Macro Tsimmis

intelligently hedged investment

Archive for December, 2007

Transmeridian (TMY) update #12

Posted by intelledgement on Mon, 31 Dec 07

Happy New Year!

Transmeridian (TMY)—our E&P with a potentially world-class property in Kazakhstan that have been suffering with production issues and soliciting takeover bids—announced today that having failed to receive any offers they deem worthy, management have raised their own war chest and are bidding to take the company private at $3/share. CEO Lorrie T. Olivier has formed an investment vehicle, Trans Meridian International, Inc. (“TMI”) to make the all-cash offer for the purpose of acquring “as many outstanding shares as possible of the Company’s common stock as a first step in a ‘going private’ transaction resulting in TMI acquiring the entire equity interest in the Company. If the transaction is completed, TMI contemplates that the shares of the Company’s common stock would be delisted from trading on the AMEX and deregistered with the Securities and Exchange Commission,” according to the press release.

Our take is that TMY management have lined up adequate financing here and that this offer is virtually money in the bank. We think the rights to the South Alibek field are a steal at $825MM. (Naturally we do, considering we paid the equivalent of 10% more than that for our shares. And of course now we regret not buying more at $1.40 last week. LOL) Accordingly, we plan to play through on this one and hold our shares to see if this tree-shaking exercise causes any serious counter-offers to drop down to the ground.

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Golden Star Resources (GSS) update #4

Posted by intelledgement on Thu, 20 Dec 07

Our money-losing gold miner, Golden Star Resources (GSS) finally figured out who will replace CEO Peter Bradford, who has resigned effective as of the end of the year. Well…sort of. Today the company announced that CFO Tom Mair “has been appointed Interim President and CEO effective January 1, 2008.” Mair will “temporarily” step down as CFO, which post will be filled by the controller, Roger Palmer.

Mair has been with Golden Star only since February, but he has previously worked for Newmont and several other mining companies over the past quarter century or so.

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Oilsands Quest (BQI) update #4

Posted by intelledgement on Thu, 20 Dec 07

Management of Oilsands Quest (BQI), our (mostly) Saskatchewan-focused tar sands play, today announced the closing of the exercise of the over-allotment of shares from their recently completed financing deal. An additional 1,650,000 shares and 825,000 warrants were sold for $5 for each share and half-warrant which results in an additional US$7.8 million in net proceeds to BQI. Total net proceeds were approximately US$75.5 million; the company sold 12,650,000 common shares with 6,325,000 common share warrants for US$5 for each unit plus 2,600,000 common shares on a flow-through basis for CDN$6.17. Each warrant entitles the owner to purchase another share of BQI common for US$6.75 anytime over the next two years.

Possibly the completion of this financing deal at a floor price of $5 will halt the PPS erosion we have been experiencing in recent weeks, in particular since the deal was announced last month…the price had fallen from $5.35 the day (19 Nov) before the announcement to as low as $4.21 on Tuesday (18 Dec) but it rallied to close at $4.42 today.

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Élan (ELN) update #6

Posted by intelledgement on Thu, 13 Dec 07

After the close yesterday, our multiple sclerosis (and hopefully soon, Crohn’s disease) drug maker’s marketing partner for tysabri, Biogen Idec (BIIB), announced that no one wanted to buy them, afterall—they had been soliciting takeover offers in recent weeks—and today ELN closed down 7% in heavy trading.

Why? Because there is a clause in Élan’s agreement with BIIB that allows them to take back the tysabri marketing rights at a bargain price if there is a change in control of Biogen Idec. Folks were imagining at the least that ELN management might be able to negotiate an improved deal with any successful bidder. Now that apparently won’t happen.

This is only marginally news but having your investment clipped by 7% in one day due to something that has almost nothing to do with your company’s real business is so emblematic of what we speculators have to put up with that it is worth attending.

Look at the bright side…it could have been worse…BIIB stock was down 24% today! LOL

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Neurocrine Biosciences (NBIX) update #4

Posted by intelledgement on Thu, 13 Dec 07

Wow. It has not been a good couple of days for our biotech, Neurocrine Biosciences (NBIX).

The company announced that yesterday, the FDA issued an approvable letter in response to NBIX’s revised New Drug Application (NDA) for their prospective insomnia product, indiplon. This in itself was a big surprize and very disappointing, in that the FDA had issued an approvable letter in response to NBIX’s original NDA for the product back in May 2006 and the company took a year to respond to all the concerns the agency had listed in that letter (and then the FDA took six months to review the response). Thus it was widely expected that the FDA would approve the product this time around.

Even more surprizing were the concerns the FDA cited for not approving the product this time.

First of all, they want a new study focused on safety and efficacy for elderly users of indiplon. This actually echoes a concern expressed by the agency in May 2006, but the company had worked with the agency for months thereafter and management believed they had mutually agreed that no additional study was necessary. The resubmission of the NDA included significant safety and efficacy data for elderly users. Apparently either management misunderstood months of guidance by the agency, or the FDA changed their minds.

