CymorFund Stock Picks – Buy BioAmber Inc (NYSE $4.92)

CymorFund Investment Letter Stock Picks  – BioAmber Inc (BIOA – NYSE)

 BioAmber

The Fallacy of Making Money on an IPO 

BioAmber Inc  – This is a company that went public in June 2013 –  only 3 1/2 months ago.  It’s IPO offering was $10.00 which included a warrant (an option to buy another share) at $11.00.  What a great deal (sic) – supposedly!!!

People rushed to buy the stock as this was the in the forefront of the next great wave of  “GREEN Technology“. It was an enormous gamble but no one seemed to think about that. The brokers did very well, as usual. The investors got clobbered, as usual.

If you look at the stock chart over the last 3  1/2 months of the company, the stock had a dramatic  and rapid fall to the $5.00 range and then fluctuating between $4 & $5. HOW TO LOSE 50% OF YOUR MONEY IN TWO MONTHS – BUY IPO’s.

 What is BioAmber Inc?

BioAmber is an advanced company in the field of succinic acid and one of the few renewable chemical companies that have reached production, even though only a test facility. In layman’s terms, BioAmber produces essential chemicals from a process using sugar & corn in a patented process that replaces the same chemicals that are currently produced from carbon fuels (crude oil).

It is good for the environment, reduces carbon emissions, reduces the demand for oil, reduces pollution, and best of all, it is cheaper to produce this way – if the process works correctly. It has zero CO2 production. Rather, it uses CO2 in the process.

 

 

 

Some Details of BioAmber 

It is the production primarily of succinic acid (and 1,4-butanediol and disodium succinate) from monosaccharides such as glucose and sucrose. It converts sugars & CO2 into green chemicals.  A key aspect is the high yield from sugar, which is more efficient by using their process than producing these chemicals from crude oil.

Conventional pathways utilize petroleum-derived hydrocarbons as feedstock including benzene which is feared as a carcinogen. Succinic acid is used by the food industry as an acidity regulator and the pharmaceutical industry as a precursor and additive. For a detailed list of the uses of these everyday chemicals, please visit the company’s website. The point is that demand for these feared chemicals is increasing rapidly, while fears concerning their use are also increasing rapidly.

Enter BioAmber which produces these chemicals from natural ingredients sugar & corn (or wheat, Tapioca, Cane, Beets, etc.), and the chemicals themselves are as a result natural. The process is much simpler and much cleaner.

Cost of This Production

The selling price of succinic acid is between $4,000 & $6,000 currently. The cost of BioAmber production is estimated to be 50% less than the older way of producing these chemicals.  As the price of hydrocarbons remains high, the competitive advantage of BioAMber remains high. The company estimates that with corn prices at $6.50 / bushel, they can be lower cost than the petro process if oil prices drop to $35/bushel.

The Market & The Opportunity

The company estimates that there is a $10 Billion market currently, and the market continues to grow. The products are used in everything from Spandex Women’s Wear to resins & coatings, to plastics, personal care products, de-icing products, polyurethanes (boot soles) and much more.

 A Pilot Plant in France

BioAmber currently operates a demonstration plant in France with a 350,000 liter fermenter and has done so since January 2010. The processes have been tested and improved in this facility. The interesting part is that after a 5 year lease period, the company will leave that plant and by contract, that pilot plant will then have to be converted to some other use.  BioAmber will have no further commitment or expenses related to that plant.

Quite a nice deal. 

One of the factors driving down the price of the stock is the financial results from selling the output of that pilot plant, which production was never intended to be commercially viable.

 A Production Plant in Sarnia, Ontario

The company is building a larger permanent facility in Sarnia, Ontario, that will have an initial succinic acid capacity of 1,000,000 liters when completed late next year, with opportunity for expansion later. Commissioning is expected in late 2014, and full production in 2017.

What is interesting is that of the $125 million cost of building this plant, BioAmber is contributing only $45 million. Mitsui & Co, their JV partner, is contributing $20 million, and government loans and grants provide $60 million.  The Sarnia facility is a joint venture between BioAmber and Mitsui & Co. (MITSY.PK) and will be co-located with a large petrochemical hub when completed. The plant is located near commercial centers, in the middle of fully developed infrastructure, in the midst of the agriculture belt providing the raw materials, and  when completed, this facility is expected to be the largest of its kind in the world.

