Macro Tsimmis

intelligently hedged investment

Archive for March, 2007

Dendreon (DNDN) update #5

Posted by intelledgement on Fri, 30 Mar 07

As planned, we sold off all our DNDN options today. If you anticpated our advice—which in retrospect, we should have posted last night or early this morning before the market opened; sorry!—and unloaded the options first thing this morning, with DNDN stock opening at $17.92 (up $13.30 from Wednesday’s close!) and then trading as high as $18.55, you could have gotten $13 or more for your UKODA Apr $5 call options.

Per our portfolio rules—having posted the sell rec after the market opened—we had to be content with the closing prices and—as DNDN’s stock price declined all day following the brief scouting expedition north of $18 after the open—we ended up with $9 for our nine UKODA calls and five cents for our five UKOKA Apr $5 puts (and thanks and good luck to the buyer of those; failing something on the order of a meteorite wiping out Dendreon’s HQ in Seattle in the next two weeks, the puts are virtually certain to expire worthless).

So in summary, counting two $15 commissions (normally we figure $8 but options trades are generally more costly than stock trades) acquiring the two positions 9 March cost us $1,975 ($1.05 for UKODA and $2.00 for UKOPA) and selling them 30 March netted us $8,095, which works out to a 310% profit…not a bad 21 days’ work! (And we are up another $1,200 on our DNDN position…with, hopefully, more to come after 15 May.)

Sorry these sentences are so long; we’re a little giddy here.

OK, shorter sentences now. We feel constrained once again to point out that situations such as this occur rarely. And when they work out so well, it’s at least partly luck. To wit, it so happens that one of the key Dendreon witnesses missed the advisory committee meeting due to transportation issues. Obviously, it was not a problem; they did fine without him…but consider this: someone noticed that the efficacy question wording was not congruent with FDA standards and—after the roll call vote had reached 0-3 against Provenge—pointed this out to the committee chairman. A discussion ensued, at the end of which the question was reconfigured to be less requiring (instead of “is Provenge efficacious?” the question became “is there substantial evidence of efficaciousness?”). All three naysayers switcher their votes and the question was answered in favor of Provenge, 13-4.

Now think about what might have happened had the individual who noticed the wording problem missed his plane (or whatever).

As the man said, “Luck is the residue of design.” But let’s not forget there’s still luck involved in speculation. We’re good, but yesterday, we got lucky, too.

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SELL Dendreon (DNDN) puts and calls

Posted by intelledgement on Fri, 30 Mar 07

WOW!! Grandslam, out-of-the-ballpark homerun!

In the wake of yesterday’s dramatic and overwhelming advisory committee recommendation to the FDA that Provenge be approved (17-0 vote that the product is safe and 13-4 that it is probably efficacious), the stock opened this morning at $17.92 and has been north of $18. We were hoping for a price in the $10-to-$12 range before the 13 Apr option expiration date and as today’s enthusiasm far exceeds our expectations, we are taking advantage and cashing in all our options positions (nine UKODA $5 Apr call options and five UKOKA $5 Apr put options).

Yesterday’s advisory committee meeting recommendation was surprizingly favorable. We were particularly surprized that a limited label recommendation—e.g., to provide Provenge for terminally ill patients with no alternative pending the completion of the currently-enrolling Phase 3 study—was never even discussed. The key turning point was after the 17-0 vote that the product was safe and the roll was being called on efficaciousness. The first three votes were “no” and at that point, some panel members expressed bemusement at the wording of the question, which bluntly asked if Provenge was effective. The wording of the question was changed to ask if there was “substantial evidence” of efficacy—which apparently is the normal way to ask the question—and the vote was taken again…all three “noes” switched to “yes” and the final vote was not close.

As there are still ten more trading days (after today) until expiration, we considered holding off on selling these options to see if we can get a better price, or alternatively selling half now and holding onto the rest. We are disinclined to be watching the ticker every minute, as would be advisable to effect such a tactic, so we are just cashing the whole thing in here. However, if you bought these calls, depending on your situation, you may quite reasonably decide to be more aggressive and hold onto some or all of them for a few days longer. If the FDA does approve Provenge for use by all prostate cancer patients on 15 May, this is probably a $30-to-$40 stock, at least. Who knows what that translates into over the next couple of weeks but a price north of $19+ is certainly not out of the realm of possibility.

