Chatham Rock Phosphate Limited - Final Announcement for the Year ended 31 March 2011

Financial Result

Your directors submit the audited financial statements of Chatham Rock Phosphate Limited (“CRPL”) for the year to 31 March 2011. The trading result for the period was a loss of $614,000 (2010 loss $198,000). 

An analysis of the result is provided in the table below 

  Year to 31 March 2011 ($,000) Year to 31 March 2010 ($,000) Income 84 34 Administrative expenses 513 142 Exploration costs written down 83   Impairment on investments   91 Net Profit (loss) before income tax (614) (198) Income tax     Net profit (loss) after tax (614) (198)

The increased reported deficit for the year to 31 March 2011 reflected a significantly higher activity overall and substantial one-off costs relating to the year-end reconstruction. These one off costs included independent expert reports, plus additional accounting, tax, legal, share registry and NZX fees. There was also a write-down in respect of PEP 50439 relinquished during the year.

Issued capital during the period increased from 20,387,263 shares to 34,526,660.

Shareholders’ Funds increased during the period from $1,159,000 to $4,603,000.  Some of this increase was due to $1,069,000 raised in cash (less expenditure written off). However the substantial component of the increase in net assets resulted from the equity- funded acquisition for $3.4 million of the 10% of the Chatham Rock Phosphate Project previously held by Widespread Portfolios Limited. 

The acquisition of the 10% holding was based on a Chatham Rock Phosphate project valuation of $34 million that was supported by two independent valuations (Simmons Corporate Finance and McDouall Stuart Securities).

In order to be consistent with this transaction the board had resolved to revalue the project to $34 million and draft year-end financial statements were prepared on this basis.

However, during the audit process it became apparent that International Financial Reporting Standards (IFRS) would not permit this project revaluation. This is apparently because the Standards do not accept the revaluation of mineral properties and it’s an issue a number of Australasian mining companies have encountered since the inception of IFRS.

Due to this nonsense we now hold in our financial statements 10% of the project at acquisition cost ($3.4 million) and the other 90% at $883,000 (based on capitalised exploration and project costs).

This folly results in an absurd hybrid valuation of the project in our books of $4.283 million and in our view significantly distorts our financial statements, an outcome that IFRS was presumably intended to avoid. 

Shareholders should be aware that if we held the project at $34 million our net assets would increase to $34.3 million from the present $4.6 million. 

Investment Summary

Following the Widespread group reconstruction at the end of March 2011, Chatham Rock Phosphate is now a single project company with a sole asset, the Chatham Rock Phosphate proect. 

Until 31 March 2011, Widespread Energy held the following investments that were divested on that date:

  • Petroleum exploration permit (PEP) 38526 over the prolific oil seeps at Kotuku on the West Coast (100%)
  • An 11.8% interest in Green Gate Limited, the holder of PEP 51150 in Taranaki.
  • An investment in Akura Limited, a Fiji based private company, which holds three Petroleum Exploration Licenses in Fiji, predominantly offshore.

Highlights of the Year

Chatham Rise Rock Phosphate has had an exceptionally busy year with the operational focus on the rock phosphate project.  Considerable effort was also devoted toward raising further equity to finance the work programme. The other corporate initiative that required several months of coordinated planning and execution was the reconstruction of Widespread Energy that transformed it from an oil and gas focussed investment company into a sole purpose fertiliser sector player.

Operational Milestones

At an operational level the main objectives during the year were to complete the first 12 months work programme included in our permit conditions. These included

  • A literature review of all previous reports and studies arising from the extensive earlier exploration work programmes
  • Digitisation of all geological, geochemical and geophysical data gathered in these earlier programmes
  • Subsequent analysis of this data in order to plan future seabed sampling requirements
  • Evaluation of other possible exploration techniques including underwater radiometric surveys
  • Environmental base-line monitoring
  • A progress report to Crown Minerals.   

This programme was completed and a report submitted to Crown Minerals in December 2010, more than two months ahead of due date.

In addition to these activities CPRL undertook or commissioned the following initiatives:

  • NIWA was contracted to undertake a series of environmental studies in order to fully understand the marine environment in our licence area
  • Rockpoint Corporate Finance was mandated to complete a pre-feasibility study, an independent project valuation and comprehensive fertiliser studies
  • The Project was extensively marketed the to the share-broking community in Wellington, Taranaki and Auckland
  • A Wellington based project headquarters was established at Level 1, 93 The Terrace.
  • A new project focussed website www.rockphosphate.co.nz was established  
  • The project was presented at conferences in Russia (UMI) and Auckland (AusIMM)
  • A Waikato University research study on related aspects of Chatham Rise mineralisation was commissioned   
  • Contact was initiated with the leading international dredging companies with the aim of establishing their degree of interest in designing and operating mining systems to recover rock phosphate from the sea bed of the Chatham Rise
  • Four of these companies showed significant interest in working with Chatham Rock Phosphate Limited and in January 2011 it was announced that agreement  had been reached with three of the world's largest dredging companies to carry out two jointly funded mining concept studies. The mining concept studies were to be funded  50/50 by Chatham Rock Phosphate and the dredging companies.
  • Later in January a third mining concept study was announced
  • The three mining concept studies were completed and received by CRPL in March. All the studies confirmed that recovery of the rock phosphate nodules was considered to be feasible and achievable at a cost per tonne broadly consistent with CRPL management estimates based on other published feasibility studies.
  • The mining concept studies were then critically reviewed by four international marine mining experts engaged to assess the reports and then report whether or not they considered there were any fatal flaws in the mining systems designs.  

