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Adventrx Pharmaceuticals (ANX): Where Is ‘Fair Value’?

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With 6 weeks to a U.S. Food & Drug Administration (FDA) decision on Adventrx Pharmaceuticals’ (ANX) Exelbine™, an enhanced formulation of the chemotherapy drug, vinorelbine, trading continues to be volatile. The reason?

Diverging opinion with a side of emotions at play.

Vista Capital Partners set a $7.50 price target on Adventrx shares in the latter part of June, two days after Rodman & Renshaw revised their target on the company upwards 355% to $16. Shares quickly leaped to a new 52-week high, on equally impressive volume. 

However, some investors are not as enthusiastic. Growing share volume has accompanied a growing short interest in Adventrx Pharmaceuticals’ shares. Investors betting on a decline in the company’s stock comprised 7.7% of the float at the end of June (NASDAQ.com). To top it off, TheStreet.com analyst Adam Feuerstein added:

Adventrx is overvalued (perhaps wildly so) on a fundamental basis. […]At the moment fundamentals don’t matter, but at some point, they will.

Feuerstein went on to explain that the addressable market for Adventrx Pharmaceuticals’ Exelbine™ is dismal, with U.S.sales of vinorelbine at $7 Million. Yet, this statement differs materially from a similar analysis in 2010, where Feuerstein wrote that the U.S. market for vinorelbine is worth $20 Million annually. In the unlikely event that the market for vinorelbine contracted 65% year-over-year (as the analyst’s research suggests), we took to Adventrx’s SEC filings for a precise answer:

Based on data from IMS Health, total vinorelbine sold in theU.S.in 2009 was approximately 9.4 million milligrams. We estimate that the current average sales price for generic, or multi-source, vinorelbine in theU.S.is between $1.40 and $1.50 per milligram

This puts U.S.sales of vinorelbine between $13.16 Million and $14.10 Million per annum – twice the number which Feuerstein quoted.

Pricing Strategy

Exelbine™, which would aim to replace branded and generic formulations of vinorelbine through its administering benefits, would offer Adventrx Pharmaceuticals pricing power over competitors if granted a unique Healthcare Common Procedure Coding System (HCPCS) product code. According to the company, a unique code would allow Exelbine™ to be quoted at its own price – regardless of the price of substitute products. Let’s put this into perspective with an example.

Microsoft controls the market for Office software. They are the sole supplier of Microsoft Office. While substitute products exist, they are not ‘identical’ to Microsoft’s Office Suite. This gives Microsoft leverage to price their product at a premium to substitutes. Adventrx’s plans for Exelbine fall along the same lines.

According to their annual report, Exelbine will be priced at $5-10 per milligram:

While we have not determined a price for Exelbine if it were approved by the FDA, we expect decision makers to value its unique formulation as compared to Navelbine and its generic equivalents, and we anticipate pricing Exelbine in theU.S.between $5 and $10 per milligram.

Valuation

Adam Feuerstein at TheStreet.com prepared a valuation for shares of Adventrx Pharmaceuticals assuming 50% market penetration for Exelbine by 2013 (that is, in two years). To be more conservative, suppose 33% penetration, and pricing at the low-end.

9,400,000 milligrams * 33% * $5/milligram = $15.67 Million in sales for fiscal 2013.

And, if Feuerstein wanted to know what those sales were worth to shareholders today, we would discount 15% and divide by a fully-diluted 35.67M shares (10Q), resulting in revenue per share of $0.38.  

At this stage, in place of a randomly assigned sales multiple (albeit, it is tempting), we’ll use the industry average price-to-sales ratio of 11.38 to measure ‘fair value’.

11.38 * $0.38/share = $4.32/share valuation.

Conclusion

Adventrx Pharmaceuticals will continue to trade in a volatile range at least until the FDA has rendered an opinion on Exelbine. Using a simple calculation, we showed that shares of this late-stage biotechnology firm are undervalued on the basis of a potential product approval and commercialization efforts. However, Exelbine’s FDA trial could also be the stepping stone for a multitude of products, including Adventrx’sANX-514, a novel, detergent-free reformulation of the chemotherapy drug docetaxel, andANX-188, a compound for the treatment of patients with sickle cell disease.

To support their efforts, cash and equivalents tallied $46.55 Million or $1.30/share, as of the most recent quarter.

Uplisting May Be Next For ImmunoCellular Therapeutics (OTCBB: IMUC)

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It stands that as of Wednesday, shares of ImmunoCellular Therapeutics (IMUC.OB) have closed above the $2 threshold for 16 consecutive sessions – the most since marking a new 52-week high in March. ImmunoCellular Therapeutics CEO, Dr. Manish Singh, told us earlier this year that his firm would pursue listing their common stock on a national exchange to gain visibility, liquidity and suitability for a broader group of investors (more on this in a moment). Prior to our interview with Dr. Singh, we explained how a successful private placement already qualified ImmunoCellular Therapeutics for listing on the NYSE Amex under ‘standard 3′ (observe below).

 

In mid-May, ImmunoCellular Therapeutics filed its quarterly report, confirming our theory that the firm met listing requirements set by the NYSE Amex. Shareholders’ equity registered above the required $4 million; market capitalization rung north of the minimally permissible $50 million. Unfortunately, at the time, the stock price did not conform.

Rich Adamonis, a spokesperson for the NYSE, told us over the phone that the approval process for listing on the NYSE Amex typically takes from 3-6 weeks. Assuming ImmunoCellular Therapeutics submitted an application to the Amex sometime last month (when the share price broke above $2), the company could get the ‘go ahead’ as early as August, as all listing requirements are now met.

However, the listing itself isn’t a big deal – it’s everything that could come with it that is.