FWIW, we are most definitely holding onto our long DNDN position here! We do think Provenge will be approved, probably with the requirement that Dendreon complete their presently enrolling Phase 3 study as a Phase 4…and possibly with a label limiting usage to terminally ill patients with no alternatives. The FDA usually takes the advice of advisory committees, and while they are not required to, given the likelihood that Provenge is efficacious and the lack of safety concerns, it is hard to see the agency refusing at a minimum to make it available to the tens of thousands of prostate cancer victims who would otherwise die in the next three years while this study is running. For anyone looking to get in here long term, however, we would advise holding off until after the short squeeze/volatility abates. You are likely to see prices below $15 in the next few days and may even get lucky and have a chance at $10 before 15 May.

One more admonition: situations such as this one with Dendreon and the binary event are very unusual. We were lucky to have it and luckier still that it played out ideally in our favor. We started this speculative portfolio primarily to gain intelligence and secondarily to illustrate the risks of investing in individual equities. It’s a little embarrassing to have the portfolio be so successful so quickly: please consider that it is not the norm for a spec portfolio to be up 75%+ in one month…and don’t be expecting us to do it again anytime soon!

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Dendreon (DNDN) update #4

Posted by intelledgement on Wed, 28 Mar 07

OK, let’s review the bidding. We have 248 shares of DNDN purchased 10 January at $4.01 that have been as high as $5.35 and closed yesterday at $4.62. We have nine UKODA ($5 Apr calls) purchased 9 March at $1.05 that have been as high as $1.65 and are presently worth $1.10. And we have five UKOPA ($5 Apr puts) purchased 9 March at $2 that have been as high as $2.25 but which are presently worth $1.75. So our total cost counting commissions is $3,068 ($2,066 for just the options) and the total present value of the DNDN positions is $3,121 ($1,975 for the options).

DNDN closed yesterday up eight cents on a muted reaction to the release of the Briefings documents, which were posted on the FDA website. As expected the FDA staff noted that Provenge failed to meet the primary endpoint (time to progression) of their major Phase 3 study—meaning Provenge infusions failed to significantly slow the progression of tumor growth within set time parameters—but that conversely there was a statistically significant survival benefit for Provenge patients over placebo patients.

The one new piece of data was that Provenge patients suffered a 3.9% incidence of strokes compared with a 2.6% rate among the placebo patients. Up to now, the consensus was that the toxicity of the treatment was negligible, so this is obviously a net negative, although it appears not to constitute a major issue.

Basically, we are looking for a panel recommendation on Thursday to reject Provenge by any vote (which should tank the stock and cause the value of our puts to soar) or a lopsided vote to approve (10-5 or better should create the expectation of likely approval by the FDA by 15 May which would at least double the price of the stock and cause the value of our calls to soar). A narrow vote to recommend approval is apt to maintain the status quo: sustained suspense leading up to the FDA ruling. In this event, the stock is not likely to move much in either direction and we will cash our options in at a loss. If the vote  is negative, we will probably sell our stock at a loss as it will be dead money for two or three years—pending the outcome of the third Phase 3 study, presently enrolling—should the FDA reject Provenge; if the vote is positive, we will hold the stock at least through the FDA decision due by 15 May.

We expect trading of the stock and options to be halted tomorrow, the day of the advisory committee hearing. But likely the volume Friday will make up for the day off.  🙂

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LionOre (LNGGF) update

Posted by intelledgement on Mon, 26 Mar 07

As we predicted, nickel is hot. The price of nickel hit an all-time high of $22/lb. last week amid rising demand and sure enough, our grossly undervalued nickel miner, LionOre, attracted a takeover bid, announced earlier today. Unfortunately, the all-cash bid from Swiss miner Xstrata (XSRAF) is for a mere C$18.50, which values our LMGGF at $4B, or about 4.7x projected annual cash flow at a nickel price of $22/lb. This is bad because when they bought Falconbridge—another mining company—last summer, Xstrata paid 15x cash flow. Perhaps that was a tad high—and the $22/lb. price is likely to moderate—but this is insulting. And it gets worse—adding injury to insult, LionOre’s board of directors have unanimously recommended we shareholders accept this lowball offer!

