
Trust:
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of Merrill Lynch Natural Resources Trust as of July
31, 2006, and the related statement of operations for the year then ended, the
statements of changes in net assets for each of the two years in the period then
ended, and the financial highlights for each of the five years in the period
then ended. These financial statements and financial highlights are the
responsibility of the Trust's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. The Trust
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audits included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Trust's internal control over
financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. Our procedures included confirmation
of securities owned as of July 31, 2006, by correspondence with the custodian.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Merrill Lynch Natural Resources Trust as of July 31, 2006, the results of its
operations for the year then ended, the changes in its net assets for each of
the two years in the period then ended, and its financial highlights for each of
the five years in the period then ended, in conformity with U.S. generally
accepted accounting principles.
Deloitte & Touche LLP
Princeton, New Jersey
September 20, 2006
MERRILL LYNCH NATURAL RESOURCES TRUST JULY 31, 2006 21
Disclosure of Investment Advisory Agreement
Activities and Composition of the Board of Trustees
All but one member of the Board of Trustees is an independent trustee whose only
association with Merrill Lynch Investment Managers, L.P. (the "Investment
Adviser") or other Merrill Lynch affiliates is as a trustee of the Trust and as
a trustee or director of certain other funds advised by the Investment Adviser
or its affiliates. The Chairman of the Board is also an independent trustee. New
trustee nominees are chosen by a Nominating Committee comprised of independent
trustees. All independent trustees also are members of the Board's Audit
Committee, and the independent trustees meet in executive session at each
in-person Board meeting. The Board and the Audit Committee meet in person for at
least two days each quarter and conduct other in-person and telephone meetings
throughout the year, some of which are formal Board meetings and some of which
are informational meetings. The independent counsel to the independent trustees
attends all in-person Board and Audit Committee meetings and other meetings at
the independent trustees' request.
Investment Advisory Agreement -- Matters Considered by the Board
Every year, the Board considers approval of the Trust's investment advisory
agreement (the "Investment Advisory Agreement"). The Board also annually reviews
and considers approval of the sub-advisory agreement on behalf of the Trust
between the Investment Adviser and Merrill Lynch Asset Management U.K. Limited,
an affiliate. The Board assesses the nature, scope and quality of the services
provided to the Trust by the personnel of the Investment Adviser, the
sub-adviser and their affiliates, including administrative services, shareholder
services, oversight of fund accounting, marketing services and assistance in
meeting legal and regulatory requirements. The Board also receives and assesses
information regarding the services provided to the Trust by certain unaffiliated
service providers.
At various times throughout the year, the Board also considers a range of
information in connection with its oversight of the services provided by the
Investment Adviser and its affiliates, including the sub-adviser. Among the
matters considered are: (a) fees (in addition to management fees) paid to the
Investment Adviser and its affiliates by the Trust, such as transfer agency fees
and fees for marketing and distribution; (b) Trust operating expenses paid to
third parties; (c) the resources devoted to and compliance reports relating to
the Trust's investment objective, policies and restrictions, and its compliance
with its Code of Ethics and compliance policies and procedures; and (d) the
nature, cost and character of non-investment management services provided by the
Investment Adviser and its affiliates.
The Board believes that the Investment Adviser is one of the most experienced
global asset management firms and considers the overall services provided by the
Investment Adviser to be of high quality. The Board also believes that the
Investment Adviser is financially sound and well managed and notes that the
Investment Adviser is affiliated with one of America's largest financial firms.
The Board works closely with the Investment Adviser in overseeing the Investment
Adviser's efforts to achieve good performance. As part of this effort, the Board
discusses portfolio manager effectiveness and, when performance is not
satisfactory, discusses with the Investment Adviser taking steps such as
changing investment personnel.
Annual Consideration of Approval by the Board of Trustees
In the period prior to the Board meeting to consider renewal of the Investment
Advisory Agreement and the sub-advisory agreement, the Board requests and
receives materials specifically relating to the Investment Advisory Agreement
and/or the sub-advisory agreement. These materials include (a) information
compiled by Lipper Inc. ("Lipper") on the fees and expenses and the investment
performance of the Trust as compared to a comparable group of funds as
classified by Lipper; (b) sales and redemption data for the Trust; (c) a
discussion by the Trust's portfolio management team regarding investment
strategies used by the Trust during its most recent fiscal year; (d) information
on the profitability to the Investment Adviser and its affiliates of the
Investment Advisory Agreement, the sub-advisory agreement and other
relationships with the Trust; and (e) information provided by the Investment
Adviser concerning investment advisory fees charged to other clients, such as
retail funds, under similar investment mandates. Since the sub-advisory services
are provided by an affiliate of the Investment Adviser, and no additional fee is
paid for these services, the Board considered the sub-advisory agreement and
Investment Advisory Agreement together. The Board also considers other matters
it deems important to the approval process, such as payments made to the
Investment Adviser or its affiliates relating to the
22 MERRILL LYNCH NATURAL RESOURCES TRUST JULY 31, 2006
distribution of Trust shares, services related to the valuation and pricing of
Trust portfolio holdings, allocation of Trust brokerage fees (including the
related benefits to the Investment Adviser of "soft dollars"), the Trust's
portfolio turnover statistics, and direct and indirect benefits to the
Investment Adviser, the sub-adviser and their affiliates from their relationship
with the Trust. The Board did not identify any particular information as
controlling, and each member of the Board may have attributed different weights
to the various items considered.
Certain Specific Renewal Data
In connection with the most recent renewal of the Trust's Investment Advisory
Agreement and sub-advisory agreement in March 2006, the independent trustees'
and Board's review included the following:
Services Provided by the Investment Adviser -- The Board reviewed the nature,
extent and quality of services provided by the Investment Adviser and the
sub-adviser, including the investment advisory services and the resulting
performance of the Trust. The Board focused primarily on the Investment
Adviser's investment advisory services and the Trust's investment performance.