Funds, for instance, are often restricted from buying into companies that trade over-the-counter. Upon listing on the Amex, this restriction would be relieved, allowing greater investment to potentially flow towards ImmunoCellular Therapeutics. Additionally, the up-listing could bear inclusion into a number of small cap indices like the Wilshire U.S. Micro Cap Index, which is tracked by the Wilshire Micro Cap ETF (WMCR), Bridgeway Ultra-Small Company Market Fund (BRSIX), iShares Russell Microcap ETF (IWC), First Trust Dow Jones Select MicroCap ETF (FDM), and a host of others, including industry-specific indices like the Amex Biotechnology Index (ABT).

Inclusion in any index almost instantaneously registers new institutional holders in a company, as funds that mirror an index allocate shares of the newly included company to rebalance their portfolios. This takes from the float, which puts upwards pressure on the share price.

ImmunoCellular Therapeutics is roughly 32% owned by insiders; 11% belongs to funds. Dafna Capital Management LLC is one of two funds that recently started a position in ImmunoCellular Therapeutics. The fund’s chief investment officer was interviewed by Reuters and had the following to say on the topic of biotech companies that are focused on cancer being hot acquisition targets:

We have seen some very successful oncology drugs,” said Fariba Ghodsian, chief investment officer at hedge fund DAFNA Capital. “Novel drugs with novel targets are in demand.

According to NASDAQ.COM, Dafna Capital’s largest allocation is in Pharmacyclics Inc. (PCYC), a clinical-stage oncology firm focused on developing and commercializing small-molecule drugs for the treatment of immune mediated disease and cancer. Threshold Pharmaceuticals (THLD) and YM Biosciences (YMI) are the only other oncology holdings among the fund’s top 10. ImmunoCellular Therapeutics provides Dafna Capital exposure to an exciting and novel technology in immunotherapy, perhaps modeling Dendreon (DNDN) at a less ‘expensive share price’, to quote the Reuters columnist. One share of ImmunoCellular Therapeutics’ currently trades for about 1/1000th of one share of Dendreon. 

ImmunoCellular Therapeutics expects interim results from their Phase II study of ICT-107 in patients with glioblastoma multiforme (GBM) in the second half of 2012. Phase I studies returned fantastic results with 80% overall survival at the two-year mark compared with historical standard-of-care survival of just 26.5%; median progression free (PFS) survival of 16.9 months compared to the historic median PFS of 6.9 months. According to the same source, the company will also be filing an Investigational New Drug (IND) application with the FDA to move ICT-140, a vaccine for the treatment of ovarian cancer, into clinical studies early next year.

Coffee Holding Co. (NASDAQ: JVA) – Shrewdly Overvalued

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This past Thursday, Coffee Holding Co., Inc. (NASDAQ: JVA) published results for its first operating quarter of 2011. For the period ended January 31st, net sales were up 20% compared to the same period in 2010. However, in the two trading sessions that ensued the financial report, shares rose 74% to the tune of shrewdly overvalued.

In the press release accompanying financial results for the most recent quarter, the company wrote:

“The increase in net income primarily reflects increased gross profit”.

True. If overhead costs remained stable, and sales grew, then the contributing factor would have to be gross profit. This piqued one inquirer’s interest in that it implied gross margins remained stable. But the company itself concluded in the very same press release that “commodity pressure” and “dramatically increased coffee prices” placed a burden on their business. This would imply shrinking margins.

“Our horizontal integrated business structure combined with our hedging policies helped us to significantly alleviate these higher costs as evidenced by our cost of sales only slightly increasing by 0.02 % during a time when the underlying commodity increased by over one dollar per pound as the fundamentals in the coffee market led to higher futures prices.”

This hedging policy, disclosed in their 10Q filing with the SEC, shows that speculation in the futures market led to a favorable gross margin. The slight 0.02% increase in the cost of sales was, therefore, attributable to a one-time gain on futures contracts. Here’s a detailed look at the disclosure.

 

For the three months ended January 31st, 2011 gains totaled $680,000 versus $135,000 in the comparable period of 2010 (see above schedule). That $545,000 contribution made up the difference in bottom line earnings from one period to the next.

Herein lie two key points.

The first is that an improved bottom line in the most recent quarter is not the result of growing or otherwise enhanced operations.

“The increase in net sales reflects higher sales prices compared to the first quarter of fiscal 2010[...]“

As input prices increased, the company was forced to increase the price at which it distributes its products. While the nominal numbers impressed investors, the 20% jump in net sales does not necessarily mean that quantity sold increased substantially. In fact, by the numbers, it’s difficult to point out any material change from last year.

Further, excluding the one-time gain from futures speculation, gross margins were depressed when compared with the same period in 2010. And income, adjusted for this event would contribute approximately the same earnings per share as in 2010. Therefore the ecstatic reaction in the stock’s market was unjustified.

The second point is that market prices fluctuate – everything from commodities to equities to currency. So to expect gains from futures contracts to rescue the company’s shrinking margins quarter after quarter is a dangerous assumption. Markets are uncontrollable, which exposes the company to potential losses on their derivative bets. In all likelihood, Coffee Holding Co.’s overvaluation was the result of investors assuming uncertain (but favorable) events without factoring in potential risks in this business.

If not the numbers, then what led to the surge in stock price and trading volume? Deja-vu – market speculators. So ask yourself, suppose other investors realize Coffee Holding Co. isn’t the growth story they sought out for. And suppose, next quarter, earnings came in flat, instead of improving over last year’s. Would that justify the stock price sliding back down to $4/share?

Beyond a reasonable doubt Coffee Holdings Co., Inc. is overvalued at its current market price.

Disclosure: I have no position in JVA at time of writing but may initiate a short position in the next 48 hours.

ImmunoCellular Therapeutics (IMUC), Technically Speaking

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This Afternoon, ImmunoCellular Therapeutics’ (IMUC) CEO, Manish Singh, Ph.D., is scheduled to present at the 13th Annual BIO CEO & Investor Conference at the Waldorf Astoria in New York City. The conference should attract institutional investment, as fund managers learn of the cancer therapeutics ImmunoCellular (IMUC) is developing. As noted in a written analysis, ImmunoCellular’s lead product candidate, ICT-107, returned stellar results from Phase 1 clinical trials in the treatment of brain tumors.