Fortunately, The Street seems to agree with us that the price is too low, as LMGGF closed today north of C$19…above the offering price. This price is just too low no matter how cushy a deal our disloyal management team has been offered to roll over on us. We expect another offer or, failing that, a shareholder vote against this offer (a two-thirds vote in favor is required for the deal to go through; Xstrata say they already have 19% of the shares pledged, presumably from our turncoat management).

We are rooting for vote down of this deal; it would be great first to stick it to these guys and second for LionOre to stay independent long enough for us to be able to run a slate against the board members who are neglecting to work in the best interests of the shareholders (which apparently is all of them).

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Dendreon (DNDN) update #3

Posted by intelledgement on Fri, 23 Mar 07

Our DNDN shares and call options are up sharply (and our puts down) over the past couple of days because of an article posted yesterday afternoon on by pharma columnist Adam Feuerstein who did a Provenge revenue projection assuming FDA approval on 15 May. In no way is this “news”—in fact, Feuerstein comes up with a relatively conservative valuation derived from his projections of $27/share—but the silly market is acting like no one ever figured this out before.

The real action for our April options will ensue next week when on Tuesday or Wednesday, the presentation materials for Thursday’s advisory committee meeting will be posted on the FDA website…we expect trading in the stock and associated options to be halted on Thursday afternoon, or perhaps for the whole day…and then climax on Friday after the recommendation has been announced.

We expect that a 10-5 or better vote in favor of approval is likely to drive the stock up to $9+, at which point we will cash in our calls (which at that share price level will be worth way more than the combined cost of buying both the calls and the puts). On the other side of the coin, so to speak, a vote recommending against approval is likely to tank the stock into the $1s, at which point we will cash in our puts. If unbounded optimism or pessimism based on the presentation materials gets us to these levels before the Thursday meeting, then our plan is to cash in earlier.

BTW, the Feurstein article is worth looking at if you are interested in drug revenue models;
his are good and well-explained.

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BUY Fording Canadian Coal Trust (FDG)—steel coal at a steal

Posted by intelledgement on Tue, 20 Mar 07

OK, this one requires a bit of explaining. Well…of course, we explain them all, but this one really needs it.

Fording is an open-ended mutual trust whose main asset is a 60% interest in Elk Valley Coal Partnership, which produces and sells hard coking coal, the premium flavor of metallurgical coal used in the integrated steel mill process. There are a large number of Canadian energy trusts, most in the oil and natural gas business, and for years they have been known as rock solid widow-and-orphan operations that pay a large dividend and deliver solid if unspectacular growth. Not the usual profile for an ISOP equity.

But a funny thing happened to FDG on the way to 2007—the stock dropped by more than 50%. Actually, two funny things happened, which the precipitous decline in the value of the stock was just reflecting. The first things was a severe cyclical drop in premium coking coal demand. Ironically, it was a “too much of a good thing” situation, whereby high demand for steel had driven up the price of premium coking coal to the point where a lot of companies opted to use cheaper, lower quality coal. FDG were forced to cut their precious dividend (which is essentially a share of ongoing profits, and of course they were down) and over the course of five months or so, the stock price fell about 40% from the low $40s to around US$25/share.

This was round about late last summer, early last fall…folks were basically thinking that FDG would be back when demand picked back up, even if it were at a lower price point for coking coal…the stock rallied once from US$25 to US$30 and then came back down to test $25 again…it appeared to be bouncing northwards again…was US$25 finally the bottom, then? And then the second funny thing: the Halloween Massacre!

The Canadian energy trusts exist because of a feature of Canadian tax law that enables trusts to pass profits along to shareholders untaxed. On 31 October 2006, Conservative Party Finance Minister Jim Flaherty staggered the investment world with an announcement that the government was no longer allowing royal trusts to form and that all existing ones (except for REITs) would have to start paying the standard 31% corporate tax in 2011. The reason Flaherty cited was too much foreign ownership of the trust stock meant that the income was mostly evading Canada’s coffers. This sort of move might have been expected from a Liberal government, but coming from a Conservative government, it was a shock.

FDG stock plunged another 20% in a week. This time, it had lots of company, as all the Canadian energy trusts tanked.