The Board compared Trust performance -- both including and excluding the effects
of the Trust's fees and expenses -- to the performance of a comparable group of
mutual funds and the performance of a relevant index or combination of indexes.
While the Board reviews performance data at least quarterly, consistent with the
Investment Adviser's investment goals, the Board attaches more importance to
performance over relatively long periods of time, typically three to five years.
For the periods ended November 30, 2005, the Trust's performance after fees and
expenses ranked in the second quintile of a comparable group of funds for each
of the one-, three- and five-year periods. Considering these factors, the Board
concluded that the Trust's performance supported the continuation of the
Investment Advisory Agreement.
The Investment Adviser's Personnel and Investment Process -- The Board reviewed
the Trust's investment objectives and strategies. The Board discusses with
senior management of the Investment Adviser responsible for investment
operations and the senior management of the Investment Adviser's equity
investing group the strategies being used to achieve the stated objectives.
Among other things, the Board considers the size, education and experience of
the Investment Adviser's investment staff, its use of technology, and the
Investment Adviser's approach to training and retaining portfolio managers and
other research, advisory and management personnel. The Board also reviews the
Investment Adviser's compensation policies and practices with respect to the
Trust's portfolio manager. The Board also considered the experience of the
Trust's portfolio manager and noted that Mr. Shearer has more than 10 years of
experience in portfolio management. The Board considered that the Investment
Adviser and its investment staff have extensive experience in analyzing and
managing the types of investments used by the Trust. The Board concluded that
the Trust benefits from that experience.
Management Fees and Other Expenses -- The Board reviews the Trust's contractual
management fee rate and actual management fee rate as a percentage of total
assets at common asset levels -- the actual rate includes advisory and
administrative service fees and the effects of any fee waivers -- compared to
the other funds in its Lipper category. It also compares the Trust's total
expenses to those of other comparable funds. The Board noted that the Investment
Adviser had advised the Board that it had no other comparable accounts with
similar investment mandates. The Board noted that the Trust's actual and
contractual management fees and actual total expenses including
investment-related expenses were lower than the medians of fees and expenses of
comparable funds as classified by Lipper. The Board concluded that the Trust's
management fee rate and overall expense ratio are acceptable compared to those
of other comparable funds.
Profitability -- The Board considers the cost of the services provided to the
Trust by the Investment Adviser and the Investment Adviser's and its affiliates'
profits relating to the management and distribution of the Trust and the
MLIM/FAM-advised funds. As part of its analysis, the Board reviewed the
Investment Adviser's methodology in allocating its costs to the management of
the Trust and concluded that there was a reasonable basis for the allocation.
The Board believes that the profits of the Investment Adviser and its affiliates
are acceptable in relation to the nature and quality of services provided and
given the level of fees and expenses overall.
MERRILL LYNCH NATURAL RESOURCES TRUST JULY 31, 2006 23
Disclosure of Investment Advisory Agreement (concluded)
Economies of Scale -- The Board considered the extent to which economies of
scale might be realized as the assets of the Trust increase and whether there
should be changes in the management fee rate or structure in order to enable the
Trust to participate in these economies of scale. While the Board concluded that
it did not believe that the Trust's assets have reached a level where such
economies are effectively available, the Board noted that it will continue to
monitor information relating to economies of scale.
Conclusion
After the independent Trustees deliberated in executive session, the entire
Board, including all of the independent Trustees, approved the renewal of the
existing Investment Advisory Agreement and sub-advisory agreement, concluding
that the advisory fee was reasonable in relation to the services provided and
that a contract renewal was in the best interests of the shareholders.
Disclosure of New Investment Advisory Agreement
New BlackRock Investment Advisory Agreement -- Matters Considered by the Board
In connection with the Transaction between Merrill Lynch and BlackRock, the
Trust's Board of Trustees considered a new investment advisory agreement (the
"New Investment Advisory Agreement") between the Trust and BlackRock Advisors,
Inc. or its successor ("BlackRock Advisors"). The New Investment Advisory
Agreement has been approved by the Fund's shareholders and is expected to become
effective upon the closing of the Transaction in the third quarter of 2006.
The Board discussed the New Investment Advisory Agreement at telephonic and
in-person meetings held during April and May 2006. The Board, including the
independent trustees, approved the New Investment Advisory Agreement at a
meeting held on May 8, 2006.
To assist the Board in its consideration of the New Investment Advisory
Agreement, BlackRock provided materials and information about BlackRock,
including its financial condition and asset management capabilities and
organization, and Merrill Lynch provided materials and information about the
Transaction. The independent trustees, through their independent legal counsel,
also requested and received additional information from Merrill Lynch and
BlackRock in connection with their consideration of the New Investment Advisory
Agreement. The additional information was provided in advance of the May 8, 2006
meeting. In addition, the independent trustees consulted with their counsel and
Trust counsel on numerous occasions, discussing, among other things, the legal
standards and certain other considerations relevant to the trustees'
deliberations.
At the Board meetings, the trustees discussed with Merrill Lynch management and
certain BlackRock representatives the Transaction, its strategic rationale and
BlackRock's general plans and intentions regarding the Trust. At these Board
meetings, representatives of Merrill Lynch and BlackRock made presentations to
and responded to questions from the Board. The trustees also inquired about the
plans for and anticipated roles and responsibilities of certain employees and
officers of the Investment Adviser and certain affiliates being transferred to
BlackRock in connection with the Transaction. The independent trustees of the
Board also conferred separately and with their counsel about the Transaction and
other matters related to the Transaction on a number of occasions, including in
connection with the April and May 2006 meetings. After the presentations and
after reviewing the written materials provided, the independent trustees met in
executive sessions with their counsel to consider the New Investment Advisory
Agreement.
In connection with the Board's review of the New Investment Advisory Agreement,
Merrill Lynch and/or BlackRock advised the trustees about a variety of matters.