Above-average share volume has been seen for at least 8-consecutive trading sessions, coincidentally since we began coverage of ImmunoCellular Therapeutics (IMUC). During this period, the stock price has gained $0.50 or 28%, encroaching on a new 52-week high. While drivers such as clinical trial results, product and corporate developments remain fundamental, relative price movement will be the catalyst to market momentum for this small biotechnology firm.

As we explain in the following video, relative price movement is an analysis of the price at a specific point in time, better known as technical analysis. Using IMUC’s chart, we interpret the relative price at this point in time, the key technical drivers moving forward, and what the technical indicators are telling us. 

Regarding the company’s presentation at the 13th Annual BIO CEO & Investor Conference, a webcast of the event will be available at http://www.veracast.com/webcasts/bio/ceoinvestor2011/68111156.cfm


Please note that we have previously been compensated for voicing an independent investment opinion of ImmunoCellular Therapeutics, Ltd. The views expressed are purely our own and do not constitute a buy or sell recommendation. See our disclaimer for details.

Today In Small Biotech

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There’s a lot going on in small cap biotech, even more so when you take into perspective the entire sector. What I’ve attempted to do is organize a brief overview of a few key biotechs making significant strides by way of price and volume. For the purposes of this report, the objective was to find companies with a capitalization under $500M, traded under $5/share, and seeing abnormal volume. The results of that screen were further narrowed down by looking at a key factor in low debt/equity. In fact, all of the companies listed (below) have hardly any debt to speak of and cash positions to justify variable levels of stability. The last criteria was for short interest to be at or below 5%. 
 
Thursday’s spotlight spent a considerable portion of time over at Rexahn Pharmaceuticals (RNN), whose shares closed at a new 7-month high on Monday. By the end of the session, investors valued the company 24% higher on the basis of last week’s $3.95 Million injection by Teva Pharmaceutical Industries (TEVA), who now owns 6.29% of the company, and the likelihood of something good coming out of ongoing Phase 2 clinical trials for three separate drugs.
 
ImmunoCellular Therapeutics (IMUC.OB) was also the beneficiary of a new 7-month high price after announcing their first patient had enrolled in Phase 2 clinical trials for ICT-107, a cancer vaccine targeting glioblastoma, late last week. They have a considerable portion of cash on hand relative to their burn rate and no debt. More information can be found in my earlier write-up on the company.
 
Repros Therapeutics (RPRX) was another recipient of abnormal share volume, which propelled its stock price higher on Monday. In January the company reported it had received Institutional Review Board (IRB) approval to commence the Phase IIb study of Androxal® in men with secondary hypogonadism. More importantly, their offering of common stock and warrants is expected to close “on or about February 8th, 2011″, and the $11 Million they will raise “is expected to provide Repros funding into mid-2012″.
 
Zalicus’ (ZLCS) oncology research collaboration agreement with Novartis was extended to May 2012 in early January. The only other noteworthy event that I could find regarding this company without getting specific was a bio conference they are presenting at. Zalicus followed suit gaining 6.25% on Monday; volume topped the 3-month average roughly 37%.
 
Unlike its biotechnology counterparts, Orexigen Therapeutics (OREX) is still trading well below 52-week highs, but quickly moving higher after being discounted 70% last week. Shares bottomed at $2.5 and have already pierced the $4 mark just four sessions later. The FDA turned back their application for a weight-loss drug that would have essentially ‘made’ the company. Instead, Orexigen has some work ahead of itself before it can resubmit an application to the Food & Drug Administration and potentially reap approval.
 
Neoprobe (NEOP) held its own revealing the long wait for listing on the AMEX is no longer a wait at all – shares will begin trading on the NYSE Amex “on or about February 10, 2011″. As volume traded was twice that of the 3-month average, shares enjoyed a modest 3.37% rise. The up-listing announcement, however, came out after hours and should give shares a boost this coming session.

Disclosure: I’ve been compensated for writing an independent opinion regarding ImmunoCellular Therapeutics.

Wenr Corp (WNRC): New Cable TV Player Scoring BIG While Trading Under The Radar.

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Big things are happening for a small company in the Cable TV business. Just months ago, Wenr Corp (WNRC) was a non-operating pink sheets company with 38 million shares outstanding and a tiny public float of only 13.8 million shares. As a non-op, shares sold at a penny. Today, the share structure hasn’t changed, but the share price is in the mid-teens — the few (so far) who are watching closely, think it has much higher to go.

So what happened with this little pinkie that got investors so excited? Quite a bit, as it turns out. Let’s begin with the purchase of two TV station licenses in a bankruptcy court fire sale for a combined $45,000. The company has created a mini media-empire that many of the bigger players could look to for lessons in inspired deal-making.

With his bargain-priced licenses in hand, company Chairman Dan Green hired and called on Manny Martinez, the Charter Communications Vice President and General Manager for California and Nevada, to turn these licenses into revenue.

As Martinez well knows, after a long career in the cable business, building an entirely new TV station is an incredibly expensive proposition. Martinez proposed a better alternative. Through his guidance, WNRC quickly became the Reno affiliate for both the Azteca America and Mexicanal TV Networks. These are two of the largest and fastest growing Spanish language networks in the US, serving Reno’s Latino demographic of 30%.

WNRC receives the benefit of retransmitting a ready-made day program: Azteca and Mexicanal pay WNRC monthly carriage fees merely for retransmitting their network signals. Besides circumventing the financial strain in having to build a new television network, WNRC has also enter the world of high-margin ad-selling.

Elsewhere the company has begun to lay groundwork for a Small Cap Financial Network that they anticipate launching locally, in the Nevada market, with the intention of expanding nationwide with the help of various national cable providers. The possibility of some future press release announcing nationwide rollout of the new financial network is simply mind-blowing.
 
