Macro Tsimmis

intelligently hedged investment

Archive for August, 2008

BPZ Energy (BZP) update #13

Posted by intelledgement on Sun, 24 Aug 08

BPZ Resources (BZP), our Peru-centric energy spec play, tentatively lined up $215 million in revolving credit facility funds this week. $15 million of the funding—announced Monday—is from the International Finance Corporation (IFC) and is expected to close in 30 days. The second tranche of $200 million is from “a major international bank,” according to the press release, and “is subject to the lender obtaining credit committee approval for the facility and completion of due diligence as reasonably required.”

Both loans run through December 2012 at a rate of LIBOR plus 2.75%. BPZ plan to apply the initial $15 million tranche to finance continue drilling activities in northwest Peru as well as to make the initial payment to General Electric to purchase three new LM6000 turbines for the gas-to-power project. They expect to close the turbines procurement contract next month and expect delivery of the turbines by 4Q09 in order to have the power plant operational in first half of 2010. They are also pursuing a second loan of $115 million from the IFC to be used exclusively for the gas-to-power project.

The second tranche of $200 million will be used as needed to fund capital projects.

“Step by step we are moving toward getting the full $215 million of senior debt in place to give the Company additional flexibility to pursue the various projects in our acreage in northwest Peru,” stated CEO Manolo Zuñiga. “This senior debt package gives a positive indication of the strength of our assets…. We are committed to growing the asset base of the Company in the most efficient way possible, and access to this financing, as well as cash flow from Corvina oil sales, should keep the Company from having to access the capital markets to fund our drilling campaign.”

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Vertex (VRTX) update #15

Posted by intelledgement on Tue, 19 Aug 08

Our development-stage biotech Vertex (VRTX) today announced the launch of their phase 3 trial for their anti-hepatitis C drug candidate, telaprevir specifically aimed at patients who tried the current standard of care (SOC)—48 weeks of nausea-inducing interferon plus ribaviron—and were not cured. 

Of the approximately six million people infected with hepatitis C in the U.S. and E.U., the SOC has been tried and failed to cure some 650,000, according to the press release. Preliminary data from large ongoing phase 2 trials have indicated a 24-week course of treatment that includes 12 weeks of telaprevir could cure as many as half of these folks. Repeating the current SOC cures about 10% of them. Conservatively, if a cycle of treatment is priced at $10,000 and one-third of the infected population eventually employs telaprevir, we are talking about at least a $20B potential. And the numbers could easily be, say, $15,000 and 60%, depending on how quickly better treatments come online. 

Telaprevir appears to have at least a two or three year window where nothing better could be available—but an important variable is how soon the drug could be approved. Pertinently, when this trial was announced last June, investors were disappointed because all the arms are 48-week courses of treatment. The difference implies that the FDA is unlikely to approve limited use of telaprevir for treatment-failure patients based on the phase 2 trial results (which previously was considered a feasible alternative both because the preliminary results have been excellent and because the trials are unusually large). This would push back potential approval at least a year.

Having said that, during the 2Q08 conference call, management would not rule out the possibility that they might file for limited approval based on the final phase 2 results at the end of 2009. So stay tuned…that, at least, is our plan.

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Transmeridian (TMY) update #25

Posted by intelledgement on Tue, 12 Aug 08

Transmeridian, our lingering Kazakhstani-focused E&P, filed their 2Q08 10-Q with the SEC today, and it includes fresh cause for concern about the company’s ability to survive if they don’t close their deal with United Energy Group.

In short, the company continues to produce less oil and lose money doing it.

Production for the quarter came in at an average 1676 BBLS/day, as compared with an average of 2451 BBLS/day a year ago. For the first six months of 2008, production averaged 1874 BBLS/day, as compared with an average of 2979 BBLS/day for the first six months of 2007. 

Fortunately, the price of oil has risen dramatically: the company has collected $82/barrel so far in 2008, compared with only $39/barrel in 2007. Thus the company has realized more revenue than last year, even though production declined: $13.6 million in 2Q08 compared to $11.2 million a year ago and $28.9 million for the first six months of 2008 compared to $18.4 million in 2007.

Alas, despite a 37% reduction in production, the cost of producing the oil actually rose 7% in dollar terms (a resoundingly depressing 70% on a per barrel basis). No big surprise here, as TMY are operating 17 wells now, as compared with eight last year. In effect, they are setting new standards for inefficiency that dwarf even their own previous impressive achievements in this regard. “Average daily production…decreased, due primarily to the lack of acid stimulation on newly completed wells, deferred workovers on existing wells and the delay of a pressure maintenance project because of a lack of sufficient operating funds. As a result, management believes that wells have not flowed at their optimal levels in the second quarter of 2008,” the 10-Q allows. Do tell.

Bottom line, on an operating basis, the company was still in the red, albeit the loss was trimmed from $11 million in 2007 to $2 million for the first six months of 2008. Still worse, however, was the toll for interest payments: $33 million for 1H08 as compared to $22 million a year ago. Overall, the company has lost $37 million so far in 2008, as compared with $32 million of red ink by this time last year. 