The advice included the following, among other matters:
o that there is not expected to be any diminution in the nature, quality and
extent of services provided to the Trust and its shareholders by BlackRock
Advisors, including compliance services;
o that operation of New BlackRock as an independent investment management
firm will enhance its ability to attract and retain talented
professionals;
24 MERRILL LYNCH NATURAL RESOURCES TRUST JULY 31, 2006
o that the Trust should benefit from having access to BlackRock's state of
the art technology and risk management analytic tools, including
investment tools, provided under the BlackRock Solutions(R) brand name;
o that BlackRock has no present intention to alter any applicable expense
waivers or reimbursements currently in effect and, while it reserves the
right to do so in the future, it would seek the approval of the Board
before making any changes;
o that BlackRock and Merrill Lynch will enter into an agreement, for an
initial three-year period and automatically renewable from year to year
thereafter, in connection with the Transaction under which Merrill
Lynch-affiliated broker-dealers will continue to offer the Trust as an
investment product;
o that BlackRock Advisors will have substantially the same access to the
Merrill Lynch sales force when distributing shares of the Trust as is
currently provided to the Investment Adviser and that other arrangements
between the Investment Adviser and Merrill Lynch sales channels will be
preserved;
o that the Trust will have access to BlackRock's network of third party
brokers, retirement plan platforms and registered investment advisers;
o that in connection with the Transaction, Merrill Lynch and BlackRock have
agreed to conduct, and use reasonable best efforts to cause their
respective affiliates to conduct, their respective businesses in
compliance with the conditions of Section 15(f) of the Investment Company
Act of 1940 (the "1940 Act") in relation to any public funds advised by
BlackRock or the Investment Adviser (or its affiliates), respectively; and
o that Merrill Lynch and BlackRock would derive benefits from the
Transaction and that, as a result, they have a different financial
interest in the matters that were being considered than do Trust
shareholders.
The trustees considered the information provided by Merrill Lynch and BlackRock
above, and, among other factors, the following:
o the potential benefits to Trust shareholders from being part of a combined
fund family with BlackRock-sponsored funds, including possible economies
of scale and access to investment opportunities;
o the potential for expanding distribution of Trust shares through improved
access to third party distribution;
o the reputation, financial strength and resources of BlackRock and its
investment advisory subsidiaries and the anticipated financial strength
and resources of New BlackRock;
o the compliance policies and procedures of BlackRock Advisors;
o the terms and conditions of the New Investment Advisory Agreement,
including the fact that the schedule of the Trust's total advisory fees
will not increase by virtue of the New Investment Advisory Agreement, but
will remain the same;
o that in March 2006, the Board performed a full annual review of the
investment advisory agreement currently in effect for the Trust (the
"Current Investment Advisory Agreement") as required by the 1940 Act and
has determined that the Investment Adviser has the capabilities, resources
and personnel necessary to provide the advisory and administrative
services currently provided to the Trust; and that the advisory and/or
management fees paid by the Trust, taking into account any applicable
agreed-upon fee waivers and breakpoints, represent reasonable compensation
to the Investment Adviser in light of the services provided, the costs to
the Investment Adviser of providing those services, economies of scale,
the fees and other expenses paid by similar funds (including information
provided by Lipper Inc. ["Lipper"]), and such other matters as the
trustees have considered relevant in the exercise of their reasonable
judgment; and
o that Merrill Lynch agreed to pay all expenses of the Trust in connection
with the Board's consideration of the New Investment Advisory Agreement
and related agreements and all costs of shareholder approval of the New
Investment Advisory Agreement and as a result the Trust would bear no
costs in obtaining shareholder approval of the New Investment Advisory
Agreement.
Certain of these considerations are discussed in more detail below.
In its review of the New Investment Advisory Agreement, the Board assessed the
nature, scope and quality of the services to be provided to the Trust by the
personnel of BlackRock Advisors and its affiliates, including administrative
services, shareholder services, oversight of fund accounting, marketing
MERRILL LYNCH NATURAL RESOURCES TRUST JULY 31, 2006 25
Disclosure of New Investment Advisory Agreement (continued)
services and assistance in meeting legal and regulatory requirements. In its
review of the New Investment Advisory Agreement, the Board also considered a
range of information in connection with its oversight of the services to be
provided by BlackRock Advisors and its affiliates. Among the matters considered
were: (a) fees (in addition to management fees) to be paid to BlackRock Advisors
and its affiliates by the Trust; (b) Trust operating expenses paid to third
parties; (c) the resources devoted to and compliance reports relating to the
Trust's investment objective, policies and restrictions, and its compliance with
its Code of Ethics and BlackRock Advisors' compliance policies and procedures;
and (d) the nature, cost and character of non-investment management services to
be provided by BlackRock Advisors and its affiliates.
In the period prior to the Board meetings to consider renewal of the Current
Investment Advisory Agreement, the Board had requested and received materials
specifically relating to the Current Investment Advisory Agreement. These
materials included (a) information compiled by Lipper on the fees and expenses
and the investment performance of the Trust as compared to a comparable group of
funds as classified by Lipper; (b) a discussion by the Trust's portfolio
management team on investment strategies used by the Trust during its most
recent fiscal year; (c) information on the profitability to the Investment
Adviser of the Current Investment Advisory Agreement and other payments received
by the Investment Adviser and its affiliates from the Trust; and (d) information
provided by the Investment Adviser concerning services related to the valuation
and pricing of the Trust's portfolio holdings, allocation of brokerage fees, the
Trust's portfolio turnover statistics, and direct and indirect benefits to the
Investment Adviser and its affiliates from their relationship with the Trust.