Not a bad few months work for this duo, but even still they were far from done. How about picking up ownership interests in a couple of radio stations? You know, the kind that are networked nationally like the TV networks WNRC works with – simply retransmitting the national feed and getting right to the meat and potatoes of selling advertising and generating revenue? That is just what they did – first with a popular Latino music station and now with the only jazz station in Reno.

There’s more.

The rigid economy has forced larger cable providers to take a hard look at their operations and cut costs anywhere they can. Several of them came to the conclusion that carrying cable subscribers in outlying, sparsely populated regions are, while still highly profitable, an overhead burden they’d rather do without. Who better to sell them to than a company like WNRC? The company has already acquired a few thousand cable subscribers…and is in non-disclose negotiations for the purchase of several thousand others. Industry-wide, these subscribers are typically valued at $4000 per household. The only thing that makes this even more exciting is that the acquisitions are financed through seller-financing. That’s no joke. And as it turns out, if your team includes a cable industry heavyweight like Martinez, the large companies will finance the sale of smaller 5000 to 20,000 systems.

Green has found the shortcut to revenue and cash flow. Period. He has repeatedly “bypassed” the messy, difficult and expensive work of having to build from scratch and positioned WNRC as the revenue “gatekeeper”. Oh yes, it’s quite remarkable. 

But I saved the best part for last. This guy, Dan Green, has really “got it”. Revenue, Cash Flow, Profitability and Share Structure are what it’s all about. No dilution or big cash outlays for him. In fact, he financed the company with personal funds until it became self-sustaining. Martinez, on his part, is a seasoned pro. He’s always on the prowl for shrewd deals where he’s recognized and respected enough to earn top spot in negotiations.

The relatively few investors who have caught on to what WNRC has accomplished so far, and the cable industry veterans who understand the realignment taking place with smaller outlying cable systems have to wonder just how long this can remain an undiscovered gem.

Article courtesy of a WNRC Shareholder

Aastrom Biosciences (NASDAQ: ASTM) Sparks New Uptrend

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A bullish crossover of the MACD indicator suggests the beginning of a new uptrend for Aastrom Biosciences, Inc. (ASTM). On Tuesday volume jumped to nearly three times the 3-month average without any news from the company. Volume, often interpreted as the lifeblood of a chart, measures strength behind price movement in technical analysis. With the price breaking above its 50 day moving average line (blue), Tuesday’s share volume confirms the ‘technical breakout’ – a move through or above a significant level of resistance.
 
More specifically, Tuesday’s session lent way for shares to climb above not one, but two levels of notable resistance. The primary breakout occurred once the price broke channel resistance (pink). We made a note of that in real-time here. As mentioned, a break above the 50MA followed suit (the secondary breakout). Additionally the RSI indicator turned upwards and broke above the 50 mark, another indication of strength behind the price rally.

 
StemCells Inc. (STEM, +1.83%) and Cell Therapeutics, Inc. (CTIC, +2.36%) were among other stem-cell companies to gain in trading on Tuesday. This data leads me to believe that Aastrom Biosciences’ more-than-modest jump in stock price (+16.6%) was fueled by more than just momentum in the market. One source pointed to a newscast praising Aastrom Biosciences (ASTM) in saving the lives of two individuals using their stem cell remedies.
 
Aastrom Biosciences, Inc., a regenerative medicine company, engages in developing autologous cell therapies for the treatment of severe and chronic cardiovascular diseases. The company’s autologous expanded cellular therapy technology uses single-pass perfusion to produce human cell products for clinical use.
 
As of their last quarterly filing, Aastrom Biosciences had total cash of $14.47M. However, an offering closed on December 15th, 2010 revealed the company’s entitlement to an additional $20.5M. As the offering was chiefly responsible for the declining share price (then) it largely eliminates the risk of another offering diluting shareholder value now and in the near-term.

Xoma Ltd: Raw, Uncut, and Unrated

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Last week XOMA’s (XOMA) stock price rose roughly 200% and 54.7M shares traded hands. Excitement brewed over the company’s multi-purpose drug, XOMA 052, which investors anticipate the company will release positive phase 2 results on early in the upcoming year. Conversely, I’m not so encouraged by all the hoopla.

It brings tears to my eyes knowing that some investors have been given a false sense of hope and security in light of the rising stock price. But don’t count on that union. Arena Pharmaceuticals (ARNA) rose in anticipation of a FDA approval of their weight-loss drug, Lorcaserin, in these past summer months. Then in September shares plummeted shedding all of the previous months’ gains in less than a week.

XOMA Ltd. (XOMA) has a reputation for misbehaving – which may explain why its Chief Executive was runner up to the least-distinguished biotech CEO of the year award. Elsewhere, XOMA has been called a “one-trick pony“. But more concerning is that both claims can be substantiated and then some. Last quarter, for instance, XOMA had total revenues of $10.9M versus $27.4M during the comparable period in 2009 (1). Concurrently, Operating expenses rose 33% year-over-year, mainly due to the rise in research and development costs. However, the troubling part is not that revenues have slid or that expenses have substantially risen or that operating activities alone burned through $43M in cash, but whom XOMA will turn to in order to finance ongoing operations.

XOMA Ltd. raised more than $40M selling paper to investors in the first three quarters of 2010. You can bet they’ll be at it again in the upcoming periods. Just earlier this year the company facilitated a 1-15 reverse stock-split after diluting their share price into the pennies. And now their future largely depends on a development-stage drug that will drain tens, if not hundreds, of millions of dollars from investors’ pockets before it is even given a chance at being commercialized.

In 20+ years of operations, XOMA Ltd. has incurred an accumulated deficit of more than $835M. Not one of those years did the company show a profit or so much as breakeven. If there is one trend that has remained consistent with Xoma Ltd. throughout their years, it’s been the careless expenditure of shareholder monies.

So I ask, what could have accounted for the discrepancy between the 21.78M shares floating and the 54.7M that actually traded hands? Was it a wave of heroic day traders or devilish short sellers? I think not. To quote Benjamin Graham, “watch out for OPM (Other Peoples’ Money) addicts”.