Capital Raised

As noted above, the company raised $1,069,000 during the year by means of private placements and a share purchase plan.

Following these issues the issued capital at balance date comprised 34,526,660 shares and 16,080,076 10c options. It is intended that no further shares will be issued by means of private placement.

The focus is now on encouraging the early conversion of the options (which expire on June 30, 2011) in order to enable the continuation of the Chatham Rock work programme on Mineral Prospecting License 50270 prior to undertaking the proposed initial public offering in Canada.

Since balance date option holders have been exercising their options. At the time of writing 2,284,000 (14.2%) had been exercised and most of the major option holders have confirmed they will be exercising their options in the next few weeks.

Steps are presently being taken to put in place an underwriting panel to ensure that all the options are exercised.

Company Reconstruction

In October 2010 a decision was made to reconstruct the various assets held by the two Widespread companies (Widespread Energy and Widespread Portfolios) in order to facilitate the raising of the significant capital required to develop the Chatham Rock Phosphate project.

The logic supporting this decision was along the following lines:

  • The two NZ companies that held the Chatham Rise project were thinly traded, partly because they are small and operate in a sector (mining and mineral exploration) that is unfashionable, scarcely researched and which attracts relatively few local investors.
  • Further, there are no NZX listed fertiliser companies, therefore no comparable stocks, and therefore little point in trying to raise significant capital and list the project on the local market.
  • In overseas markets (particularly the Toronto Stock Exchange) the activities of minerals and fertiliser sector companies are better understood, regularly researched and form a legitimate part of many investors’ portfolios.
  • As a result these companies are often readily able to raise significant quantities of new capital to finance exploration and project development. In Toronto alone there are 17 listed fertiliser stocks, which collectively raised over C$187 million in the first three months of 2011.
  • These factors lead the Boards of Widespread Energy and Widespread Portfolios to conclude that the interests of both groups of shareholders would be far better served if the Chatham Rise project were to be restructured with a view to a new listing in an overseas sharemarket.
  • Widespread Energy would become the dedicated vehicle for the Chatham Rise Project prior to an offshore listing occurring.
  • This would require selling all other Widespread Energy investments as well as undertaking an issue of shares to Widespread Portfolios so that Widespread Energy would then hold 100% of the Chatham Rise Project.
  • The key benefit of that approach were that the operations of Widespread Energy would be singularly focussed for taking to an offshore market to raise capital and a New Zealand domiciled and listed company (Widespread Portfolios) would remain a significant shareholder.

In order to complete this restructuring a number of approvals were required under the Takeovers Code, NZX Listing Rules and from Crown Minerals. Independent adviser reports were also necessary. These reports and approvals were completed and the transactions were subsequently approved on 30 March 2011 by the shareholders of both Widespread Energy and Widespread Portfolios.

On April 14 the transformation of Widespread Energy, previously an investor in predominantly oil and gas projects, into a fertiliser project development company, was consummated by the name change to Chatham Rock Phosphate Limited.

Chatham Rock Phosphate – why we are so excited about this project 

The concept of recovering rock phosphate from the seabed in New Zealand territorial waters has a significant number of economic, environmental and market benefits.

  • The economic benefits include

  • Import substitution of up to $300 million annually
  • Possible exports to near markets
  • Reduced commodity risk for fertiliser manufacturers and farmers
  • Reduced foreign exchange risk for fertiliser manufacturers and farmers
  • Development of a new industry
  • Generation of additional income tax, GST and royalty income for the local economy
  • Security of supply (most rock phosphate is imported from potentially unstable regimes in North Africa and the Middle East) 

The environmental benefits include

  • Local product is significantly lower in cadmium and uranium than imported product
  • Much lower carbon footprint than imported product
  • If applied as a direct application fertiliser CRP has less run off than super-phosphate, is applied once every three years, and is a more effective, slower acting product
  • Extraction will affect only 1/1000th of the Chatham Rise total area and will be intermittent
  • Extraction will occur in accordance with International Marine Mining environmental guidelines

The market benefits include

  • Much cheaper source than Morocco
  • 25+ years security of supply
  • Known extraction costs will allow fixed price contracts over several years which will benefit fertiliser companies, farmers and agriculture outputs generally as fertiliser pricing will be less of a lottery

Post Balance Events

The project now has significant momentum. Since balance date there have been further developments on various fronts including operational matters, cash generation, and the Canadian IPO.  