Which brings us to our purchase thesis: the underlying value of the assets controlled by the trust is now greater than the current marketcap (US$3.3B) with the price still hovering around US$22/share here. We are not sure how much Fording’s premier coking coal interests are worth on the open market, but with all the steel demand in Asia, it’s gotta be pushing US$6B. (T’would be delicious irony if the Canadian government, worried about losing income to foreign investors and solving that problem by forcing the trusts to restructure/sell assets to extract value ends up with large swathes of Canada’s energy assets foreign controlled…afterall, who else has that sort of cash to throw around? Hmmm…does anyone know if the Chinese government contributed to Jim Flaherty’s last election campaign? They should mos def help him out the next time around!)

Of course, all the Canadian energy trusts are down now in the wake of the Halloween Massacre…but FDG is down the most due to the earlier cyclical coking coal pricing decline. And we believe it has the most potential to move back on up.

And—here’s the kicker—in the meantime, FDG are still paying a 7% dividend…a lot lower than it used to be, but nice money to be paid while waiting the The Street to wake up and smell the coke.

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Transmeridian (TMY) update #2

Posted by intelledgement on Thu, 15 Mar 07

Transmeridian (TMY) held their 4Q04 and year end results conference call this morning. The results themselves were an anticlimax…we already knew they spent a lot more money than they brought in in 2006 as they focused on infrastructure to enable them to wring some production out of their first class properties in Kazakhstan. The actual numbers (announced yesterday) showed a near-doubling of production over 2005 (from 1100 bpd to 2000 bpd) and tripling of revenues, but the gain was more than offset by increased operations expenses and at the end of the day, TMY lost $54.3MM in 2006 as compared with $21.6MM in 2005. No surprizes there.

But what we really wanted to hear was their progress on ramping up production. This is a critical issue because the company had enough cash to last through the first quarter at their current (aggressive) level of CAPEX/production enhancement spending. Transmeridian needs about 4000 bpd of production just to keep the lights on, 6500 bpd to maintain a modest CAPEX program reworking existing wells and drilling a handful of new ones, and 8000 bpd of production to be comfortable.

Well, the bad news is that they aren’t going to make it. Company management stated that current production is running around 4000 bpd, which is better than the numbers in February or January, but disappointingly down from just a week ago (5100 bpd as of 6 March).

So, with only $15MM cash on hand—most of which is earmarked for a looming interest payment—the other bad news is that management have no choice but to throw in the towel and seek an additional $15MM-to-$22MM in equity-funded cash, which means more dilution for the likes of us existing shareholders. 😦

So what’s the good news? Well…they completed their first horizontal-lateral well, and management believe that this approach will prove the key to unlocking their reserves, which flow freely through a series of fractures…the theory is that digging vertical wells is dicey because it is easy to miss or only tangentially plug into the fractures but horizontal-lateral drilling is much more likely to intersect fractures, potentially at multiple points and this is a better approach for getting more oil out of the ground. Unfortunately, this first horizontal well started out strong at 1000 bpd but (as predicted here earlier this month) has lapsed down to 400 bpd now. Management believe but are not certain that acid stimulation deployed in this new well failed to make it into the lateral drilled region but was confined to the original vertical area, and that once they deliver acid stimulation to the lateral areas of this and subsequent wells, it will help with the efforts to tap into the fractures and boost production. Perhaps it would be more accurate to say that these are “good expectations” rather than “good news.”

Another good expectation is that with the new wells being drilled now plus the reworking of existing wells also underway, management project reaching 8000 bpd of production by mid-May. By then they also expect to be selling nearly 100% of their output on the international market—the figure in 2006 was 57%—which provides a better price than the Kazakhstan domestic market. They also appear to be near completion on their pipeline infrastructure project, which should provide them with the capacity to move up to 30000 bpd more economically. This projected combo of higher production, better prices, and lower costs should not only make Transmeridian self-funding, but push it into the black.

The stock surged today, up as high as $3.74 before closing at $3.02, up 4%. But it was not in reaction to this sunny scenario, which has been described before (and indeed was supposed to have arrived already). The surge was in set off by management’s announcement prior to the open that they were “considering strategic alternatives” due to disappointment with the market valuation of the company and a desire to maximize shareholder value. Management stated that there have been inquiries and that non-disclosure agreements have been signed and that they are providing corporate data to interested third parties. They stated they would be open to any alternatives, from partnership to partial sale of the South Alibek field to a buyout.

