by Jenny Ruth
Monday 27th August 2007
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Sharechat: How much longer do you think it will be before Asian Mineral Resources gets its mining license? (In September 2005, you said it should be about three months)
Widespread Portfolios managing director Chris Castle: Both AMR and Widespread expected the grant of the mining license much earlier than has been the case. Since 2005, based on the known mining laws at the time, and the implementation of related policies, AMR has at various times publicly advised its expectations of the mining license grant date. Subsequently both the mining law, and the way in which Vietnamese officials have chosen to administer it, have evolved further and the process became very much more complicated. A detailed explanation of this was filed by AMR in its March 2007 quarterly report and repeated in Widespreadís 2007 annual report. Notably both AMR and Widespread have stopped forecasting the mining license grant date. The mining license application is now in its final phase with only the approval of the Ministry of Resources & Environment (MONRE) required. Recently both Asian Minerals and Widespread announced that the other major hurdle, the approval of the Prime Ministerís Office, had been obtained. The PMO approval had become a greater hurdle than expected because it required much wider consultation with other government ministries than had been signalled. (This consultation process included organisations that had never before been asked to comment on whether a mining license should be granted to a company wishing to mine). AMR management is presently working through the multi-staged MONRE approval process. Good progress is being made and the mining license is not far away, but the actual grant date is up to the Vietnamese and Iím not prepared to make an estimate.
SC: What happens then in terms of sourcing funding?
CC: AMR is very well advanced in negotiations with providers of both debt and equity finance to project-finance the building of the mine and processing plant. A decision on the mix of debt or equity will be made after the mining license is granted. Based on the significant interest in the project from both banks and brokers, itís expected that the finance will be very easily sourced.
SC: Why were AMRís management changes so significant?
CC: There have been no significant changes. The CEO who joined in January 2004 (former Macquarie executive David Woodhouse) signed a three-year contract and elected not to renew it. Rob Thomson, who had been a non-executive director since January 2004, then became CEO. What is significant is that the market value of the company tripled within months of Thomson becoming CEO, a pretty clear signal of the marketís understanding of his reputation in commissioning mining operations in the Asia Pacific region (six including the Kingsgate and Oxiana projects). More recently, AMR has recruited a number of other senior staff as it readies for a rapid start to construction as soon as the mining license is granted.
SC: You said in the annual report that you think AMR is still very undervalued. Why is that?
CC: Nickel mining companies have a common valuation yardstick often used when being compared. This is the value of the defined nickel reserves/resources in the ground compared with their listed market value. Using this measure AMR is very much undervalued, which is understandable given that the major hurdle facing any mining company (the grant of the mining license) has not yet occurred. The project economics (which have also been filed in Canada on the TSX.V reporting site Ė www.sedar.com) also support a much higher value, given the present nickel price.
SC: What is happening to the nickel price currently?
CC: The current nickel price is $US12.70 a pound, having risen from around $US6 a pound in mid-2005 to a peak of $US24.50 a pound in May 2007. It subsequently fell to $US11.30 a pound in recent weeks but now appears to be in recovery mode. (In a 2005 feasibility study, AMRís operating cost per pound was $US3.)
SC: Why did King Solomon Mines choose to list in Australia?
CC: Itís a much better market to raise funds for mining ventures than New Zealand. Both Canada (TSX.V) and AIM (UK) were considered but had higher cost structures.
SC: Are you still thinking about listing Widespread Portfolios in Canada?
CC: Itís still a possibility but hasnít been under active consideration recently. One factor which could cause us to reconsider is the situation of a Canadian listed company called Pinetree Capital. Itís the only other listed investment company (anywhere) that Iím aware of that focuses on investing in mining company start-ups. Its shares usually trade at premium to net assets per share, presumably because investors are factoring in future growth. Pinetree has a pretty good track record (400% increase in NTA per share since 2001) although not in the same league as Widespread which has grown net assets per share at an even higher rate.
SC: Why take a stake in Glass Earth?