In their deliberations, the trustees considered information received in
connection with their most recent continuation of the Current Investment
Advisory Agreement, in addition to information provided by BlackRock and
BlackRock Advisors in connection with their evaluation of the terms and
conditions of the New Investment Advisory Agreement. The trustees did not
identify any particular information that was all-important or controlling, and
each trustee attributed different weights to the various factors. The trustees,
including a majority of the independent trustees, concluded that the terms of
the New Investment Advisory Agreement are appropriate, that the fees to be paid
are reasonable in light of the services to be provided to the Trust, and that
the New Investment Advisory Agreement should be approved and recommended to
Trust shareholders.
Nature, Quality and Extent of Services Provided -- The Board reviewed the
nature, extent and quality of services provided by the Investment Adviser,
including the investment advisory services and the resulting performance of the
Trust, as well as the nature, quality and extent of services expected to be
provided by BlackRock Advisors. The Board focused primarily on the Investment
Adviser's investment advisory services and the Trust's investment performance,
but also considered certain areas in which both the Investment Adviser and the
Trust receive services as part of the Merrill Lynch complex. The Board compared
the Trust's performance -- both including and excluding the effects of the
Trust's fees and expenses -- to the performance of a comparable group of mutual
funds, and the performance of a relevant index or combination of indexes. While
the Board reviews performance data at least quarterly, consistent with the
Investment Adviser's investment goals, the Board attaches more importance to
performance over relatively long periods of time, typically three to five years.
In evaluating the nature, quality and extent of the services to be provided by
BlackRock Advisors under the New Investment Advisory Agreement, the trustees
considered, among other things, the expected impact of the Transaction on the
operations, facilities, organization and personnel of BlackRock Advisors and how
it would affect the Trust; the ability of BlackRock Advisors to perform its
duties after the Transaction; and any anticipated changes to the current
investment and other practices of the Trust.
The trustees were given information with respect to the potential benefits to
the Trust and its shareholders from having access to BlackRock's state of the
art technology and risk management analytic tools, including the investment
tools provided under the BlackRock Solutions brand name.
The trustees were advised that, as a result of Merrill Lynch's equity interest
in BlackRock after the Transaction, the Trust will continue to be subject to
restrictions concerning certain transactions involving Merrill Lynch affiliates
(for example, transactions with a Merrill Lynch broker-dealer acting as
principal) absent revised or new regulatory relief. The trustees were advised
that a revision of existing regulatory relief with respect to these restrictions
was being sought from the Securities and Exchange Commission and were advised of
the possibility of receipt of such revised regulatory relief. There can be no
assurance that such relief will be obtained.
26 MERRILL LYNCH NATURAL RESOURCES TRUST JULY 31, 2006
Based on their review of the materials provided and the assurances they had
received from the management of Merrill Lynch and of BlackRock, the trustees
determined that the nature and quality of services to be provided to the Trust
under the New Investment Advisory Agreement were expected to be as good as or
better than that provided under the Current Investment Advisory Agreement. It
was noted, however, that it is expected that there will be changes in personnel
following the Transaction and the combination of the operations of the
Investment Adviser and its affiliates with those of BlackRock. The trustees
noted that if current portfolio managers or other personnel cease to be
available, the Board would consider all available options, which could include
seeking the investment advisory or other services of BlackRock affiliates.
Accordingly, the trustees concluded that, overall, they were satisfied at the
present time with assurances from BlackRock and BlackRock Advisors as to the
expected nature, extent and quality of the services to be provided to the Trust
under the New Investment Advisory Agreement.
Costs of Services Provided and Profitability -- It was noted that, in
conjunction with the recent review of the Current Investment Advisory Agreement,
the trustees had received, among other things, a report from Lipper comparing
the Trust's fees, expenses and performance to those of a peer group selected by
Lipper, and information as to the fees charged by the Investment Adviser or its
affiliates to other registered investment company clients for investment
management services. The Board reviewed the Trust's contractual management fee
rate and actual management fee rate as a percentage of total assets at common
asset levels -- the actual rate includes advisory fees and the effects of any
fee waivers -- compared to the other funds in its Lipper category. They also
compared the Trust's total expenses to those of other comparable funds. The
information showed that the Trust had fees and expenses within the range of fees
and expenses of comparable funds. The Board considered the services to be
provided by and the fees to be charged by BlackRock Advisors to other funds with
similar investment mandates and noted that the fees charged by BlackRock
Advisors in those cases, including fee waivers and expense reimbursements, were
generally comparable to those being charged to the Trust. The Board also noted
that, as a general matter, according to the information provided by BlackRock,
fees charged to institutional clients were lower than the fees charged to the
Trust, but BlackRock Advisors provided less extensive services to such clients.
The Board concluded that the Trust's management fee and fee rate and overall
expense ratio are reasonable compared to those of other comparable funds.
In evaluating the costs of the services to be provided by BlackRock Advisors
under the New Investment Advisory Agreement, the trustees considered, among
other things, whether advisory fees or other expenses would change as a result
of the Transaction. Based on their review of the materials provided and the fact
that the New Investment Advisory Agreement is substantially similar to the
Current Investment Advisory Agreement in all material respects, including the
rate of compensation, the trustees determined that the Transaction should not
increase the total fees payable, including any fee waivers and expense
reimbursements, for advisory and administrative services. The trustees noted
that it was not possible to predict with certainty New BlackRock's future
profitability from its relationship with the Trust.
The trustees discussed with BlackRock Advisors its general methodology to be
used in determining New BlackRock's profitability with respect to its
relationship with the Trust. The trustees noted that they expect to receive
profitability information from New BlackRock on at least an annual basis and
thus be in a position to evaluate whether any adjustments in the Trust's fees
and/or fee breakpoints would be appropriate.
Fees and Economies of Scale -- The Board considered the extent to which
economies of scale might be realized as the assets of the Trust increase and
whether there should be changes in the management fee rate or structure in order
to enable the Trust to participate in these economies of scale. The Board
determined that changes were not currently necessary and that the Trust
appropriately participated in these economies of scale.