Second of all, the agency wants a new safety study comparing indiplon with an unnamed product already on the market focusing on major adverse effects such as sleepwalking. Such events appear to be very rare with indiplon—there was only one at the applied for dosages of 5mg and 10mg in all the studies conducted to date—and so it would appear on the face of it that to obtain a meaningful statistical base of such AEs would require minimally a six-month study with a 5,000 or more patients. This requirement is unprecedented—no other approved sleep remedy has ever been tested in this way—and would be very expensive.

The third concern is even more bizarre. The agency wants a new study on the effects of indiplon on third-trimester pregnant animals. Indiplon was administered to pregnant animals as a matter of course during pre-human testing and there were no indications of any effect on mammalian fetuses but the agency now wants an expanded study focusing on this issue. This is particularly weird in view of the fact that indiplon is not indicated for use by pregnant humans (nor is any insomnia remedy currently approved for use by the FDA; nor has such a special study ever been required before).

Management conducted a teleconference this morning and are evidently clueless. They plan to meet with the FDA in the next few weeks to seek clarity with respect to the agency’s concerns, but clearly investors at this point need to discount indiplon completely. If the FDA does not ameliorate their demands, it is probably too expensive for NBIX to pursue approval. And even if the agency does relent in part, does it make sense to throw good money after bad when apparently they are apparently either unwilling to approve new insomnia remedies or so incompetent as to be likely to come up with fresh irrational objections?

So kissing the $100MM-to-$250MM of projected indiplon annual revenues goodbye, is NBIX still worth owning here? We still have a potential $1B+ product: the GnRH antagonist receptor anti-endometriosis agent currently in phase 2b testing. The problem is that revenues there are three years away at best, and the company has only $125MM cash. Layoffs are coming—the company had built up a sales staff in anticipation of FDA approval of indiplon—the costs of which will eat into that hoard. In any event, the cash on had might cover a year of operations at best. So a need for additional financing to the tune of $200MM or so before we see any serious income is probable. At the close yesterday (management did not announce the FDA decision until 3am today), the company had a market cap of $378MM…so for the sake of argument, if this bizarre FDA decision costs shareholders $200MM, then let’s say the company should now be worth $178MM. In point of fact, the stock opened today at $5.50—an overnight decline of 46%, in keeping with our observation about it being a bad couple of days for NBIX—which amounts to a marketcap of $203MM, so evidently The Street more or less concur with this back-of-the-envelope figuring.

Of course, what The Street say the company is worth, while interesting, is not how we determine valuation. (Logically, if it were, then there would never be any reason to buy or sell a stock, as the current valuation as determined by The Street would always be correct.) If we posit GnRH agonist approval in early 2011 and sales ramping up to $1B in the next four years, then at a valuation of 15x sales, NBIX should be worth $15B by 2015. But the GnRH agonist product is still in phase 2, and the FDA have gone insane, so let’s discount heavily for risk…say, 40% per year? Working backwards, a reasonable valuation for NBIX would then be about $250MM here.

So bottom line, we think The Street have overshot the mark here in correcting NBIX’s valuation, and we are sticking with the company. Since May 2006—when the nonapprovable letter with respect to the 20mg tablet killed off the chance for $1B revenues—indiplon has been a sideshow. Management should attempt to sell the drug to a better-capitalized company in need of product who can afford to contend with the FDA’s schizoid demands. The focus now has to be on the GnRH product. In today’s teleconference, NBIX CEO Gary A. Lyons stated that he expected to be able to announce a partnership agreement with respect to the GnRH product by early January, possibly by the end of the year. That could be a good next step towards realizing the inherent potential value.

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Wachovia Corporation (WB) update

Posted by intelledgement on Wed, 12 Dec 07

Things keep deteriorating for Wachovia Corporation (WB), the big league US bank we have sold short. Wachovia filed a Regulation FD Disclosure with the SEC today revealing that they now expect to file a loan loss provision in the current quarter of $1B, up from the $500-to-$600MM expected as recently as last month. The stock closed at $40.53, down 3% on heavy volume.

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Nov 07 Intelledgement Speculative Opportunity Portfolio Report