Financial

BioAmber is listed on the NYSE. It has 18 million shares outstanding (fully diluted 26 million). It has a current market cap of approximately $90 million, whereas it has cash in the bank of $103 million & debt of $28 million. It has sufficient cash on hand to meet its run rate of $24 million annually and to contribute its share of the cost of the Sarnia facility.

Given the modest cost of production, the Sarnia plant is expected to be quite profitable, and the company has plans for substantial further developments and expansions.

RISKS 

As always, when a production facility is being built, there are hopeful estimates of when it will be completed, how well it will operate, and how big the cost overruns will be. No one knows if management will be able to complete this project on time. No one knows if the costs of production will in fact mirror the current estimates. No one knows if some unforeseen factor will affect all of these hopes and estimates.

The building and creation of such a plant is an expensive and lengthy process, inherently subject to the unknown. The company’s experience and opportunity to operate the Pilot Plant in France should mitigate these risks somewhat, but until there is production at a suitable cost, the unknowns remain.

Summary

The market valued this IPO at $10 per share. All of the fundamentals that existed then, still exist, except that the project has advanced substantially further. The market weakness has provided a buying opportunity.

CymorFund Stock Picks – Buy BioAmber Inc  (NYSE $4.92)

 

We may or may not have positions in securities we name. In making an investment decision consider numerous factors such as portfolio balancing, timing, cash and capital reserves, asset allocation and other. Do your own research. Matters discussed contain forward-looking statements that are subject to risks and uncertainties and actual results may differ materially from any future results, performance or achievements expressed or implied.

Views expressed are opinions and not investment advice. You should retain a licensed professional to guide you and  not rely on the opinions expressed herein. This report is neither a solicitation nor a recommendation to buy or sell securities. We are not a registered investment advisor nor a broker-dealer. The information contained herein is based on sources which we believe reliable but is not guaranteed as being accurate or a complete statement or summary of the available data.

By Larry Cyna

Mr. Cyna is an accomplished investor in the Canadian public markets for over 20 years, and has managed significant portfolios. He is a financing specialist for private and public companies, and has expertise in real estate and debt obligations. He has assisted private companies accessing the public markets, has been a founding director of public companies and continues as a strategic consultant to selected clientele. He is and has been a director, a senior officer and on the Advisory Board of a number of TSX and TSXV public companies in the mining, resource, technology and telecommunications sectors, and the Founding Director of two CPC’s with qualifying transactions in mining and minerals. He was an honorary director of the Rotman School of Management MBA IMC program, has completed the Canadian Securities Institute Canadian Securities Course & Institute Conduct and Practices Handbook Course, was a former Manager under contract to an Investment Manager at BMO Nesbitt Burns, a roster mediator under the Ontario Mandatory Mediation Program, Toronto, a member of the Institute of Corporate Directors of Ontario, a member of the Upper Canada Dispute Resolution Group, and the Ontario Bar Association, Alternate Dispute Resolution section. He obtained his designation as a Chartered Accountant in Ontario in 1971 and was the recipient of the Founder’s Prize for academic achievement together with a cash reward. He became a CPA in the State of Illinois, USA in 1999 under IQEX with a grade of 92%. He is a Member of the Institute of Chartered Accountants of Ontario and the Canadian Institute of Chartered Accountants. He holds certificates in Advanced ADR & in Civil Justice in Ontario, Faculty of Law, University of Windsor, certificate in Dispute Resolution from the Ontario Institute of Chartered Accountants. Previous accomplishments are Manager of Cymor Risk Consultants LP specializing in Risk Management Assessment; CEO of Cyna & Associates specializing in mediation and ADR; Founder & Senior Partner of Cyna & Co, Chartered Accountants, a fully licensed and accredited public accountancy firm with international affiliations; and was a partner in a large public accountancy firm. Mr. Cyna is well known in the Canadian Investing community. He is invited to, and attends presentations given by public companies usually 3 or 4 times each week. These presentations are intended by the various hosting companies to present their inside story to sophisticated parties and Investment Managers for the purpose of attracting funding, or of making parties more interested in acquiring shares of those companies. Being a part of this keeps Mr. Cyna deeply involved in the current market and leads to numerous investment opportunities.