Lastly, on the topic of share capitalization, it puzzles me how a company with a supposed blockbuster drug can have so little vested interest on the part of those on the inside. According to Yahoo Finance, insiders hold just 2.56% of the total number of shares outstanding. But I’ll leave this issue at that.

On the basis of the daily chart, three technical indicators, RSI (95), MFI (99) and CCI (398), show the stock price to be overbought. Currently, the price is considered to be overextended to the upside or ‘overbought’ relative to the position of the upper bollinger band, an indicator of price deviation from the norm. This means that the price will likely pull back to at least par with the upper BB (currently at $5.10). Another significant supporting trendline is indicated on the chart (below).

XOMA Daily Chart

1. Financial Data Taken From Quarterly Filing (10Q)

Lotus Pharmaceuticals (LTUS): The Big Little Chinese Drug Manufacturer

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While speculative opportunities in small cap biotech continue to entertain investors, half-way across the world big little drug manufacturer, Lotus Pharmaceuticals, Inc. (OTCBB: LTUS), is operating to the tune of explosive growth – and out of its own pocket, too.
 
In addition to manufacturing their own branded drugs and pharmaceuticals products, Lotus Pharmaceuticals distributes over 5000 western drugs, Traditional Chinese Medicines (TCMs) and medical equipment items through wholesale and retail channels such as ten of their owned and operated pharmacies in Beijing.  
 
For the first three quarters of 2010, revenues totaled $52.5M or 31% higher than the comparable period in 2009. Wholesale revenue saw 18% growth while retail sales growth, at 83%, was the driving force behind top-line growth. This falls in line with the company’s recent announcement to forgo construction of a new facility outside of China and instead focus more on core business in Beijing.

“We have decided not to move forward with the construction of our planned facility in Inner Mongolia in order to focus our efforts and resources on expanding our core business in Beijing. We believe that selling or transferring this property will be a more effective use of our capital.”

 

In December of 2008 the company had acquired the property in Chahaer Industrial Park, Inner Mongolia for $26.3M. 
 
Assuming the property is sold on a timely schedule and at or near cost, proceeds from the sale will in part, if not wholly, finance growth and expansion plans in the upcoming period. Cash inflows from operating activities, which brought in $19M in the first three quarters of 2010, have helped balance outflows in investing activities. As a growing entity it is expected that the company will continue to invest in property and equipment. The beauty of the situation lies in that in case of a draught, the company always has the option of turning to shareholders or a low interest bank loan for quick access to capital resources.
 
Based on diluted EPS of $0.39, Lotus Pharmaceuticals currently trades at a trailing P/E ratio of 3.07. In contrast, companies in the healthcare sector boast double-digit P/E ratios. And while, in general, the recent fright over legitimacy of small-cap Chinese companies may continue to daunt investors, there are reasons beyond the scope of growth that deem Lotus Pharmaceuticals undervalued at its current price.
 
For instance, the market hasn’t taken into consideration Lotus Pharmaceuticals’ pipeline of drugs awaiting approval from China’s State Food and Drug Administration (SFDA).
 
 
 
Laevo-Bambutero, Lotus’ asthma drug, is anticipating SFDA approval by 2012. While that seems like light-years away it’s this type of inherent value that attracts large industry players to hostile takeovers.
 
Elsewhere, most recently being the PHARMCHINA 64th National Drug Fair Conference, the company continues to build its list of product distributors, which now totals 200. In the CEO’s own words, “Our participation in the PHARMCHINA conference was very fruitful, as we came away with six new contracts upstream and five downstream. We believe we are well-positioned to reach our goal of 25% top-line growth in 2011.”
 
And whether you like it or not, Lotus’ management is taking strides towards qualifying for a higher-exchange listing. More on this another time. 

The Nuggets in Great Basin Gold – GBG – Interview with CEO Dippenaar

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The Nuggets in Great Basin Gold – GBG – Interview with CEO Dippenaar

October 19, 2010

By:  Marco G.

http://goombarhsedge.blogspot.com/

Great Basin Gold’s (GBG, TSX:GBG, JSE:GBG) stock has just broken out to the high side and they have doubled their market capitalization in the short time space of two months.  See the calculations in the table following:  (click to enlarge).

Table 1:  Great Basin Gold – Market Capitalization.  At October 19th, 2010 all the warrants are in the money and debentures may be converted to shares.

What do you suppose the market is saying here?  Well, ladies and gentlemen, this is a prime example of a mining company sitting in the sweet spot of the value curve when bringing their new mine into production.  For a fuller explanation of the sweet spot for a mining Junior click here. 

Great Basin does not just have one mine coming into production but two.  Their large prime mine in the Witwatersrand Basin of South Africa, Burnstone has started milling ore, this fall.  Their smaller sister Nevada mine, Hollister has been test mining for over one year and has just recently this summer stabilized their milling operations.  The market is finally acknowledging this mining production progress and is beginning to recognize the value of Great Basin and has responded by assigning a higher share price.  This is not a trivial matter, in the creation of a $600 million valuation increase, by bringing these mining projects into production.  This is the culmination of a long time struggle with mine building and financial markets resulting in rapid revaluation of Great Basin Gold’s share price.

Interview with Mr. Ferdi Dippenaar, CEO of Great Basin Gold

The author has followed Great Basin closely, and further background may be obtained from these articles here on Seeking Alpha.  It was with surprise and pleasure, when Mr. Michael Curlook, Manager of IR & Corporate Development  called and said that Mr. Ferdi Dippenaar, President & CEO of Great Basin Gold was willing to talk to me about Great Basin’s future prospects.  The interview following is verbatim from notes and was conducted by telephone with Mr. Dippenaar in South Africa on October 19th, 2010. 