Posted by intelledgement on Wed, 12 Dec 07

Position Purchased Shares Paid Cost Now Value Change ROI CAGR
TMY 03-Jan-07 300 3.30 998.00 1.77 531.00 -2.75% -46.79% -50.16%
FDG 20-Mar-07 44 22.68 1,005.92 34.09 1,577.75 -6.40% 56.85% 90.54%
ELN 04-Apr-07 129 13.90 1,801.10 23.03 2,970.87 -3.24% 64.94% 114.18%
VRTX 18-Apr-07 57 31.65 1,812.05 25.39 1,447.23 -21.49% -20.13% -30.46%
NBIX 22-May-07 158 11.33 1,798.14 13.02 2,057.16 40.76% 14.40% 29.18%
BQI 13-Jul-07 565 3.35 1,900.75 4.50 2,542.50 -17.10% 33.76% 113.60%
GSS 19-Jul-07 451 4.19 1,897.69 3.02 1,362.02 -16.11% -28.23% -59.51%
GSS 24-Aug-07 613 3.08 1,896.04 3.02 1,851.26 -16.11% -2.36% -8.52%
BZH 18-Sep-07 -178 11.18 -1,982.04 8.49 -1,511.22 24.40% 31.15% 288.44%
SLT 5-Oct-07 111 19.75 2,200.25 26.30 2,919.30 1.27% 32.68% 532.39%
WB 12-Nov-07 -59 40.63 -2,389.17 43.00 -2,574.76 n/a -7.21% -78.09%
BZP 19-Nov-07 245 9.77 2,401.65 11.40 2,793.00 n/a 16.30% 14,929.01%
cash -3,340.38 6,869.96
Overall 03-Jan-07 10,000.00 22,836.07 -4.82% 128.36% 148.73%
Global HF 03-Jan-07 10,000.00 11,047.50 -1.66% 10.47% 11.62%
NASDAQ 03-Jan-07 2,415.29 2,660.96 -6.93% 10.17% 11.28%

Position = symbol of the security for each position
Purchased = date position acquired (for long positions) or sold (for short positions)
Shares = number of shares long or short in the portfolio
Paid = price per share
Cost = what portfolio paid (including commission); note for short sales, the portfolio gains cash
Now = price per share as of the date of the report
Value = what it is worth as of the date of the report (# 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 the ISOP 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 2% rate of interest on the listed cash balance.

Transactions: Two of our three sales this month eliminated duplication between the spec port and the investment port. Now, the vast majority of our speculative positions—and all our our investment positions—are consistent with our macro analysis. E.g., positions in a specific E&P company for the spec fund and in the IFC ETF for the investment fund are both thematically consistent with our macro analysis that the relative value of energy is rising. However, one of the purposes of the spec fund is to push ourselves to gather more intelligence and learn new things and duplicating the same positions as we have in the investment fund does not advance the ball in that regard. While these sell decisions were based purely on ROI considerations, we were happy to get rid of the dupes and do not anticipate seeing such a situation arise again. Note: because we are short Wachovia (WB), we had to pay out the 64-cent dividend on 28 Nov, rather than collecting it as is normally the case with dividends.


Comments: The hedgies won! The hedgies won! Yes, folks, the professional hedge fund managers finally recorded their first monthly victory of 2007—that is, the first month they have outperformed both ISOP and the NASDAQ—by virtue of managing to lose money slower than anyone else: only -2% compared to -5% for us and -7% for the NASDAQ. Way to go, pros! Ironically, it was also their worst month of the year, in terms of ROI…in fact, November was easily everyone’s worst month of the year.

Despite the Fed’s continued determination to lower interest rates and increase liquidity to counter the housing and credit crises, the US stock market shrank at the prospect of looming recession…or worse. There was really no good news whatsoever this month. For us, in fact, mostly there was bad news—Vertex ( VRTX, -21%) saw competitors to their prospective anti-hepatitis drug, telaprevir, wax stronger…Oilsands Quests (BQI, -17%) reported underwhelming reserve numbers and announced another dilutive offering of more shares…Golden Star (GSS, -16%) had another quarter of unanticipated operational challenges…Beazer Homes (BZH, +24%) had an even worse-than-expected quarter—which is saying a lot as folks expected a very bad quarter—but in this case as we are short the stock, bad news is good for us. Our star performer for the month was Neurocrine (NBIX, +41%) but most of the runup there was due to anticipation of FDA approval of their sleep drug, indiplon, next month, rather than any genuine good news. Our newest position in BPZ Resources (BZP, +16%) was up sharply for us in just 11 days but that was mostly a rebound from the bad news that they, too, plan a dilutive sale of additional shares.

Despite the sharp pullback, overall we are still way, way ahead: +128% so far in 2007 compared to +10.48% for the Greenwich Alternative Investment’s hedge fund index and +10.17% for the NASDAQ.

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Oilsands Quest (BQI) update #3

Posted by intelledgement on Wed, 05 Dec 07

Management announced earlier this morning that the financing deal has closed as planned. The company realized US$67.7MM from the deal. “The Company intends to use the proceeds of the offering of Units for reservoir testing and other costs associated with the Axe Lake Discovery and for general corporate purposes,” according to the press release.

With the share price threatening to sink below $4, it is encouraging that the underwriters are confident they can move 11MM shares prices at $5. (Of course the purchasers have the incentive of a warrant for every two shares they buy now that gives them the option to buy another share at $6.75 anytime in the next two years.)

No word on the disposition of the overallotment shares. If those sold too, that would be another good sign. However, if the USA rolls into recession, the price of oil—and the perceived outlook for oilsands developers—are likely to suffer, near term, irrespective of the long term considerations of true believers such as ourselves. LOL speculation…gotta love it.

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