CC: Itís a well-managed company with powerful backers (Newmont, St Andrews Goldfields), prospecting for major projects in uncontroversial areas, and using new technology. Iíve known Simon Henderson, the operations manager, since I worked with him in the Brierley mineral exploration arm in the mid-1970s. I also saw the appointment of John Dow (former CEO of Newmont in Australia) as a major plus. These factors were enough for me to break my usual rule of never investing in mining projects in New Zealand.
SC: What are the chances of Glass Earth ever being able to mine in New Zealand, even if it finds good prospects?
CC: Pretty good given the location of their prospects, their powerful backing (small mining companies in New Zealand usually donít having the lobbying power required to get a mining license) and my understanding of their existing working relationships with local authorities and other stakeholders.
SC: Why is Widespread Energy (WEN) lending Widespread Portfolios (WID) money?
CC: WEN holds shares in TSX listed Canada Partners, some of which were sold right at the end of March 2007 using WIDí sharebroker in Canada (WEN doesnít have an account with this broker). At March 31, the funds had not yet been remitted to WID to pay across to WEN. The funds were paid across shortly after balance date. Usually the opposite is the case; WEN is financed by WID (being management fees and other small disbursements paid in arrears).
SC: You donít seem to be terribly interested in reporting profits?
CC: Correct Ė WID is in the business of growing the value of its assets. Given the nature of its business, it will never be valued on a price-to-earnings-multiple basis anyway, so trying to report earnings by selling assets that should be held because they are still appreciating doesnít make sense. This operating philosophy has been consistent from the outset in 1989.
SC: Why did you do a share split earlier this year?
CC: For two reasons:
1/ to double the number of voting securities prior to issuing the warrants Ė if this had not been done, potential new shares arising from the warrant issue would have been disproportionate relative to existing issued capital and
2/ to drive the net tangible assets (NTA) per share (then around three cents) back under two cents to better equate the NTA with the market price (which seems to be in the 1.5 to two cent range, regardless of the asset backing).
SC: Why has Widespread Portfolios been buying back its own shares?
CC: They were then trading at an abnormally high discount to NTA per share (around 30%, more than double the usual discount). This discount was probably due to selling of the ordinary shares in May/June to finance warrant conversions. We will either cancel these shares (thereby increasing the NTA per share of the remaining shares), or exchange them for a shareholding in another company. They wonít be sold back into the market.
SC: Why, when the market isnít in a "melt-down," do you think Widespread Portfoliosí shares persistently trade at such a deep discount?
CC: They donít, I track (and graph) both net assets and the market price of the company and the average discount of for the two years prior to the split and warrant issue announcement in March was 15%. Since the warrant issue and split the discount has reduced to 6.5%. As already noted, investors seem to like trading our shares in a range of 1.5 to two cents and many donít seem to be aware of changes in the value of our underlying assets, even though these are advised every Friday to NZX and also posted on our website. Itís noticeable that every time our NTA increases the share price tends to lag. I donít really see this as a problem. Itís more of an opportunity for astute investors, including Widespread itself. Compared with other New Zealand listed investment companies (GPG, Infratil) our discount isnít too bad.
SC: How successful would you say the bonus issue of warrants was in meeting each of your five objectives?
CC: The five objectives were:
- To reduce or eliminate the market-price-to-NTA discount (presently averaging around 15%). That was partially achieved Ė the discount is now averaging 6.5%.
- To reward existing shareholders. That was achieved. A holder of one million shares before the split and warrant issued now has 20,000 free warrants with a market value of $7,200.
- To reposition Widespread Portfolios into the "middle" part of the share-market while still using the leverage available to a penny stock. That was achieved. The warrants trade in good volumes in the 36 to 45 cent range.
- To create a mechanism for raising cash from existing shareholders in a manner that can be determined by the shareholders themselves. That was very successful from the feedback Iíve received, especially from major shareholders for whom a rights issue with fixed payment dates could be inconvenient.
- To increase the market profile of the company. This was pretty successful Ė certainly in terms of the level of debate on chat sites, it worked well. Trading volumes of shares also increased markedly. However, because of our small size, it was under the radar screen of most of the mainstream media and the share broking community.
