Chairman's report

 

Growth in shareholders’ funds and market value

Including new capital raised of $88,000, shareholders’ funds increased 92.2% to $19,526,000 (a gain of 91.2% excluding new capital). Net tangible assets (NTA) per share, adjusted for the two share splits that took place (June 2006 and February 2007), increased from 1.1 cents to 2.1 cents. As at March 31 2006 the market value of the Company was $9.66 million. By 31 March 2007 it had increased to $16.8 million. At the time of this report it had increased further to $24.4 million, partially reflecting further increases in the market value of the Company’s major investments (Asian Minerals, King Solomon Mines and Widespread Energy).

Re-rating of Asian Mineral Resources

During the year to 31 March 2007, the market value of Canadian listed Asian Minerals increased from CAD20.6 million to CAD123.3 million. Despite adverse currency movements, which reduced the gain in New Zealand dollar terms, there was a highly positive impact on Widespread’s position. It’s been most gratifying to see the market place finally start to recognise the value inherent in Asian Minerals. The re-rating to date can be largely attributed to management changes, a strong nickel price and further progress toward gaining the mining licence. 

Notwithstanding these gains, the company is still  (in market value terms) very undervalued when compared with its peer group of small to medium sized nickel explorers, developers and miners. It would be reasonable to assume, if the nickel price remains at present levels, that the Asian Minerals market value could increase substantially further when the mining license is granted. Presently Widespread holds 9.8% of Asian Mineral Resources and it represents, at a market value of CAD2.06, 81.4% of our total assets.

King Solomon Mines

Australian Stock Exchange listed King Solomon Mines (“KSO”) is a minerals explorer with gold and copper projects in the Sonid region of Inner Mongolia in China. Sonid is on the edge of the Gobi desert – along strike and across the Mongolian- Chinese border from Ivanhoe’s well-known and huge Oyu Tolgoi copper/gold deposit. KSO listed on the ASX on April 18 2007, after raising $A10 million (in 50 million 20 cent shares) in a well supported initial public offering. Following listing the company has traded actively in the range 21 to 29 cents.  Widespread Portfolios holds 9% of the present issued capital of 90,775,040 shares and is represented on the board by Chris Castle.

Widespread Energy

Widespread Energy made really significant progress during the year to 31 March 2007. Milestones included: n the adoption of a new business strategy together with a name change to reflect this;

n the restructuring of the share capital to better effect the new business direction;

n a number of private placements to raise seed capital;

n adoption of a new constitution and listing on the NZAX;

n completion of a share purchase plan and subsequent share tender;

n an increase in shareholders’ funds from a $4,560 deficit to $1,201,264; and

Operating Highlights
As reported in our final announcement in May the year to 31 March 2007 was one of our best years and included the following highlights; n a 91.2% increase in shareholders’ funds (excluding new capital raised); n a 73.8% increase in the market value of the company; n a massive re-rating of Asian Mineral Resources, our major investment; n a successful March 2007 initial public offer (IPO) by King Solomon Mines, raising $A10 million from Australasian investors; and n the successful New Zealand AX market listing and operational launch of Widespread Energy as an oil and gas project investor.

n a number of investments giving Widespread Energy significant exposure to the oil and gas sector. 

These investments included:

n Canada Energy Partners (Canada based coal bed methane developer then at a pre-IPO stage);

n Akura Limited (privately owned, Fiji based oil explorer); and

n an application over the Kotuku oil seeps, West Coast, South Island.

In addition and since the balance date, agreement was reached to subscribe for a 10% shareholding in Green Gate Limited, a South Island based private oil and gas exploration company. Widespread Energy’s issued capital is now 14,306,925 ordinary shares and 13,494,425 options to acquire ordinary shares at an exercise price of 10 cents per option. Both securities listed on November 6 and have subsequently traded at 10 and 4–5 cents respectively. Widespread Portfolios owns 26% of the shares and 27.4% of the options.

Widespread operating result for the year

The after tax operating result, including unrealised losses on the share trading portfolio, was a loss of $398,000. An analysis of the trading result is shown in the table below:

Year to

31 March 2007

($,000)

Year to

31 March 2006

($,000)

Gains on the sale of shares 410 1,404

Unrealised gains (losses) on

trading stock

(680) 1,412

Other income 188 112

Total Income (82) 2,928

Expenses (500) (426)

Net profit before income tax (582) 2,502

Income tax 184 (416)

Net profit (loss) after tax (398) 2,086

Disregarding unrealised losses, the outcome for the year was

a pre-tax profit of $98,000 (2006 $1,090,000).

This lower trading result was due to:

n reduced returns on our share trading portfolio, largely linked to a downturn in some sectors of the Canadian mining market during 2006;

n a decision to hold rather than sell some of our other, better performing investments;

n increased operating costs, although these were materially offset by income earned from management and directors’ fees.

Trading since balance date

The year to 31 March 2008 has opened on a very positive note. The pre-tax operating profit for the first two months, including fee income and realised share-trading gains, exceeds $600,000. While this level of performance is unlikely to continue at that rate, it has already ensured that there will be a positive trading result for the full year to 31 March 2008. These excellent operating results have been accompanied by substantial increases in the value of our major investments, which has driven net assets from $19 million as at 31 March 2007 to $26.9 million as at today’s date.