The author asked Mr. Dippenaar to brief us on Great Basin’s outlook going forward as to exploration priorities among their existing mine sites of Hollister, and Burnstone and also their green field explorations in Tanzania and Mozambique.  Note:  further information about the Tanzanian and Mozambique properties are in the March 31, 2010 Annual Information Form here.

Ferdi Dippenaar:  If we have a look at the Mozambique property.  It is in the Tsetsera  area, it is a green belt.  It is an area that has seen some mining.  What we have is… we actually have a property, which we’ve done some dirt sampling, grab sampling, we’ve looked at some trenches, and tried to get…this is even …if I qualify, this is even before we put out a drilling program. 

Marco G.:  Right.

Ferdi Dippenaar:  The whole idea was to do a lot of surface work, and the mapping.  I forgot to say we’ve done the actual mapping, which we’ve spend quite a bit of time on.  So we have the…we could have let go of the property, we’ve decided against that, because just based upon the initial results, even if it’s only from the initial surface exploration, was such that we felt that it’s definitely worth follow-up.  The follow-up would be ….probably more trenching and then first pass drilling.

Marco G.:  First pass drilling?

Ferdi Dippenaar:  First pass drilling, yes.

Marco G.:  That will be exciting for investors.

Ferdi Dippenaar:  Yeah, I think it definitely will, we are looking forward to it.  We actually think it could be extremely exciting. 

Marco G.:  Yes, you say the property is 17 square kilometers, and from the information on your site, it has been worked historically by artisanal miners and that there is exposure on the surface.

Ferdi Dippenaar:  There is definitely exposure on the surface, but it is also trying to…there is not a huge amount of ground cover.  But it is also to bring it a bit further ….to understand the extent of the mineralization. 

Marco G.:  Okay, that’s Mozambique, how about the other area, Rusaf… GBG Rusaf.

Ferdi Dippenaar:  Yes GBG Rusaf , yeah that is quite interesting.  I think if you access the actual reports, technical reports, that were placed on the web site…  did you get them.

Marco G.:  Yes, we have gone through them.

Ferdi Dippenaar:  In our minds, it is basically the two areas, and that would be the Lupa area, which we own a significant land package, which ……..definitely after the first pass drilling.  That’s basically, what we did two years ago.  It is having to firm up.  Now it is the second pass drilling because we’ve identified some target areas.

Marco G.:  Okay,

Ferdi Dippenaar:  I don’t want to repeat everything that are in the actual reports as well.

Marco G.:  I understand… I guess what we are kind of looking for, and maybe GBG plans aren’t yet there.  October 15th has just barely gone past last Friday.  What with the warrants, now there is a fresh infusion of funds into the company.

Ferdi Dippenaar:  Exactly, you are quite right.  The whole intention is…so let’s just go through the various areas in Tanzania.  We’ve discussed the…we call it the N’kuluwisi gold property in southern Tanzania.  That’s bordered the Lupa area.  I think that you’ll see the measured and indicated and inferred resource, it probably around …well let’s just take the grade of 1.5 g /ton that’s currently 67,000 ounces.  That’s with the first pass drilling, that took place.  If one has a look at the northern section, which you’ve got the Lubando area.  I don’t know if you saw that technical report? 

Marco G.:  I may have, but it is not at my fingertips presently.

Ferdi Dippenaar:  I just trying to deal with the size and the actual resource.  So, that’s nearly 200,000 ounces but the one that probably excites us more is the Imweru report, where we have the resource of 629,000 ounces.  Yeah, that’s fairly large.  And bear in mind that is just first pass drilling.  So that’s was our prioritization of target areas, it would probably be in Imweru and then the southern portion which is the Lupa target area.  And that’s in N’kuluwisi, that technical report.

Marco G.:  All right.

Ferdi Dippenaar:  So, here we are talking exploration, and the prioritization thereof.  I would put the Hollister property right on top.

Marco G.:  Wow, Okay,

Ferdi Dippenaar:  So the Hollister property is the most important, bear in mind that we’ve made three discoveries, the Hatter Graben, the Gloria veins system and the extended Gwenivere veins system… all really prospective. 

Marco G.:  Right.

Ferdi Dippenaar:  We actually believe, that even from underground, we could achieve… we’ve focused and targeted another area.  Which is probably…it is the subject of exploration, that still has to take place later this year.

Marco G.:  Okay, as soon as that.

Ferdi Dippenaar:  Yeah, as soon as that.  Each year we do a lot of infill drilling at the Hollister property.  But we do believe that …our thinking is that if we drill a fairly long hole out to the Velvet area from underground.  We actually think that we could be passing through a number of structures that could be hosting mineralization.

Marco G.:  Yes, I see that in your reports, where you hit one area and then you hit a new vein system with one drill hole.  I guess that is the advantage of going underground and drilling underground,

Ferdi Dippenaar:  Yeah, again drilling underground is of course a lot easier.  It’s the ability to drill, to put out a long hole.  It just makes a lot more sense and lot more cost effective.

Marco G.:  Right, not only are you…  sometimes you can even do the infilling and you may hit things that you were not expecting, which is great…blue sky.

Ferdi Dippenaar:  Exactly, I believe there is a significant amount of blue sky at the property.  Hollister is just so extremely prospective!  It is slightly more expensive to drill in North America, than what it would be in South Africa or Africa, but just due to the prospective nature of the property, I believe there is good pay back there.

Marco G.:  Right, to add to the existing mine life and increasing resources.  I recall reading somewhere, that you say you are looking for 3 million ounces, so that is adding 2 million before putting in your own mill. 

Ferdi Dippenaar:  Yeah, that would be the idea.  That would definitely be…expand the current operation and also the life of mine.  I think that it is a bit of both.

Marco G.:  One of the best articles that I have read about your mine was the Northern Miner article, from February  of this year.  I think it was a lady that wrote it, a Gwen Preston from a site visit to your Hollister mine.

Ferdi Dippenaar:  Oh yes, that’s right. 

Marco G.:  They went over quite a bit of exploration.  I recall that the Hatter Graben, from one of your conference calls , that one of the analysts was very interested in that.  They were asking you, I think it was earlier this year.