So, one might wonder, why are we still here? Good question. Primarily, we are here because China needs oil and Chinese money is on the way to finance serious and proper development of the potentially huge South Alibek field (although a delay in the completion of the transfer transactions that are prerequisites to closing the deal with UEG was announced last Thursday). So we still have hopes of getting a bigger fraction of our $3/share back. Also as we been lucky and good overall with this speculative portfolio, it’s philosophically appropriate to keep a failure around as a reminder of the risks of investing in individual stocks (which as a general policy for individual investors, we eschew in favor of ETFs).

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Beazer Homes (BZH) update #11

Posted by intelledgement on Sun, 10 Aug 08

Beazer Homes (BZH), the homebuilder we have sold short, announced 3Q08 results Friday and while it was a seventh straight quarter of substantial losses, and while there were big double-digit Y-O-Y declines in new home orders (-37% compared to 3Q07), closings (-42%), and revenues (-40%), there were a few glimmers of hope.

First, while the company lost another $109.7 million in the quarter, this was not only their smallest loss in over a year, but a slight Y-O-Y improvement—they lost $118.9 million a year ago—the first time that metric had ticked northwards (if that is a fair way to characterize a smaller loss that still amounted to over $100 million!) in over three years.

The stock was up 3% on the day to close at $6.10…and is up 60% in the past week on optimism that the housing market may be bottoming. We are still ahead 44% at this level and it is tempting just to cash in our chips and declare victory here—but we remain depressingly expectant that the road ahead is going to get bumpier for everyone, and that there is no hidden armada of prospective home buyers lurking around the next corner. On top of that, the unresolved SEC and DOJ criminal investigations remain open.

In these circumstances, we expect to do better on this short position, so we are staying the course here.

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Jul 08 Intelledgement Speculative Opportunity Portfolio Report

Posted by intelledgement on Sun, 10 Aug 08

Position Purchased Shares Paid Cost Now Value Change YTD ROI CAGR
TMY 03-Jan-07 300 3.30 998.00 0.50 150.00 -20.63% -74.62% -84.97% -70.00%
VRTX 18-Apr-07 57 31.65 1,812.05 33.22 1,893.54 -0.75% 43.00% 4.50% 3.48%
NBIX 22-May-07 158 11.33 1,798.14 4.72 745.44 12.60% 3.92% -58.54% -52.18%
BQI 13-Jul-07 565 3.35 1,900.75 5.94 3,354.97 -8.65% 45.54% 76.51% 71.68%
GSS 19-Jul-07 451 4.19 1,897.69 2.62 1,181.62 -2.60% -17.09% -37.73% -36.73%
GSS 24-Aug-07 613 3.08 1,896.04 2.62 1,606.06 -2.60% -17.09% -15.29% -16.24%
SLT 5-Oct-07 111 19.75 2,200.25 15.53 1,723.83 -2.33% -40.43% -21.65% -25.70%
BZP 19-Nov-07 245 9.77 2,401.65 26.85 6,578.25 -8.67% 140.16% 173.91% 323.45%
BZP 30-Jan-08 186 11.27 2,104.22 26.85 4,994.10 -8.67% 140.16% 137.34% 461.30%
WB 1-Feb-08 -57 39.99 -2,271.43 10.58 -639.54 31.87% 72.18% 71.84% 198.19%
BZH 24-Mar-08 -214 10.99 -2,343.86 3.82 -817.48 31.42% 48.59% 65.12% 313.71%
cash -2,393.50 10,502.20
ISOP 03-Jan-07 10,000.00 31,273.00 -7.71% 43.16% 212.73% 106.32%
Global HF 03-Jan-07 10,000.00 10,782.24 -2.28% -2.97% 7.82% 4.90%
NASDAQ 03-Jan-07 2,415.29 2,325.55 1.42% -12.32% -3.72% -2.38%

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—or minus for short positions—the value of dividends)
Change = Change since last report (not applicable for positions new since last report)
Year-to-Date = Change since 31 Dec 07
Return on Investment = on a percentage basis, the performance of this security since purchase
Compounded Annual Growth Rate = annualized ROI for this position since purchase (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 2007 inclusively) provides a CAGR of around 15.1%. For comparison’s sake, we also show the NASDAQ index, which over the same time frame has yielded a CAGR of around 10.1%. 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: We sold Elán (ELN) when further analysis of the Phase 2 results for bapineuzumab reported last month called into question the entire theory the anti-Alzheimer’s Disease drug is based on.


Comments: POW! Following our best month of the year in June, we had our worst month ever in July, down 8%. We were outperformed by both the NASDAQ (+1%) and the Global Hedge Fund Index (-2%); overall after 19 months of operations, the ISOP is now +213% compared with +8% for the hedgies and -4% for the NASDAQ.

Our energy plays led the decline, with our sick puppy TMY -21%, and both BZP and BQI down -9% and commodity prices faltered. Our miners were also down; GSS down 3% and SLT down 2%. Our remaining biotechs—after our sale of ELN—were mixed, with VRTX -1% and NBIX +13%. Our shorts performed well, with BZH declining 31% (+31% for us) and WB 32%.