Shareholder returns

This extremely successful year caps a period of very high returns to shareholders, measured in terms of growth in both the market value and in the net tangible asset value (“NTA”) of their investment. The table below summarises the returns to shareholders in the 12 months to 31 March 2007, together with corresponding figures for 2, 5, and 10 years and the returns since the Company’s inception in September 1989.

Average annual

increase in

market value

Average annual

increase in

net assets

Year to 31 March 2007 73.8% 91.2%

2 years to 31 March 07 58.4% 59.7%

5 years to 31 March 07 27.4% 28.0%

10 years to 31 March 07 28.5% 30.0%

18 years Sept 9 to

March 07

19.9% 21.2%

Note: Trades before the Company listed in January 2004 were managed by the Company and were usually transacted at a 10% discount to the NTA per share at the time of the transaction. “Market” prices for periods commencing prior to January 2004 have been calculated on this basis. All returns are issue adjusted. The increase in NTA per share is the compounded rate of return on investment (equivalent to IRR or internal rate of return)  The chart below encapsulates the information in the table and also incorporates recent changes in share price and net asset backing since our 31 March balance date.

Widespread Portfolios 10-year growth to June 2007

(NZX listing January 2004)

New Zealand Stock Exchange

Adjusted for issues our shares have traded in a range between 0.9 cents and 1.8 cents during the last 12 months with a share turnover during that period of approximately 118 million shares (total value of trades $2.45 million). Turnover since the  Company listed in January 2004 now exceeds 220 million shares. Our warrants listed in March 2007 and have subsequently traded in a range of 30 to 65 cents with the most recent sales at 51 cents. 426,800 warrants (the equivalent of 42.7 million shares) have traded in the last three months. 

Each warrant entitles the holder to subscribe for 100 new Widespread shares by subscribing $1.50  by 30 June 2007, $2 by 30 June 2009, or $3 by 30 June 2012, after which date they will lapse.  The warrant terms will automatically adjust for any share splits, bonus issues or rights issues that  take place between the time of this report and 30 June 2012. A warrant subscription form is on the home page of www.widespread.co.nz or will be emailed to shareholders on request.

WIDESPREAD PORTFOLIOS 2007 ANNUAL REPORT

Some thoughts on how to value the warrants

As described above, the warrants offer the holder an opportunity to acquire Widespread shares at set prices in the future. The value of a warrant is therefore directly linked to the expected future market value of the shares. In turn, the future market value of the shares  should be determined by the net asset value of the shares at the time the warrants are exercised. The future net asset value of the shares will be  affected by three key factors: 

1. The present net asset value of the shares (around 2.4 cents)

2. Annual increases in net asset backing per share

3. Future warrant conversions (both quantum and timing)

Annual increase in net asset backing per share

Widespread has achieved, in round numbers, 20% per annum growth in net assets per share since the company was formed in 1989. Since 1997, the returns have been even better, at 28.5% p.a.  In contrast, the 2009 and 2012 warrant exercise prices of 2 and 3 cents are escalated at a compound growth rate of 15% over the 30 June 2007 exercise price of 1.5 cents. 

This means, that if historic rates of return are maintained, the NTA per share will grow at a faster rate than the entry cost (the warrant exercise price). The potential widening gap is further accentuated by the present gap between the 1.5 cent current exercise price and the present NTA per share of 2.4 cents. The table below (calculated on a per share basis – each warrant relates to 100 shares) compares the exercise price of the warrants at the two future terminal dates (30 June 2009 and 2012) with two possible growth scenarios.  

Warrant conversions

The numbers assume little dilution in NTA arising as a result of warrant conversions by 30 June 2007, and that half of the warrants are exercised in 2009 and the remainder in June 2012. The two example growth rates are also applied to the funds subscribed when warrants are converted in June 2009.

Exercise

price

(cents)

Future

NTA/share

assuming

20% annual

growth

Future

NTA/share

assuming

28.5% annual

growth

As at 30 June

2009 (undiluted)

2.0 4.2c 4.8c

As at 30 June

2009 (diluted for

50% of warrants

exercised)

2.0 3.4c 3.8c

As at 30 June

2012 (diluted

for all warrants)

3.0 5.2c 6.9c

It can be seen from the table that if a 20% growth rate is assumed and all the warrants are exercised as outlined, each warrant will entitle the holder to acquire either 100 shares with an NTA of $3.40 in June 2009, or $5.20 in June 2012. Based on the assumptions set out above (the cost of exercise will be $2 in 2009 and $3.00 in 2012) the warrants have a possible net future value, in NTA terms, of either $1.40 (in June 2009) or $2.20 (in June 2012). 

Their present value depends on each individual investor’s cost of capital during the intervening period and their perception of what the market price of Widespread shares will be relative to asset backing. If a 28.5% growth rate is assumed the net future value in June 2009 is 1.8 cents and in June 2012 is 3.9 cents. Other more formal valuation methodologies exist for warrants and options that take into account other variables including the volatility of the shares. These are beyond the scope of this report but, if shareholders wish to learn more on this, references can be provided.

