Jenny Ruth: Nickel venture looking good for Widespread

You wouldn't know it from its share price, but Widespread Portfolio investments has made significant progress since its backdoor listing through the shell of stockbroker NZIJ in late 2003.

Widespread's shares are languishing at 1.8c, having peaked at 3c early this year, well in penny dreadful territory.

Its biggest investment, a 13 per cent stake in Asian Mineral Resources, which accounts for 67 per cent of Widespread's portfolio, has finally made tangible progress.

When Widespread got involved in AMR in 2000, project originator Terry Bates had been trying for over a decade to get his Ban Phuc nickel prospect in Vietnam into production with scant sign of progress.

Since Widespread's listing, AMR has also gained listed status, joining the Toronto Stock Exchange early last year.

While Bates remains an AMR shareholder with a 12 or 13 per cent stake, a whole new management team has been put in place headed by chief executive David Woodhouse, formerly a resources banking director at Macquarie Bank.

AMR has also raised C$12.5 million ($15 million) since listing, the last C$5 million in mid-July, which has allowed it to fund further exploration and to increase its stake in the project from 70 per cent to 90 per cent.

A final feasibility study is nearly completed and the company expects to file a mining licence application late this month or early next month.

Chris Castle, who founded Widespread in 1989 as a share club for friends after the 1988 collapse of his Charter Corp in the wake of the sharemarket crash and who is also an AMR director, said being listed on a recognised exchange was a crucial step in making it possible for AMR to raise such capital.

A preliminary feasibility study resulted in a discounted cashflow valuation of C$111.1 million at current commodity prices - nickel is trading at more than US$7 ($9.9) a pound - and AMR's share is worth C$96.9 million or C$2 a share. Assuming the nickel price drops back to US$5 a pound, AMR's share would still be worth C$43.1 million or 95.1Cc a share.

Castle expects it will take about three months to get the licence.

While not a sure thing, Carter says AMR has good relationships with the relevant government authorities and the awarding of a licence to fellow miner Tiberon Minerals in early July signals Vietnam is willing to encourage foreign investment.

It should also help that AMR is using the same legal team that Tiberon used. Assuming it gets a licence, AMR will be starting production by the third or fourth quarter of next year, Castle says.

In the meantime, AMR will have to put all the relevant infrastructure in place, including increasing its staff from 25 to about 300 - 270 of which will be based at the mine itself.

Despite this, AMR's shares have fared even worse than Widespread's, falling from C$1.10 when it listed to as low as 21Cc in late April.

When Widespread issued its annual report for the year ended March, directors valued the AMR stake at $5.06 million when the market value was only $2.72 million or about 30Cc a share, causing auditors Sherwin Chan & Walshe to tag the accounts as having "fundamental uncertainty".

"Adjustments may have to be made to the valuation of this investment if the recoverable reserves are not mined as expected," the auditors said.

Castle argues that the AMR stake isn't for sale and that if anyone wants to take over Widespread, they will have to pay considerably more than the present share price.

"The market price is really irrelevant."

He cites the example of Australian-listed Oxiana, whose shares have risen from around the 12Ac level to A$1.17, giving it an A$1.6 billion ($1.7 billion) market capitalisation.

"The people who developed that mine are the same people who came into AMR, the same engineers and consultants. It's basically the same team. We've even hired some of their management."

The annual report compares AMR's share price to other Canadian nickel mining stocks. At 30Cc, the market was valuing AMR at C$127 per tonne while other junior nickel miners were being valued at C$966 a tonne, 7.6 times higher.

Supporting Castle's view that the market is undervaluing AMR is the fact that British-based Cambrian Mining was prepared to invest in AMR at a 60 per cent premium to the market price, although that was still only at the equivalent of 50Cc a share. Since that deal was announced, AMR's share price has risen to 42Cc.

Castle's view is that the flagging share price reflects the fact that AMR's executives have been focusing on getting the mine up and running and that not enough attention has been paid to marketing the company to investors.

"The Toronto Stock Exchange has thousands of listed mining stocks, many with good stories to tell and investor attention can really only be achieved by having a senior company executive (preferably the CEO) in Canada marketing on a continuous basis," says Widespread's annual report.

"AMR management is well aware of the existing communications problem and has developed a strategy to address this."

Widespread's second biggest investment, its 3 per cent stake in Toronto-listed Vaaldiam Resources, which accounts for 17 per cent of its assets, is also making progress.

In June, resources giant Rio Tinto exercised an option to acquire 51 per cent of Vaaldiam's diamond-exploring project in Brazil by spending US$12.5 million over three years.

Vaaldiam's share price has jumped from about 50Cc in April to 72Cc yesterday.

Widespread has been successful in raising funds since it listed. In October last year, it raised $402,000 from a 1-for-10 rights issue priced at 1.7c a share.

Later that month, after inviting shareholders to tender for the shortfall of nearly six million shares, it got applications for more than 17 million shares.

The near six million shares were sold at premium to the rights issue at 2c each, raising a further $119,722.

This month, Widespread raised a further $500,000 through a placement priced at 1.71c a share.

Castle blames the rights issue for depressing Widespread's share price. Widespread also makes regular share splits instead of paying dividends - and with its various investments still in their early stages, the company continues to report losses.

In each of the last two years, the company has split every 10 shares into 11, effectively a 1-for-10 bonus issue. All these share issues mean the company won't lose its penny dreadful status any time soon and that's the way Castle likes it.

"I'm a great believer in leverage. My strategy is that I think it's much easier for a share price to go from 1.7c to 3c than from $1.70 and $3."

He isn't in favour of doing a share consolidation, saying that shares often fall below their theoretical value after a consolidation.

"As far as I'm concerned, where there's muck, there's brass. We don't mind being regarded as a penny dreadful."

Ironically, when Widespread started as a share club, its first shares were issued at $1000 apiece.

Who, what, where

Head office: The Sandspit, Onekaka, Golden Bay.

Profile: Widespread Portfolios is a venture capital investor in mining ventures.

Market capitalisation: Just under $7 million.

Latest results: The company reported a $304,000 net loss for the year ended March, up from a $209,000 loss the previous year.

Management: Chris Castle manages the company in return for an annual fee of 1 per cent of funds under management. He will also be entitled to a profit share of 10 per cent of realised trading profits when certain other conditions are met.

Major shareholders: Castle and chairman Linda Sanders with 12.1 per cent (at June 20). Directors own 16.8 per cent, the top 20 shareholders 57.3 per cent and the company has 550 other shareholders.