If management truly believe they are two months away from black ink (following years of ever-increasing losses), the timing for solciting bids seems curious. Wouldn’t it make more sense to wait a few weeks and then deal from a position of greater strength? It is likely that this is primarily a tactical manuever designed to pump up the value of the stock in order to obtain a better deal on their forthcoming funding deal. (The bears might say that management have concluded that cracking the complex geography of the South Alibek field is beyond their limited means and they genuinely want out.)

In any event, we are hanging on here to allow management the rope they say they need to get to 8000 bpd. The prospect of a profitable E&P sitting on 67MMBBLS of proved (down from last year’s estimate of 73MMBBLS, another little disappointment) and 140MMBBLS of probable reserves is too good to give up on this close to potential fruition. We will, however, be watching closely to ensure that management achieve their goal of producing sufficient crude at a low enough price to both fund their CAPEX and show a profit. Failing that, we should be looking for a buyout, here, too…not the sort requiring the buyers to sign NDAs.

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Feb 07 Intelledgement Speculative Opportunity Portfolio Report

Posted by intelledgement on Wed, 14 Mar 07

Position Purchased Shares Paid Cost Now Value Change ROI CAGR
TMY 03-Jan-07 300 3.30 998.00 4.01 1,203.00 19.70% 20.54% 238.21%
DNDN 10-Jan-07 248 4.01 1,002.48 4.64 1,150.72 8.16 14.79% 179.55%
PTR 23-Jan-07 8 127.17 1,025.36 116.37 930.96 -5.64% -9.21% -62.47%
IFN 13-Feb-07 24 41.76 1,010.24 39.10 938.40 n/a -7.11% -83.41%
FXI 27-Feb-07 10 95.00 958.00 99.10 991.00 n/a 3.44% 23,558,534.25%
LMGGF 28-Feb-07 73 13.55 997.15 13.55 989.15 n/a -0.80% n/a
cash       4,008.77   4,043.68      
Overall 03-Jan-07     10,000.00   10,246.91 1.99% 2.47% 17.24%
Global HF 03-Jan-07     10,000.00   10,182.75 0.63% 1.83% 12.54%
NASDAQ 03-Jan-07     2,415.29   2,416.15 -1.94% 0.04% 0.23%

Position = security the portfolio owns
Purchased = date position acquired
Shares = number of shares the portfolio owns
Paid = price per share
Cost = what portfolio paid (including commission)
Now = price per share
Value = what it is worth as of the date of the statement (# shrs multiplied by price per share plus value of dividends)
Change = Change since last report (blank for positions new since last report)
Return on Investment = on a percentage basis, the performance of this security to date
Compounded Annual Growth Rate = annualized ROI for this position (to help compare apples to apples)

Notes: The benchmark for this portfolio is the Greenwich Alternative Investments Global Hedge Fund Index, which historically (1988 to 2006 inclusively) provides a CAGR of around 15.4%. For comparison’s sake, we also show the NASDAQ index, which over the same time frame has yielded a CAGR of around 11.0%. Note that for the portfolio, dividends are added back into the value of the pertinent security and not included in the “cash” total (this gives a more complete picture of the ROI for dividend-paying securities). Also, the “Cost” figures include a standard $8 commission and there is a 3% rate of interest on the listed cash balance.

Transactions: We took three positions in February allocating $1,000 for each one (10% of the starting value of the portfolio).

• 13 Feb – Bought 24 IFN for $41.76/shr
• 27 Feb – Bought 10 FXI for $95.00/shr
• 28 Feb – Bought 73 LMGGF for $13.55/shr

Comments: Turn, turn, turn! The market gave back the gains of January while we were up 2% for the month…not bad, considering we are only 60% invested (and two of those six positions came on the last day and next-to-last day of the month). Getting fully invested is taking longer than we had expected…there are plenty of good-looking opportunities out there, but selecting among them and then presenting our thesis takes time…so, we cheated this month, stealing two downbeaten picks from our “big sister” IMSIP…you know if IMSIP is seeing someone, the odds of getting jerked around or dumped are virtually nil. So far, the secondhand beaus are kinda mixed: up $30 on FXI, down $70 on IFN…but even if nothing else comes of it, we already learned that an ROI of 3.44% a day will net you 23MM percent in a year…see, this portfolio is both fun and educational, just as promised!

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BUY Dendreon (DNDN) puts and calls—straddle play

Posted by intelledgement on Fri, 09 Mar 07

OK, first we suggest you check out this article which summarizes what is at stake for Dendreon and their prostate cancer product, Provenge, at the 29 March FDA advisory committee meeting.