WIDESPREAD PORTFOLIOS 2007 ANNUAL REPORT

Management restructure

During the financial year it became obvious that the size and scope of managing Widespread and its various major investments had increased significantly from the status of when this aspect of Widespread’s operations was last examined in October 2005. Every aspect of the Company’s management, administration, portfolio management and operations (with the exception of the preparation of the formal annual and half year financial statements) continues to be provided by executive director Chris Castle. 

During the intervening 18 months Widespread’s total assets have grown from $8 million to $27 million at the time of writing. In the year to 31 March 2007, director and management fees totalling $148,000 (for services provided by Chris Castle on behalf of Widespread) were paid to Widespread Portfolios by Asian Minerals, Widespread Energy and King Solomon Mines. The 2007/8 forecast income for the same services is $190,000. In the year to 31 March 2007 Chris Castle received (net of GST) $200,000 for services provided to Widespread. 

A bonus of $50,000 (net of GST) was also paid following the achievement of a greater than 15% increase in net assets (excluding new capital raised). Accordingly, excluding the bonus, the net cost of all management services, administration, portfolio management, etc, provided to the Company by Chris Castle was $52,000. The Board considered that this remuneration was clearly well out of line with the normal cost of such services for a company of Widespread’s size and complexity.

The independent directors conducted a review of both the services being provided by  Chris Castle and the fair remuneration for these services. Following this assessment it was determined that new arrangements with Chris Castle be documented into two contracts and the advice of Widespread’s solicitors was sought to document these arrangements. The material particulars of the resultant contracts which are both effective from 1 April 2007 are: 

n Chris Castle is contracted to Widespread  exclusively with respect to Company management services and oil, gas and mineral  exploration activities.

n Accordingly, any fees earned by him arising from other Widespread related companies (e.g. Asian Minerals, Widespread Energy, and King Solomon Mines) are to the account of Widespread.

n Responsibilities are to include strategic development, management, company administration, preparation of management accounts, regular reports to the board, portfolio management, investment research, liaison with brokers, investor relations and sharebroker contact, maintenance of the website, NZSX related continuous disclosure, statutory filings, etc.

n The investment and strategic development related services will be provided by Chris Castle directly under one contract, whilst the services of an administrative nature will be provided by Nevay Holdings Limited under a second contract, although Nevay will procure the personal services of Chris Castle.

n The fees payable to Nevay Holdings Limited under its contract will be $120,000 plus GST per annum.

n The base fees for the services Chris Castle provides directly to Widespread are to be $180,000 plus GST per annum. If external fees earned by Chris Castle (and paid to the account of Widespread as described above) exceed $150,000 in the year ending on 31 March, such additional fees (plus GST) will be paid to Chris Castle up to a maximum amount of $45,000 plus GST.

n A bonus of up to $75,000 is to be paid on the achievement of certain key performance indicators, the most significant of these being an issue-adjusted increase of not less than 15% in net assets per share during the year. 

WIDESPREAD PORTFOLIOS 2007 ANNUAL REPORT

n Accordingly, under both contracts, the total base remuneration is $300,000 plus GST with up to a further $120,000 plus GST payable if the bonus and external fee conditions stipulated above are met.

n The contracts are both for a term of three years with a right of renewal for a further three-year term. The remuneration will be reviewed on an annual basis by the independent directors and may be increased by a maximum of 10% at each annual review.

The independent directors have delivered to NZX a certificate that they have approved the contracts and that they have been agreed on an arm’s length, commercial basis. These new arrangements are not expected to materially increase Widespread’s operating costs given the forecast level of external income expected to be generated by Chris Castle. The Board believes that the arrangements also represent a more realistic payment for the services being provided with appropriate incentives and recognise the significant value that Chris Castle’s services generate for the benefit of Widespread shareholders.

Annual meeting

The Annual General Meeting of shareholders will be held at 5 pm, 29 July at The Wellesley Club, 2–8 Maginnity Street, Wellington. The Notice of Meeting is on page 32 of this report.

Auditors, dividend and directors report

Sherwin Chan and Walshe have confirmed their willingness to continue in office as Auditors to the Company. The directors do not propose to recommend a dividend in respect of the period under review. This is in accordance with the Company’s stated core philosophy concerning dividends. In accordance with the Constitution, Marion Franks and Linda Sanders retire by rotation and being eligible offers themselves for re-election to the board. 

For and on behalf of the Board,

Linda J Sanders Chris D Castle

Chairman Director

Takaka, 24 June 2007

Objectives for 2007/2008

The milestones we would like to achieve in the next 12 months include:

n The granting of a mining licence for Asian Mineral Resources together with significant progress in building the operating plant and commissioning the nickel mine.

n Exploration success for King Solomon Mines in Inner Mongolia.

n Exploration success for Widespread Energy in the Green Gate and Kotuku oil and gas prospects.

n Building value in our other strategic holdings.

n An increase of at least 20% in the Widespread net asset backing per share (after adjusting for issues).

n A positive pre-tax trading profit for the year (in other words excluding non realised gains and losses).