Operational

  • In recent months there has been an ongoing dialogue with three fertiliser sector companies and we now expect to be able to sell product to all three. Other market development initiatives included added value processing for exports are also underway
  • NIWA has recently completed for CRPL six reports concerning various aspects of the Chatham Rise seabed environment. We intend to publish these reports in order that there can be an informed discussion about what actually exists on and above the Chatham Rise and can put into context our planned activities there
  • CRPL representatives will next week be meeting the dredging companies, together with our selected panel of international marine mining experts. The expected outcome of these meetings will be a determination of  the best way forward with one chosen mining services provider
  • This week environmental baseline monitoring equipment will be stationed within our permit area on the Chatham Rise. This equipment will be monitoring currents, water temperatures, water turbidity, etc, in order to create baseline environmental records for our permit area. Some rock phosphate samples may also be gathered.     
  • There is an ongoing dialogue with stakeholders in the project with ongoing briefings of government and non-government agencies. 

Cash Raising

As noted earlier in this report, we are raising the cash to maintain forward momentum by encouraging option holders to exercise their options well before the witching hour of 30 June this year. Options not exercised by their holders by that date will likely finish up in the hands of the underwriters who will then be able to exercise them and acquire CPRL shares for 10 cents.

Option holders who are not in a position to exercise their options can sell them in the market. They are in the money at the present CPRL price of 14 cents and at the time of writing there was a buying bid for the options at 3 cents. Option holders who are uncertain about what to do or who require an option exercise form should contact Chris Castle at chris@widespread.co.nz  

Canadian IPO

During February and March 2011 a number of meetings were held in Toronto with investment banks potentially interested in sourcing equity in Canada for Chatham Rock Phosphate. Several of these firms subsequently indicated firm interest in further discussions, subject to first receiving an independent technical report on the project. This report, required to be prepared in respect of any resources-based new listing in Canada, is known as a National Instrument  43 101. (43 101).

We commissioned this report during March from a Vancouver based consulting engineering group, and a final draft was submitted last week to the TSX and has already been provisionally approved by them.

The 43 101 report was then circulated to the Toronto investment banks and presentations are being made to them tomorrow. The time for talking turkey has commenced.

A prospectus is also required for the IPO and drafting of this is underway. The timing of the IPO remains early July as we have been advised that options should first convert.

Notwithstanding this other preparations are underway with suitably qualified Toronto based legal advisers, a company secretary and a chief finance officer signed up subject to the IPO proceeding.   

Outlook

The continuation of the present level of activity and that foreshadowed over the next two years is reliant upon the success of the TSX listing and the proposed IPO. 

At the time of writing we are confident of success in our market of choice (Canada) but markets change and we cannot predict the future.

However, even if we do face setbacks in Canada we do have fallback plans in place for other markets and other possible funding scenarios.

The project itself has very low fixed overheads and these can be reduced even further if necessary while still adhering to the work programme in our permit conditions.   

For and on behalf of the Board

Keith T Hindle                          Chris D Castle
Chairman                                 Director                

Onekaka

20 May 2010

Results for announcement to the market – NZX Format

Reporting Period Year ended 31 March 2011 Previous Reporting Period Year ended 31 March 2010

  Amount (000s) Percentage change Revenue from ordinary activities $84, 34 147% Profit (loss) from ordinary activities after tax attributable to security holder. $(629), (198) (218%) Net profit (loss) attributable to security holders. $(629), (198) (218%)       Interim/Final Dividend Amount per security Imputed amount per security It is not proposed to pay a dividend for the reporting period. N/A N/A

Record Date Not Applicable Dividend Payment Date Not Applicable

Comments: On the 30th March 2011 Chatham Rock Phosphate Limited purchased Widespread Portfolios Limited 10% interest in Chatham Rise Joint Venture for a purchase price of $3.4m. This value was determined with reference to two independent reports which support a board valuation of the current value for the Chatham Rock Phosphate Project being $34 million. This valuation was reviewed by Simmons Corporate Finance on behalf of Chatham Rock Phosphate shareholders and by McDouall Stuart Corporate Finance for Widespread Portfolios shareholders, which both concurred with the fairness of the valuation. This transaction was approved by the shareholders of both companies. Consideration for this purchase was by way of an asset swap whereby the non-project assets of Chatham Rock Phosphate Limited including shareholdings in Akura Limited, a Fijian oil prospector, and Green Gate Limited, a private oil explorer which no longer holds any licence interests, together with exploration expenditure capitalised in Kotuku PEP 38526 were transferred to Widespread Portfolios Limited. Additionally Widespread Portfolios Limited was issued with 4,099,627 shares in Chatham Rock Phosphate Limited at an issue price of $0.70587 cents. 
Widespread Energy does not operate any dividend or distribution reinvestment plan.