Ferdi Dippenaar:  You are quite right.  She did that visit.  Yes, anybody that tend to visit the site gets the …I sense….they see and they enjoy the what they see.

Marco G.:  Like from her article, it says here that GBG’s plan was to head towards that area with an underground decline .

Ferdi Dippenaar:  Yeah, that is still the plan.  The whole idea is to rather do a bit more exploration because exploration is obviously a lot cheaper than doing the development.

Marco G.:  Right, and that would serve a double purpose.  The decline would help in exploration and later it would be part of the infrastructure. 

Ferdi Dippenaar:  Exactly, that is still the thinking. 

Marco G.:  As part of this article, may I ask you are looking for the mine, a second raise it says.  Is that still happening presently?

Ferdi Dippenaar:  The second raise… oh yes, the Alimak raise, that is currently being developed as we speak.

Marco G.:  This is a vertical raise to help with ventilation and maybe other usages as well.

Ferdi Dippenaar:  Absolutely.

Marco G.:  I haven’t seen anywhere else, but this article touches upon the prospectively of the Esmeralda property that you folks were very fortunate to latch onto.

Ferdi Dippenaar:  Yeah, the Esmeralda property, we believe in terms of priority, it would be Hollister and then Esmeralda.  The principal or the main focus after we acquired Esmeralda was to get the mill up and running.  Of course after we get the mill up and running, we can then start focusing on actually …after the mill, is to try and see how… that is to look at more of Esmeralda but underground .  Bear in mind that we have a number of declines on the site, and the declines …especially the Prospectus decline …it was flooded by ordinary ground water.  It is something that could be easily be de-watered.  And they did just stop the mine, stopped mining so there is some mineable material and stopes available for mining which can contribute to production, while we are busy with more exploration.  There is production upside at Esmeralda and exploration upside

Marco G.:  Wow, okay.  I suppose I am a little bit too early.  As I’ve said your plans aren’t yet in place yet.

Ferdi Dippenaar:  Yes, it will be basically determined by the availability of funding.  So, if there is funding available, we will then go out and do the exploration at Esmeralda.  But only after we’ve allocated funding to do the exploration at Hollister.

Lastly, there is Burnstone.  At Burnstone, we have a significant ore body.  It is already in excess of 13 million ounces.  We can drill more holes and we continue to drill more holes and find more but ultimately at the end of the day you can only mine so much in the short term.  I just believe that one could do better by spending a bit more money on the …you know you get more return for your exploration dollar if it was spent at Hollister and Esmeralda in the short term. 

Marco G.:  Okay, short term it is Hollister and Esmeralda.  But what is the potential though, at Burnstone?  It’s the reef area and you are fortunate that in the Burnstone mine that it is the up lifted portion of the reef.  But there must be a deeper portion on the other side of the faults.

Ferdi Dippenaar:  No, it actually becomes shallower again.  The deepest portion of that basin is probably about 1200 to 1300 meters below surface.  That is the deepest portion; bear in mind that after 19 years of mining we only get down to 750 meters below surface.  So this is in 25 years maybe we get down to 1200 meters below surface.  There is a lot of mining to do.  A lot of shallow areas still that can be explored.   You know, we have ….remember that this ore body is extremely shallow.  We are mining on the shallowest part. 

Marco G.:  It is quite uncharacteristic of the deep South African mines.

Ferdi Dippenaar:  Very, very different.  Bear in mind … the very different basin; we own the largest land holdings in this South Rand basin.  The reef starts at 216 meters below surface. 

Marco G.:  That’s very shallow.  Mr. Dippenaar, may I enquire a little bit?  Your company is just bringing two mines on, into production and you have these mine building teams in place.  What might be the outlook going forward.  You are doing the exploration for further reserves and resources at both mines, in Hollister and Burnstone.   And Hollister is probably higher priority and more bang for the buck as you say.  Are there any thoughts as to how to further leverage these mine building capabilities of your teams.

Ferdi Dippenaar:  Yeah, I definitely think so.  If you have a look at the fact that the teams are there.  They have the necessary experience and then to  go out to expand the current operations or then build new mines.  We do have the capacity and management and the experience to actually to do that.

Marco G.:  The only thing holding you back is getting the production complete and the markets to re-rate Great Basin Gold as a Mid-Tier producer.

Ferdi Dippenaar:  Yeah, I tend to agree with that.  I just think we need to settle down both Hollister and then Burnstone.  And as soon as we settle them down, I think we are ready to go.  So, to me it’s just taking a bit of a breather.

Marco G.:  Sure.

Ferdi Dippenaar:  In terms of getting a bit of consistency at the operations. 

Marco G.:  May I ask, that Hollister, again, I read somewhere, that the main holdback for expansion isn’t mining, its actually milling capability.  For expansion of the milling circuit, you would be able to increase production.

Ferdi Dippenaar:  Exactly, that’s exactly why acquiring or ending up with a mill significantly larger than what we have would be the ideal situation.

Marco G.:  Would it be possible to continue like what you’ve done in the past, the contract milling.  Like say either at Midas or the Yukon Nevada operation, in parallel with your Esmeralda or is it just the costs don’t warrant it?  The costs and complexity.

Ferdi Dippenaar:  I wouldn’t like to send any more ore to the Midas mill, the costs of milling it there are just too expensive.  You just pay too much or lose too much by doing it.  My focus would rather be to find either a milling capacity…  If we do find milling capacity, we would be able to grow either operations, Hollister or Esmeralda.  That is the target.

Marco G.:  The target is to find milling capacity.  In previous years, I understand other companies were looking at and examining Hollister in terms of resources and in terms of …before the mine was actually where it is now.  It was three, four years ago where that they had an interest, maybe now it might the other way around.  You are working now and you have an interest in…  You have expertise in this narrow vein mining and there are probably other mines in there that could use that.