In reviewing the Transaction, the trustees considered, among other things,
whether advisory fees or other expenses would change as a result of the
Transaction. Based on the fact that the New Investment Advisory Agreement is
substantially similar to the Current Investment Advisory Agreement in all
material respects, including the rate of compensation, the trustees determined
that as a result of the Transaction, the Trust's total advisory fees would be no
higher than the fees under its Current Investment Advisory Agreement. The
trustees noted that in conjunction with their most recent deliberations
concerning the Current Investment Advisory Agreement, the trustees had
determined that the total fees for advisory and administrative services for the
Trust were reasonable in light of the services provided. It was noted that in
conjunction with the recent review of the Current Investment Advisory Agreement,
the trustees had received, among other things, a report from Lipper comparing
the Trust's fees, expenses and performance to those of a peer group selected
MERRILL LYNCH NATURAL RESOURCES TRUST JULY 31, 2006 27
Disclosure of New Investment Advisory Agreement (concluded)
by Lipper, and information as to the fees charged by the Investment Adviser to
other registered investment company clients for investment management services.
The trustees concluded that, because the rates for advisory fees for the Trust
would be no higher than its current fee rates, the proposed management fee
structure, including any fee waivers, was reasonable and that no additional
changes were currently necessary.
Fall-Out Benefits -- In evaluating the fall-out benefits to be received by
BlackRock Advisors under the New Investment Advisory Agreement, the trustees
considered whether the Transaction would have an impact on the fall-out benefits
received by the Investment Adviser by virtue of the Current Investment Advisory
Agreement. Based on their review of the materials provided, including materials
received in connection with their most recent approval or continuance of the
Current Investment Advisory Agreement, and their discussions with management of
the Investment Adviser and BlackRock, the trustees determined that those
benefits could include increased ability for BlackRock to distribute shares of
its funds and other investment products and to obtain research services using
the Trust's portfolio transaction brokerage commissions. The trustees also
considered possible benefits stemming from the proposal that PFPC Financial
Services, an affiliate of BlackRock, serve as transfer agent for the Trust
following the Transaction. The trustees noted that any benefits were difficult
to quantify with certainty at this time, and indicated that they would continue
to evaluate them going forward.
Investment Performance -- The trustees considered investment performance for the
Trust. The trustees compared the Trust's performance -- both including and
excluding the effects of the Trust's fees and expenses -- to the performance of
a comparable group of mutual funds, and the performance of a relevant index or
combination of indexes. The comparative information received from Lipper showed
Trust performance at various levels within the range of performance of
comparable funds over different time periods. While the Board reviews
performance data at least quarterly, consistent with the Investment Adviser's
investment goals, the Board attaches more importance over relatively long
periods of time, typically three to five years. The trustees believed the
Trust's performance was satisfactory. Also, the trustees took into account the
investment performance of funds currently advised by BlackRock Advisors. The
Board considered comparative information from Lipper which showed that the
performance of the funds advised by BlackRock Advisors was within the range of
performance of comparable funds over different time periods. The Board noted
BlackRock's considerable investment management experience and capabilities, but
were unable to predict what effect, if any, consummation of the Transaction
would have on the future performance of the Trust.
Conclusion -- After the independent trustees of the Trust deliberated in
executive session, the entire Board, including the independent trustees,
approved the New Investment Advisory Agreement, concluding that the advisory fee
rate was reasonable in relation to the services provided and that the New
Investment Advisory Agreement was in the best interests of the shareholders. In
approving the New Investment Advisory Agreement, the Board noted that it
anticipated reviewing the continuance of the agreement in advance of the
expiration of the initial two-year period.
Contingent BlackRock Subadvisory Agreement -- Matters Considered by the Board
At the telephonic and in-person meetings held during April and May 2006 at which
the Board of Trustees discussed and approved the New Investment Advisory
Agreement, the Board, including the independent trustees, also considered a
contingent subadvisory agreement (the "Contingent Subadvisory Agreement")
between the Investment Adviser and BlackRock Advisors (the "BlackRock
Subadviser"). The Contingent Subadvisory Agreement is intended to ensure that
the Trust operates with efficient portfolio management services until the
closing of the Transaction, in the event that the Board deems it necessary and
in the best interests of the Trust and its shareholders that the BlackRock
Subadviser assist in managing the operations of the Trust during the interim
period until the closing of the Transaction. The Contingent Subadvisory
Agreement would take effect only upon recommendation from the Investment Adviser
and upon subsequent approval of the Board in the period up to the closing of the
Transaction. The effectiveness of the Contingent Subadvisory Agreement,
therefore, is contingent on further Board approval. Pursuant to the Contingent
Subadvisory Agreement, the BlackRock Subadviser would receive a monthly fee from
the Investment Adviser equal to 50% of the advisory fee received by the
Investment Adviser. The Investment Adviser would pay the BlackRock Subadviser
out of its own resources. There would be no increase in the Trust's expenses as
a result of the Contingent Subadvisory Agreement.
In making its approval at the May in-person meeting, the Board considered the
Contingent Subadvisory Agreement in conjunction with the New Investment Advisory
Agreement
28 MERRILL LYNCH NATURAL RESOURCES TRUST JULY 31, 2006
and reviewed the same information and factors discussed above. The Board also
considered in conjunction with the Contingent Subadvisory Agreement the
necessity of ensuring that the Trust operates with effective management services
until the closing of the Transaction. In reviewing the subadvisory fee rate
provided in the Contingent Subadvisory Agreement, the Board took note of the
fact that both the Investment Adviser and the BlackRock Subadviser would have
significant responsibilities under their respective advisory agreements. The
Investment Adviser would remain responsible for oversight of the Trust's
operations and administration and the BlackRock Subadviser would provide
advisory services to the Trust under the Contingent Subadvisory Agreement. The
Board also took into account the expected short duration of the term of any
Contingent Subadvisory Agreement and the fact that total advisory fees paid by
the Trust would not increase as a result of the Contingent Subadvisory
Agreement. Under all of the circumstances, the Board concluded that it was a
reasonable allocation of fees for the BlackRock Subadviser to receive 50% of the
advisory fee paid by the Trust to the Investment Adviser.