Essentially, if Provenge is approved, DNDN stock, currently around $4, is likely to double or triple at least on the expectation that Dendreon will get revenues starting this year and be profitable by 2008. If the product is not approved, the next window for consideration would be when the currently-enrolling Phase III test results are available, which would be sometime after late 2008 or early 2009 at the earliest, and in the meantime to keep the doors open the company would have to raise more money which means at best—assuming the product is eventually approved, which obviously could not be guaranteed—more dilution for existing shareholders. In this case the stock is likely to plunge 50% or more.

The Street (that is, the common wisdom, not seems to feel the FDA is more likely not to approve Provenge. There is a huge short position, meaning that many traders are betting against approval and if they are wrong, they will all have to buy stock to close out their positions, which will likely exaggerate what would already be a sharp appreciation in share price. The ISOP is long DNDN so obviously we tend to think it is more likely to be approved than not. But today we are taking another position utilizing short term options that is designed to take advantage of this binary event on 29 March. In true hedge fund fashion, we are purchasing a straddle; if the advisory committee recommends approval of Provenge, we will do insanely great and if not, our losses will be mitigated (and if the stock falls low enough, we might even make money that way, too).

We are buying Apr $5 DNDN puts (UKOPA) and Apr $5 DNDN calls (UKODA).

Each UKOPA put option gives us the right to sell 100 shares of DNDN on or before the date the option expires (13 Apr 07) at $5/share (the “strike price”). With the stock currently at $4, these puts are going for about $200 each (that is, we have to lay out $2/share now for the right to sell the stock at $5 anytime between now and 13 Apr). Right now these puts are “in the money” because they give us the right to sell DNDN stock for more than it is worth on the open market. The options are worth more than the $1 difference between the current stock price ($4) and the strike price ($5) because of the possibility that DNDN could fall further between now and 13 Apr. Should DNDN stock decline in value between now and 13 April, then the options will be worth more than $1; should DNDN stock go up, then these options will be worth less. If DNDN stock is worth more than $5/share on 13 April, then these options will expire worthless, as obviously no one would pay anything to acquire the right to sell a stock cheaper than the price he can get on the open market. Essentially, DNDN has to go down another dollar (to $3/share) by 13 April for us to break even on these options, as they will then be worth $2 each, which is what we are paying for them today. If the stock declines more, we will make a profit.

Each UKODA call option gives us the right to buy 100 shares of DNDN on or before the date the option expires (13 Apr 07) at $5/share. With the stock currently at $4, these calls are going for about $100 each (that is, we have to lay out $1/share now for the right to buy the stock at $5 anytime between now and 13 Apr). Right now these puts are “out of the money” because they give us the right to buy DNDN stock at a higher price than we can get it on the open market. The options are not worthless, though, because of the possibility that the stock price could exceed $5 between now and then. Should DNDN stock go up in value between now and 13 April, then the options will be worth more; should DNDN stock goes up, then these options will be worth less. If DNDN stock is worth less than $5/share on 13 April, then these options will expire worthless, as obviously no one will pay to acquire the right to buy a stock at a higher price than he can get on the open market. Essentially, DNDN has to go up $2 (to $6/share) by 13 April for us to break even on these options, as they will then be worth $1 each, which is what we are paying for them today. If the stock goes up more, we will make a profit.

In point of fact, we never intend to exercise these options; instead our plan is to sell them—hopefully for a profit—before they expire.

The puts are currently asking $2.10 and the calls $1.05; there is healthy open interest for both (meaning there are lots of trades every day and thus it is easy to buy and sell them at the market price). Thus we will buy five puts and ten calls. Note that because we are buying both puts and calls, the stock has to move up or down farther for us to make an overall profit that it would if we just bought one or the other. This is because if either the puts or calls are in the money, by definition the other position is worthless. So if the stock goes up, even though we only spent $1,000 to buy the calls, we have to make more than $2,000 on them to make a profit overall because we we need to cover the $1,000 we spent on the now-worthless puts. Normally, you would probably do better just to buy one or the other based on your best guess which way the stock will move. But the straddle makes sense here because [a] the decision could easily go either way and [b] whichever way the decision goes, the stock is likely to move significantly in one direction or the other. With a “straight” play—either buying or shorting DNDN, or just buying calls or puts but not both—there is a close to fifty-fifty chance you will get burned. With our straddle, you can actually come out ahead—or at least cut your losses—no matter which way the decision turns.

