Uruguay venture to spend $70m

Chairman Keith Smith says the company remains positive about the prospects for the business. Photo / Glenn Jeffrey

In the face of volatile dairy prices NZ Farming Systems Uruguay is looking to spend close to $70 million on developing dairy farms in South America.

The company yesterday outlined plans to raise money through a bond issue and the sale of farms, first flagged in its annual results statement two months ago.

Chairman Keith Smith said on the back of a successful bond issue in July, which raised US$30 million ($40 million) from Uruguayan investors, the company would seek to raise a similar amount in the second half of the current financial year. The remainder of the funding would come from the sale or sale and lease-back of farms.

Smith said the sale of land was preferable to an equity raising, given the share price is currently trading at a substantial discount to net asset value - shares in NZ Farming Systems closed up 3c at 47c with net asset backing of around 94c a share.

The company sold an 800ha farm in June and is about to settle the sale of a 2000ha undeveloped farm for $3500 a hectare.

"When capital was freely available we land-banked," said Smith. "In hindsight, land-banked too much with the way the milk price has gone."

He said that with the squeeze on capital some of the properties no longer fitted with the company's focus on developing irrigated farms. Currently 400ha are irrigated, with the most recent bond issue funding a further 1200ha of irrigation.

The company said it was still on target to irrigate 10,000ha of its 35,500ha land holding.

Smith said the company remained positive about the prospects for the business, citing the recent increases in dairy prices.

In August, NZ Farming Systems posted a full-year loss for the year ended June 30 of US$45.9 million, after writing down the value of livestock and farms in the face of falling dairy prices.

The operational loss was US$15.6 million, although revenue doubled to US$15.8 million from US$7.8 million, as milk production more than tripled to 44.6 million litres from 13.4 million litres the previous year.

Smith said lower dairy prices, the global credit crunch and a one-in-30-year drought had hit the company results.

He said cost cutting, scaling back on farm development and reducing beef stock numbers had helped counter the downturn.

Challenges in adapting New Zealand dairy farming methods to Uruguay were also blamed for slower than expected progress.

PGG Wrightson Funds Management's Michael Thomas said that while the uncertain environment made it difficult to provide any future guidance, it was anticipated this year's milk production would double to around 85 million litres from a herd of 18,000 cows. Operating losses and an operating cashflow deficit were also expected for the current year, said Thomas.

The company announced a change to its fund management and farm management agreements with PGG Wrightson which Smith said "will be to the benefit of all stakeholders".

The two agreements will be merged with the management fee reduced from 1 per cent to 0.75 per cent of the gross asset value with any future performance fees able to be paid in shares rather than cash.

Last month, Singapore-based multinational food business Olam International purchased a 14.35 per cent stake in NZ Farming System, paying 41c a share in the on-market transaction.

Market watchers speculated whether Olam would move to a controlling stake by initially targeting PGG Wrightson's 11 per cent share, triggering a compulsory offer for 50 per cent of the company.

Yesterday, Smith said Olam was welcome to buy further shares on-market but any direct offer for a stake in the company would need to be at a fair price, not at a discount to the net tangible assets.

Commission drops inquiry into 'fudge this'

The Securities Commission has dropped its inquiry into NZ Farming Systems Uruguay release of its annual results with the words "fudge this" in the financial statements.

The line "Depreciation - fudge this to equal depn in FA note 11$ 2391 ..." earned the company a "please explain" notice from the NZX, with the matter referred to the Securities Commission.

At the time, NZ Farming Systems Uruguay chief financial officer Andrew Clark said the offending line had no material bearing on the result and was simply a file note overlooked in the final version of the results.

Speaking at the annual general meeting yesterday, chairman Keith Smith said "the fudge issue" was an administrative error which was regretted. "There is no question that we take our compliance and reporting obligations most seriously," said Smith.