After the independent trustees deliberated in executive session, the entire
Board, including the independent trustees, approved the Contingent Subadvisory
Agreement, concluding that the advisory fee was reasonable in relation to the
services provided and that the Contingent Subadvisory Agreement was in the best
interests of shareholders.
Proxy Results
During the six-month period ended July 31, 2006, Merrill Lynch Natural Resources
Trust's shareholders voted on the following proposals. With respect to Proposals
1, 3 and 5, the meeting on July 31, 2006 was adjourned until August 31, 2006. A
description of the proposals and number of shares voted were as follows:
- -------------------------------------------------------------------------------------------------
Shares Voted Shares Voted Shares Voted
For Against Abstain
- -------------------------------------------------------------------------------------------------
1. To approve a new investment advisory agreement. 2,833,439 87,458 100,575
- -------------------------------------------------------------------------------------------------
3. To approve a contingent subadvisory agreement. 2,829,193 91,623 100,655
- -------------------------------------------------------------------------------------------------
5. To approve a change in Fundamental
Investment Restriction. 2,777,389 137,545 106,537
- -------------------------------------------------------------------------------------------------
MERRILL LYNCH NATURAL RESOURCES TRUST JULY 31, 2006 29
Officers and Trustees
Number of
Portfolios in Other Public
Position(s) Length of Fund Complex Directorships
Held with Time Overseen by Held by
Name Address & Age Trust Served Principal Occupation(s) During Past 5 Years Trustee Trustee
====================================================================================================================================
Interested Trustee
- ------------------------------------------------------------------------------------------------------------------------------------
Robert C. P.O. Box 9011 President 2005 to President of the MLIM/FAM-advised funds since 2005; 131 Funds None
Doll, Jr.* Princeton, NJ and present President and Chief Investment Officer of MLIM and 178 Portfolios
08543-9011 Trustee FAM since 2001; Co-Head (Americas Region) thereof
Age: 51 from 2000 to 2001 and Senior Vice President from
1999 to 2001; President and Director of Princeton
Services, Inc. ("Princeton Services") since 2001;
President of Princeton Administrators, L.P.
("Princeton Administrators") since 2001; Chief
Investment Officer of OppenheimerFunds, Inc. in 1999
and Executive Vice President thereof from 1991 to
1999.
------------------------------------------------------------------------------------------------------------------------
* Mr. Doll is a director, trustee or member of an advisory board of certain other investment companies for which
MLIM or FAM acts as investment adviser. Mr. Doll is an "interested person," as defined in the Investment Company
Act, of the Fund based on his positions with MLIM, FAM, Princeton Services and Princeton Administrators. Trustees
serve until their resignation, removal or death, or until December 31 of the year in which they turn 72. As Fund
President, Mr. Doll serves at the pleasure of the Board of Trustees.
====================================================================================================================================
Independent Trustees*
- ------------------------------------------------------------------------------------------------------------------------------------
Donald W. P.O. Box 9095 Trustee 2002 to General Partner of The Burton Partnership, Limited 23 Funds Knology, Inc.
Burton Princeton, NJ present Partnership (an investment partnership) since 1979; 42 Portfolios (telecommuni-
08543-9095 Managing General Partner of The South Atlantic cations) and
Age: 62 Venture Funds since 1983; Member of the Investment Symbion, Inc.
Advisory Council of the Florida State Board of (health care)
Administration since 2001.
- ------------------------------------------------------------------------------------------------------------------------------------
John P.O. Box 9095 Trustee 2005 to President and Chief Executive Officer of Allmerica 23 Funds Cabot Corpor-
Francis Princeton, NJ present Financial Corporation (financial services holding 42 Portfolios ation (chem-
O'Brien 08543-9095 company) from 1995 to 2002 and Director from 1995 to icals), LKQ
Age: 63 2003; President of Allmerica Investment Management Corporation
Co., Inc. (investment adviser) from 1989 to 2002, (auto parts
Director from 1989 to 2002 and Chairman of the Board manufactur-
from 1989 to 1990; President, Chief Executive ing) and TJX
Officer and Director of First Allmerica Financial Companies,
Life Insurance Company from 1989 to 2002 and Inc.
Director of various other Allmerica Financial (retailer)
companies until 2002; Director from 1989 to 2006,
Member of the Governance Nominating Committee from
2004 to 2006, Member of the Compensation Committee
from 1989 to 2006, and Member of the Audit Committee
from 1990 to 2004 of ABIOMED; Director, Member of
the Governance and Nomination Committee and Member
of the Audit Committee of Cabot Corporation since
1990; Director and Member of the Audit Committee and
Compensation Committee of LKQ Corporation since
2003; Lead Director of TJX Companies, Inc. since
1999; Trustee of the Woods Hole Oceanographic
Institute since 2003.
- ------------------------------------------------------------------------------------------------------------------------------------
David H. P.O. Box 9095 Trustee 2003 to Consultant with Putnam Investments from 1993 to 23 Funds None
Walsh Princeton, NJ present 2003, and employed in various capacities therewith 42 Portfolios
08543-9095 from 1973 to 1992; Director, Massachusetts Audubon
Age: 64 Society from 1990 to 1997; Director, The National
Audubon Society from 1998 to 2005; Director, The
American Museum of Fly Fishing since 1997.
30 MERRILL LYNCH NATURAL RESOURCES TRUST JULY 31, 2006
Officers and Trustees (concluded)
Number of
Portfolios in Other Public
Position(s) Length of Fund Complex Directorships
Held with Time Overseen by Held by
Name Address & Age Trust Served Principal Occupation(s) During Past 5 Years Trustee Trustee
====================================================================================================================================
Independent Trustees* (concluded)
- ------------------------------------------------------------------------------------------------------------------------------------
Fred G. P.O. Box 9095 Trustee 1998 to Managing Director of FGW Associates since 1997; Vice 23 Funds Watson
Weiss ** Princeton, NJ present President, Planning, Investment and Development of 42 Portfolios Pharmaceuti-
08543-9095 Warner Lambert Co. from 1979 to 1997; Director of cals, Inc.