Ferdi Dippenaar:  That is true.  But as I said, let’s first get the current operation up and running and then we’ll be able to get a better idea of where it is we go in the future. 

Marco G.:  All right,  well, I want to thank you again, Mr. Dippenaar.  You are taking time, and it is the end of a very busy day for you, in the middle of your busy schedule.  This is really an exciting time for you I’ m sure, that these things are coming to fruition.  Burnstone pouring Gold and Hollister being  stabilized as an actual operation. 

Ferdi Dippenaar:  Yeah…….It is definitely an exciting time to be around.  Yeah…..it is a great time to be around.

Marco G.:  And also, certainly helps that there seem to be an increased emphasis on the Gold and precious metals.  Here you have two mines coming into full production right in the midst of that big trend.

Ferdi Dippenaar:  Yeah…it is a nice change.  We’ve been working on this extremely hard.   And it just seems like it is coming together pretty nicely. 

Marco G.:  Well, my hat’s off to you and your folks.  You folks have really brought it in.  This is probably just the beginning for Great Basin.

Ferdi Dippenaar:  I believe that.  I think we are at a very, very interesting time in the Company’s development.

Marco G.:  I kind of hear what you are saying about Burnstone, you have already 12-13 million ounces of Gold there.  The money has more bang for the buck, say elsewhere as at Hollister where it may be possible to expand production with the grades and the expertise that you have at being able to mine the narrow widths.

Ferdi Dippenaar:  Absolutely.

Marco G.:  Well, that is just great.   I hope that this interests our readers and maybe new investors.

Ferdi Dippenaar:  Thank you, I appreciate it.

Well, dear readers, there you have it, the CEO of Great Basin, that is in the process of ramping up two high quality production Gold mines. 

Outlook for Great Basin Gold in Production

The author borrows information from Great Basin’s presentation at the recent September 20th, 2010, Denver Gold Show to display the company outlook forthcoming.  The production forecast is in the chart following:  (click to enlarge).

 

Figure 1:  GBG Production Estimate.  Note the increase this year from Burnstone coming online and Hollister being stabilized.

Great Basin’s Hollister mine is now in full production with their Esmeralda mill tuned up for full recoveries.  Added to Hollister’s production is the start of milling at the Witwatersrand Burnstone mine this month.  Great Basin is estimating production of about 150,000 ounces of Gold for fiscal 2010.  That means sometime in the 4th quarter of 2010, Great Basin Gold will turn the corner into profitability. 

Then the outlook for 2011, in production is about 270,000 ounces of Gold.

Outlook for Great Basin Gold in Cash Flow

The chart following displays the estimated cash flow for the next few years:  (click to enlarge).

 

Figure 2:  GBG Cash Flow Forecast.  Note the rapid jump to almost $200 Million in 2011.

It is estimated that Great Basin after turning profitable towards the end of 2010, will now turn cash flow positive in 2011 with almost $200 million for the year.  This is due to the quick  ramp up in production of the Hollister and Burnstone mines.  This is a time of rapid change for the good in the financial affairs of the company.  As Mr. Dippenaar commented in the interview above:

                “Yeah…….It is definitely an exciting time to be around.  Yeah…..it is a great time to be around.”

Great Basin Gold is now in High Growth Stage of Cycle

Great Basin is in an opportune spot, as displayed in the classic model of a mining company along the route of mine development in the chart below:  (click to enlarge).

 

Figure 3:  Classic Mining Company Ramp Up.  Note the potential for a company that sits in the sweet spot of between point 6 and 7.  The high growth stage of GBG may be just starting.

That opportune sweet spot is just when the mining company turns the corner into profitability and is now poised for high growth.  Great Basin has just completed the mine construction and is now at the production start-up point.  As the theoretical model shows, there now appears to be great upside, as the company enters the high growth stage of its life.

Marco G.’s Opinion

The author looks to satisfy two prime criteria for investing in a mining company.  The first criteria is the quality, competence and perseverance of management.  Mining is difficult, and the results will boil down to how the management will create value for the investor.

The second criteria consists of the prospects of mining in terms of production, reserves & resources and exploration upside.  Obviously, Great Basin is increasing production with the commissioning of the Burnstone mine.  The Burnstone mine is a shallow, low cost and long life golden nugget for Great Basin Gold.

 For reserves and resources, recently in September 2010, Great Basin has released  new NI 43-101 technical  reports for both their Burnstone and Hollister mines.

As for exploration, now that the mine building emphasis may be shifted, funding for  exploration should resume.  This was what the interview with Mr. Dippenaar was about; where are the exploration opportunities for Great Basin?  There are many drilling prospects as disclosed in the interview, but the highest priority will be the underground drilling from Hollister due to be reported upon this year.  Why is Hollister the highest priority, you may ask?  The Gold mining grades at Hollister are among the highest grades in the world for a production gold mine and may be considered “bonanza” grades, as reported in the September 2010 NI 43-101 report:

At a cut-off grade of 0.25 oz/ton (8.57 g/t Au), the combined measured and indicated mineral resources contain 1.64 million gold equivalent ounces grading 1.305 oz/ton (44.73 g/t Au) for gold and 10.3 oz/ton (355 g/t) for silver

The high grade is not just a lucky hit but the calculated average over the whole resource definition.  Hollister is the second bright nugget for Great Basin Gold.

Disclosure: The author is long Great Basin Gold -GBG.

Important Disclaimer

The information and opinions contained within this document reflect the personal views of the author and should be viewed as food for thought and amusement only. The author may from time to time have a position in any of the securities mentioned. There are no guarantees of the accuracy, reliability or completeness of the information contained herein. Independent due diligence and discussions with one’s own investment and business advisor is strongly recommended. These writings are not to be construed as an offer or solicitation with respect to the purchase or sale of any security or as an endorsement of any product or service. We do not request or receive compensation in any form in order to feature companies in this publication. It is prohibited to copy or redistribute this document to any type of third party without the express permission of the author. This document may be quoted, in context, provided proper credit is given.