September 25, 2002 BUSINESS AND INVESTING > THE SPECULATOR
SPECULATOR: PIGS WILL FLY
Our star biotechnology stock Chemeq (ASX code: CMQ) soared to a new high of $3.95 last week, representing a phenomenal gain of almost 700% in just one year since I put them into the portfolio at 51¢ (Visionary position, Oct 2, 2001). The Perth-based company is on track to commercialise its patented germicide to kill harmful bacteria in the guts of pigs and poultry, thus eliminating the use of antibiotics in animal feed.
Chemeq has been a winner for the portfolio since I first bought them three years ago (Sept 14, 1999) at 34¢, a month after the company floated with a public issue at 25¢ to raise a modest $3.5m. The funds were to further the development of a unique germicide, which Perth-based scientist Dr Graham Melrose had been working on for a decade. Melrose, who is chairman and chief executive, has a wide background in research and marketing. With a PhD from the University of WA and an MBA (Macquarie), he has previously been in charge of polymer research at Dulux Paints, head of applied organic chemistry at the University of NSW and an executive director at Johnson & Johnson (Australia).
After several year's work on a pilot-scale plant at Murdoch University's industrial park and field trials in Australia and overseas with pigs and poultry, Chemeq has begun building a $25m manufacturing plant south of Perth that is due for completion in the first half of 2003.
The company's business philosophy is a bit like the giant Coca-Cola company. Melrose plans to make his patented food additive at his headquarters plant in Perth and sell it under licence to the makers of animal feed, with early sales already made in South Africa and China. Patents have been granted in some two dozen countries for a germicide called Chemyde, based on the polymerisation of the organic substance acrolein. The resultant molecule, while toxic to all microbes, is so large it is inhibited in passing through the membranes of intestines, lungs and skins of animals. It kills only the bugs in the pig's guts but won't penetrate the intestinal wall and poison the animal. This has led to successful trials in pig feed to boost weight gain by eliminating gut infections. It will hopefully eliminate the need to use antibiotics in stockfeed, where growing bacterial resistance is passed through the food chain to humans. The potential world veterinary market for this application is estimated to exceed $1bn.
After holding for nearly two years, I sold out at 55¢ (Sept 5, 2001) after the company announced the US Food and Drug Administration would fast-track its polymeric anti-microbial delivery system. Unfortunate timing on my part, for the shares promptly soared to 72¢, before tumbling back in a nervous market after the September 11 terrorist attacks in New York. I bought back in at 51¢ (Oct 2, 2001).
Chemeq has on issue 65 million shares, of which 23.75 million are controlled by Melrose. He took some modest fruit for his labours recently by selling 25,000 shares for $85,000.
For the year to June 30, Chemeq announced a loss of $3.54m, which was within the company's budget before the transition to commercial production. At mid-year, Chemeq had $6.19m cash and more recently raised another $10.5m from placements. I sold 2000 Chemeq shares to reduce debt but the remaining holding still represents the biggest value of the portfolio.
Meanwhile, I've taken a modest punt on AGD Mining (ASX code: AGZ), which is among the lowest-priced counters on the boards. The company is accelerating plans to bring its Costerfield gold-antimony mine to production with a one-for-four issue of shares plus an attached option for every four shares held to raise $1.87m.
The issue closed on October 1 and will see the company's already huge number of counters balloon from 1.07 billion shares to 1.34 billion. Ex-entitlement to the issue, the company's shares traded between 0.6¢ to 0.8¢.
The issue will be filled, for interests associated with Melbourne entrepreneur John Byrne have underwritten it. Lead underwriter is Byrne's Cambrian Mining (which already owns 7.4% of AGD) supported by the listed Deepgreen Minerals (which owns 18.15%).
Next week, we'll take a closer look at the Costerfield project, where a recent 70% surge in the world antimony price has fuelled some excitement.
Declaration: The author's family has shares in AGD.
Sold
2000 Chemeq @ $3.80 = $7486
(Bought @ 51¢; 17.09.01) CMQ.AX CMEQF.PK
Bought
200,000 AGD Mining @ 0.7¢ = $1450
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