Age: 64 the Michael J. Fox Foundation for Parkinson's (pharma-
Research since 2000; Director of BTG International ceutical
Plc (a global technology commercialization company) company)
since 2001.
------------------------------------------------------------------------------------------------------------------------
* Trustees serve until their resignation, removal or death, or until December 31 of the year in which they turn 72.
** Chairman of the Board of Trustees and the Audit Committee.
====================================================================================================================================
Trust Officers*
- ------------------------------------------------------------------------------------------------------------------------------------
Donald C. P.O. Box 9011 Vice 1993 to Managing Director of MLIM and FAM since 2006 and Treasurer thereof since 1999;
Burke Princeton, NJ President present First Vice President of MLIM and FAM from 1997 to 2005; Senior Vice President and
08543-9011 and and Treasurer of Princeton Services since 1999 and Director since 2004; Vice President
Age: 46 Treasurer 1999 to of FAM Distributors, Inc. ("FAMD") since 1999 and Director since 2004; Vice
present President of MLIM and FAM from 1990 to 1997; Director of Taxation of MLIM from 1990
to 2001; Vice President, Treasurer and Secretary of the IQ Funds since 2004.
- ------------------------------------------------------------------------------------------------------------------------------------
Robert M. P.O. Box 9011 Vice 1997 to Managing Director of MLIM since 2000; First Vice President of MLIM from 1998 to
Shearer Princeton, NJ President present 2000; Vice President of MLIM from 1997 to 1998.
08543-9011
Age: 51
- ------------------------------------------------------------------------------------------------------------------------------------
Jeffrey P.O. Box 9011 Chief 2004 to Chief Compliance Officer of the MLIM/FAM-advised funds and First Vice President and
Hiller Princeton, NJ Compliance present Chief Compliance Officer of MLIM (Americas Region) since 2004; Chief Compliance
08543-9011 Officer Officer of the IQ Funds since 2004; Global Director of Compliance at Morgan Stanley
Age: 54 Investment Management from 2002 to 2004; Managing Director and Global Director of
Compliance at Citigroup Asset Management from 2000 to 2002; Chief Compliance
Officer at Soros Fund Management in 2000; Chief Compliance Officer at Prudential
Financial from 1995 to 2000; Senior Counsel in the Securities and Exchange
Commission's Division of Enforcement in Washington, D.C. from 1990 to 1995.
- ------------------------------------------------------------------------------------------------------------------------------------
Alice A. P.O. Box 9011 Secretary 2004 to Director (Legal Advisory) of MLIM since 2002; Vice President of MLIM from 1999 to
Pellegrino Princeton, NJ present 2002; Attorney associated with MLIM since 1997; Secretary of MLIM, FAM, FAMD and
08543-9011 Princeton Services since 2004.
Age: 46
------------------------------------------------------------------------------------------------------------------------
* Officers of the Trust serve at the pleasure of the Board of Trustees.
- ------------------------------------------------------------------------------------------------------------------------------------
Further information about the Trust's Officers and Trustees is available in the Fund's Statement of Additional
Information, which can be obtained without charge by calling 1-800-637-3863.
- ------------------------------------------------------------------------------------------------------------------------------------
Custodian
The Bank of New York
100 Church Street
New York, NY 10286
Transfer Agent
Financial Data Services, Inc.
4800 Deer Lake Drive East
Jacksonville, FL 32246-6484
800-637-3863
- --------------------------------------------------------------------------------
Laurie Simon Hodrick resigned as a Trustee of Merrill Lynch Natural Resources
Trust effective May 1, 2006.
- --------------------------------------------------------------------------------
Electronic Delivery
The Trust offers electronic delivery of communications to its shareholders. In
order to receive this service, you must register your account and provide us
with e-mail information. To sign up for this service, simply access this Web
site at http://www.icsdelivery.com/live and follow the instructions. When you
visit this site, you will obtain a personal identification number (PIN). You
will need this PIN should you wish to update your e-mail address, choose to
discontinue this service and/or make any other changes to the service. This
service is not available for certain retirement accounts at this time.
MERRILL LYNCH NATURAL RESOURCES TRUST JULY 31, 2006 31
[LOGO] Merrill Lynch Investment Managers
www.mlim.ml.com
- --------------------------------------------------------------------------------
Mercury Advisors
A Division of Merrill Lynch Investment Managers
www.mercury.ml.com
This report is not authorized for use as an offer of sale or a solicitation of
an offer to buy shares of the Trust unless accompanied or preceded by the
Trust's current prospectus. Past performance results shown in this report should
not be considered a representation of future performance. Investment return and
principal value of shares will fluctuate so that shares, when redeemed, may be
worth more or less than their original cost. Statements and other information
herein are as dated and are subject to change.
A description of the policies and procedures that the Trust uses to determine
how to vote proxies relating to portfolio securities is available (1) without
charge, upon request, by calling toll-free 1-800-637-3863; (2) at
www.mutualfunds.ml.com; and (3) on the Securities and Exchange Commission's Web
site at http://www.sec.gov. Information about how the Trust voted proxies
relating to securities held in the Trust's portfolio during the most recent
12-month period ended June 30 is available (1) at www.mutualfunds.ml.com and (2)
on the Securities and Exchange Commission's Web site at http://www.sec.gov.
Merrill Lynch Natural Resources Trust
Box 9011
Princeton, NJ 08543-9011
#10303 -- 7/06
Item 2 - Code of Ethics - The registrant has adopted a code of ethics, as of the
end of the period covered by this report, that applies to the
registrant's principal executive officer, principal financial officer
and principal accounting officer, or persons performing similar
functions. A copy of the code of ethics is available without charge
upon request by calling toll-free 1-800-MER-FUND (1-800-637-3863).