If you are following our macro analysis, you know that we have been anticipating a market crash ever since the Fed started lowering rates nearly a year ago. We still expect the central banks to do their utmost to hold things together until (at least) after the Olympics to avoid embarrassing the Chinese and ideally until after the USA elections to avoid the risk that too many hard questions might be asked of the politicians.

But the Olympics end on 24 August, so the crash watch alert level will be going up a notch or two. Stay tuned.

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Golden Star Resources (GSS) update #8

Posted by intelledgement on Sat, 09 Aug 08

Our consistently disappointing gold mining spec play, Golden Star Resources (GSS), announced their 2Q08 results earlier this week, and the results were…drum roll please…disappointing. Again.

The company lost $7 million, or three cents per share, the sixth consecutive quarter of red ink, but that was not the cardinal disappointment. The thesis of this investment has always been that the bio-oxidation (BIOX®) porcess that the company licensed in 2005 due to declining production numbers there at their Bogoso mine would increase production and decrease costs. Too much of the gold in this ore is encapsulated in sulphide minerals such as pyrite, arsenopyrite and pyrrhotite, thus preventing the standard cyanide leaching process from accessing it. The BIOX® process destroys the sulphide minerals and exposes the gold for subsequent cyanidation, thereby increasing the overall gold recovery that can be achieved.

Sounds good in theory, but in practice it has been very hard to operate, as reflected by increased production costs at Bogoso.

Well…production costs this quarter increased still further, to a worst-ever $757/oz. According to the press release (click here and then open the 8/5/08 press release), “Rising costs of labor, energy, raw materials, reagents and other consumables increased second quarter operating costs relative to the first quarter.”

The news isn’t all bad. The company sold 78,313 ounces, an increase of 36% from the prior quarter, and 54% more than the company sold in 2Q07. According to Tom Mair, President and CEO, “[G]ood progress is being made at both our mine sites. The Bogoso sulfide processing plant improved recovery rates of the transition ores currently being processed from the first quarter’s 59% to 70% in the second quarter. Toward the end of 2008, we expect to access fresh sulfide ore which testwork indicates will yield higher flotation recovery and consequently higher overall recovery. The Wassa mine continued to deliver according to expectations, construction of the haul road from Benso is progressing well, and we expect the project to be on time and on budget with delivery of high grade ore from Benso to Wassa beginning in the third quarter as planned…. As we predicted earlier this year, significant progress is being made at both our mining operations and is expected to continue in the remaining half of the year resulting in improved results in 2009 and beyond.”

Management still expect operating costs at Bogoso to come down…eventually. “As the ore pits deepen and we access increasing amounts of fresh sulfide material in the second half, we expect flotation recovery to improve and consequently overall recovery to further improve. Ongoing plant modifications and operating efficiencies should also contribute to improved gold recoveries, higher gold production and lower cash operating costs going forward,” according to the press release.

The revenue of $70.4 million in the quarter was an all-time record. The gold sold for an average price of $900/oz, down from $926 last quarter. The company ended the quarter with $37.1 million in cash, down from $54.7 million at the end of March 2008 and $75.8 million at the end of 2007, and they anticipate that combined with improved operational cash flows, this sum will be sufficient to cover capital and operating needs for the remainder of the year.

Management are projecting full year production of 315,000-to-350,000 ounces of gold in 2008 at a cost of  $600-to-$650/oz and 460,000-to-520,000 ounces in 2009 at a cost of  $525-to-$575/oz.

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Transmeridian (TMY) update #24

Posted by intelledgement on Thu, 07 Aug 08

Looks as if we won’t have to go far to track the disappointing performance of TMY stock for another few months, as the AMEX has agreed to extend until 31 October an opportunity for the company to regain compliance with the AMEX’s continued listing standards, according to a TMY press release. AMEX said back in May that they were considering delisting TMY due to “sustained losses which are so substantial in relation to its overall operations or its existing financial resources…that it appears questionable, in the opinion of the AMEX, as to whether the Company will be able to continue operations and/or meet its obligations as they mature.” 

Yep, well we are so far in the hole here that at this point, we are holding on primarily as a potential tax loss to offset capital gains. (Or at least we should like to avail ourselves of that rationalization…if only we didn’t recommend this port primarily for tax-free accounts.) So we can’t gainsay the AMEX’s concern…but we do look forward to seeing if, with their new financing, management can pull a rabbit out of the hat here. A good sign would be if the new investors bring in fresh talent, as the existing cast of characters have pretty decisively demonstrated they are out of their league.

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Vertex (VRTX) update #14

Posted by intelledgement on Fri, 01 Aug 08

The company yesterday reported a 2Q08 loss of $91MM, compared with $118MM a year ago. The improvement is primarily due to materially increased income—$69MM, compared to $38MM for the second quarter of 2007—primarily due to a $45MM milestone payment recorded as revenue in the second quarter of 2008, received from Johnson & Johnson in connection with dosing of the first patients in the telaprevir Phase 3 ADVANCE clinical trial. 

The press release includes a good update on the progress of all their current trials and research…and for more details, check out the Q&A in this transcript of the conference call they held yesterday.

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