SC: If no warrants had been exercised, would you have had to raise funds some other way?
CC: No. We had no foreseeable commitments that could not be met from existing cash resources. I was very surprised by the level of warrant conversions and the level of funds raised ($1.23 million).
SC: Are you happy with the way the warrants are trading?
CC: Yes and no. Iím very pleased with the volumes (637,000 in five months, representing 63.7 million shares) but I think the market is having some difficulty understanding how they should be valued. Some investors donít seem to grasp the notion that the value of the warrant relates, not to the current market price of the shares (or to the current market value of the company), but to what the NTA backing (and related share price) could be in June 2012. Obviously, no one knows what that will be, but extrapolating WIDís growth rates (especially in the last five years) is a good starting point. As a director of the company I canít shout from the rooftops that I think the shares and warrants are cheap Ė all I can do is try and keep the market informed and I will be doing more of that.
SC: Why were the warrants issued to directors and staff at less favourable terms than the other warrants and why are they unlisted and un-transferable?
CC: These terms were devised to ensure that the holders of the listed warrants were not disadvantaged. The higher hurdle price to exercise was also intended to demonstrate the confidence of the directors in the future prospects of the company. The differing exercise terms also meant that they could not be listed as they were a separate class of security with only five holders.
SC: Why do many advisers have negative things to say about you and Widespread Portfolios when the long-term returns and share price performance have been so good?
CC: Iím well aware of this issue. Several shareholders have advised me that their client advisers (who appeared to know very little about the company) had told them not to buy our shares.
There are a number of reasons.
1. The demise of Charter Corporation in the share market crash of 1987.
2. Iíve had virtually no contact with sharebroker client advisers for the last two years, the period during which we have achieved exceptional growth (having grown from a $5 million company to one over $20 million). During 2005 I made a number of broker presentations with the intention of raising cash by means of private placements. This fundraising program was underpinned by my expectation that WID would grow rapidly in the next two to three years. (those 1.7 cent shares are now, including the warrants, trading at about 3.9 cents, even at WIDís currently depressed price). I havenít been back to see the brokers since, primarily because as an executive director of WID and WEN (and for the last nine months, AMR), Iíve been too busy.
3. For those client advisors who have not met me, there is a reliance on our published material (mostly our website), which warns investors, among other statements, "the investment strategy employed by the company is aggressive and inherently risky."
4. Further, we operate in a sector (mining) which is, to put it mildly, unfashionable in New Zealand.
5. Ours is a very specialised business (effectively a seed capitalist of new mining ventures overseas) and one of the very few listed companies anywhere in the world that does this. Most client advisors could be expected to have some difficulty explaining this to their clients.
6. Our small size and perceived illiquidity means that to date no broker analyst has researched the company. This could remain a hurdle because very few brokersí analysts in New Zealand would have the requisite knowledge of the mining sector.
7. We have an unconventional capital structuring strategy (keeping the share price and NTA at penny dreadful levels) which puts off many more conventional investors and client advisors.
8. We actually have a very active shareholder communications strategy with constant continuous disclosure-related announcements to NZX, with these also being immediately copied to our emailing lists. However, because of our small size, most of these announcements are not picked up by the mainstream media, so unless you are an existing shareholder, and on our emailing list, you will read about WID only on rare occasions. Incidentally, those shareholders who are on our emailing lists regularly congratulate the board (at the AGM) on our investor relations strategy.
SC: Do you think you can ever overcome such views? How?
CC: Iím very confident of changing these attitudes. We have a very good track record and itís only a matter of communicating it better. We plan to do this in the following manner:
1. Build our emailing list so that more of our 815 shareholders will see our announcements (only 165 are presently on the list - next week our shareholders will all receive a letter suggesting they join the emailing list)
2. Reinstate a program of regular broker visits around New Zealand
3. Investor presentations around New Zealand
4. A more proactive approach to meeting with and briefing the financial media
5. A half year shareholder meeting
6. Refresh the website appearance and make it easier to navigate
An overseas listing in a country where the mining sector (and the value of our assets is better understood) is another option. Canada or Australia are the most logical choices.
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