Item 3 - Audit Committee Financial Expert - The registrant's board of directors
has determined that (i) the registrant has the following audit
committee financial experts serving on its audit committee and (ii)
each audit committee financial expert is independent: (1) Donald W.
Burton, (2) Laurie Simon Hodrick (resigned as of May 1, 2006), (3) John
F. O'Brien, (4) David H. Walsh and (5) Fred G. Weiss.
The registrant's board of directors has determined that Laurie Simon
Hodrick qualifies as a financial expert pursuant to Item 3(c)(4) of
Form N-CSR.
Ms. Hodrick has a thorough understanding of generally accepted
accounting principals, financial statements, and internal controls and
procedures for financial reporting. Ms. Hodrick earned a Ph.D. in
economics and has taught courses in finance for over 15 years. Her
M.B.A.-level course centers around the evaluation and analysis of
firms' corporate financial statements. She has also taught in financial
analysts' training programs. Ms. Hodrick has also worked with several
prominent corporations in connection with the analysis of financial
forecasts and projections and analysis of the financial statements of
those companies, serving on the Financial Advisory Council of one of
these major corporations. She has also served as the Treasurer and
Finance Chair of a 501(c)(3) organization. Ms. Hodrick has published a
number of articles in leading economic and financial journals and is
the associate editor of two leading finance journals.
Item 4 - Principal Accountant Fees and Services
(a) Audit Fees - Fiscal Year Ending July 31, 2006 - $29,000
Fiscal Year Ending July 31, 2005 - $28,000
(b) Audit-Related Fees - Fiscal Year Ending July 31, 2006 - $0
Fiscal Year Ending July 31, 2005 - $0
(c) Tax Fees - Fiscal Year Ending July 31, 2006 - $6,000
Fiscal Year Ending July 31, 2005 - $5,700
The nature of the services include tax compliance, tax advice and tax
planning.
(d) All Other Fees - Fiscal Year Ending July 31, 2006 - $0
Fiscal Year Ending July 31, 2005 - $0
(e)(1) The registrant's audit committee (the "Committee") has adopted
policies and procedures with regard to the pre-approval of services.
Audit, audit-related and tax compliance services provided to the
registrant on an annual basis require specific pre-approval by the
Committee. The Committee also must approve other non-audit services
provided to the registrant and those non-audit services provided to the
registrant's affiliated service providers that relate directly to the
operations and the financial reporting of the registrant. Certain of
these non-audit services that the Committee believes are a) consistent
with the SEC's auditor independence rules and b) routine and recurring
services that will not impair the independence of the independent
accountants may be approved by the Committee without consideration on a
specific case-by-case basis ("general pre-approval"). However, such
services will only be deemed pre-approved provided that any individual
project does not exceed $5,000 attributable to the registrant or
$50,000 for all of the registrants the Committee oversees. Any proposed
services exceeding the pre-approved cost levels will require specific
pre-approval by the Committee, as will any other services not subject
to general pre-approval (e.g., unanticipated but permissible services).
The Committee is informed of each service approved subject to general
pre-approval at the next regularly scheduled in-person board meeting.
(e)(2) 0%
(f) Not Applicable
(g) Fiscal Year Ending July 31, 2006 - $2,186,750
Fiscal Year Ending July 31, 2005 - $7,926,666
(h) The registrant's audit committee has considered and determined that
the provision of non-audit services that were rendered to the
registrant's investment adviser and any entity controlling, controlled
by, or under common control with the investment adviser that provides
ongoing services to the registrant that were not pre-approved pursuant
to paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X is compatible
with maintaining the principal accountant's independence.
Regulation S-X Rule 2-01(c)(7)(ii) - $1,409,500, 0%
Item 5 - Audit Committee of Listed Registrants - Not Applicable
Item 6 - Schedule of Investments - Not Applicable
Item 7 - Disclosure of Proxy Voting Policies and Procedures for Closed-End
Management Investment Companies - Not Applicable
Item 8 - Portfolio Managers of Closed-End Management Investment Companies - Not
Applicable
Item 9 - Purchases of Equity Securities by Closed-End Management Investment
Company and Affiliated Purchasers - Not Applicable
Item 10 - Submission of Matters to a Vote of Security Holders - Not Applicable
Item 11 - Controls and Procedures
11(a) - The registrant's certifying officers have reasonably designed such
disclosure controls and procedures to ensure material information
relating to the registrant is made known to us by others particularly
during the period in which this report is being prepared. The
registrant's certifying officers have determined that the registrant's
disclosure controls and procedures are effective based on our evaluation
of these controls and procedures as of a date within 90 days prior to
the filing date of this report.
11(b) - There were no changes in the registrant's internal control over
financial reporting (as defined in Rule 30a-3(d) under the Act (17 CFR
270.30a-3(d)) that occurred during the second fiscal half-year of the
period covered by this report that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting.
Item 12 - Exhibits attached hereto
12(a)(1) - Code of Ethics - See Item 2
12(a)(2) - Certifications - Attached hereto
12(a)(3) - Not Applicable
12(b) - Certifications - Attached hereto
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
Merrill Lynch Natural Resources Trust
By: /s/ Robert C. Doll, Jr.
-------------------------------
Robert C. Doll, Jr.,
Chief Executive Officer of
Merrill Lynch Natural Resources Trust
Date: September 20, 2006
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By: /s/ Robert C. Doll, Jr.
-------------------------------
Robert C. Doll, Jr.,
Chief Executive Officer of
Merrill Lynch Natural Resources Trust
Date: September 20, 2006
By: /s/ Donald C. Burke
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Donald C. Burke,
Chief Financial Officer of
Merrill Lynch Natural Resources Trust
Date: September 20, 2006