Here is how we expect this to play out. If the FDA advisory committee recommends outright approval of Provenge and the stock goes up to $10 (halfway between doubling and tripling), then the puts expire worthless and the calls are worth $500 each for a profit of $3,000. If the stock reachs $12, then the calls are worth $700 each for a profit of $5,000.

If the FDA advisory committee does not recommend that the agency approve Provenge and the stock tanks the expected 50% to $2, then the calls will expire worthless but the puts will be worth $300 each for a net combined loss of $500 on both trades. If the stock goes down to $1, then the straddle will breakeven; at prices below $1 the straddle is profitable.

Of course, the risk is that there will be some sort of grey result from the advisory committee meeting that only modestly boosts or hurts the stock. For example, there might be a delay in the decision, or the committee might recommend Provenge be granted limited approval for use with terminal prostate cancer and no viable treatment alternatives with full approval pending the results of their currently enrolling Phase 3 study. This latter eventuality—which we actually think is the most likely—would probably afford the company enough revenue to avoid the need for more funding through 2008, but not enough to turn profitable until when and if Provenge is fully approved. At any DNDN price between $1 and $7, the straddle loses money. Worst case is the stock going up from the current $4 to $5, in which case both the puts and calls expire worthless.

Our expectation, however, is that conditional approval would still get the stock up close to $8 and that the prospects of any other non-decisive outcome or a delay at this point are remote. In any event, going with later options is more expensive and thus the potential ROI on a straddle is reduced considerably. This is a relatively unusal situation where the timing of an event that is likely to have a huge effect on the stock price is known about beforehand: you don’t get better straddle opportunities than this.

BTW, to purchase options (and/or to sell stock short), you generally need to have established a margin account with your broker. It is a good idea to do this even if you never intend to buy on margin (which indeed we recommend you never do) so that you have the flexibility to transact such a trade. If you took the same $2,000 we are deploying here and just bought DNDN stock outright at $4, if the stock tanks to $2 you are out $1,000 while our straddle play is down only $500…and if the stock rockets to $10, you have a profit of $3,000 while our straddle play is up $5,000…at $12, you are up $4,000 and the straddle is up $7,000.

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Transmeridian (TMY) update

Posted by intelledgement on Tue, 06 Mar 07

Transmeridian (TMY) issued an update today and the news was…well lukewarm. The best news is that the company has achieved 5100 bpd of production, which exceed our target of 4000 bpd in 1Q07. Unfortunately, it is not yet clear whether that level of production is sustainable, as the average production in January was 3700 bpd and in February it actually declined to 3500 bpd. (According to the press release, “production was curtailed during the last two weeks of February due to storage capacity limits and other technical issues related to the startup of pipeline deliveries”). Still, compared to a 2006 estimated average of 2200 bpd, the vector looks good. But not great, given that we need 4000 bpd just to sustain ongoing operations and to service the debt and pay for the additional drilling needed to access the remaining 92% of the company’s proven reserves, we need 6000-to-8000 bpd.

There was also drilling news, and it too was good but not great. The first horizontal drilling project is complete: a workover of a marginal well SA-5H, which previously had been producing a measly 100 bpd. After acid stimulation—deemed only partially effective due to not having equipment optimal for acid stimulation of lateral horizontal wells—the workover project boosted production here tenfold to 1000 bpd. Decent enough…if it holds at that level. If past experience is any guide, there will probably be some dropoff. Two other wells were completed and put into production in early February and two more are nearing completion. TMY plan to drill and complete four more wells in 2007, for a total of eight.

Finally, there was unmitigated good news on the pipeline front: TMY are now delivering oil to market via the nearby KazTransOil pipeline system utilizing third-party processing facilities at the Alibekmola field with a capacity of 4500 bpd, increasable to 9000 bpd. Management expect to switch over to their own treating and pipeline delivery system by late summer of 2007 (initial capacity of 15000 bpd). In either case, the end of the truck-to-train delivery chain should improve the bottom line starting this quarter.

Overall, The Street was decidedly underwhelmed by this news, which was released just after 1pm. The stock was down 13% today on heavy volume. Still, at $3.46 it is north of where we bought in and the potential upside here is still very high. So we are standing pat.

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