CymorFund Stock Picks – Sell BioAmber Inc (BIOA–NYSE $7.00)
On September 27th, 2013 we picked BioAmber Inc (BIOA) at $4.92. It is a stock that went public at $9.00 as an IPO and promptly got hammered to a low of $4.00.
On Friday, it traded between $6.74 & $7.10.
At a current price of $7.00, this represents a gain of 42% in less than 1 1/2 months. This is an excellent profit.
Sell now.
The Company
We described this company in detail when we picked it. Essentially it has run a pilot plant operation in France which closes soon, and is building a plant in Sarnia, Ontario which it hopes to commission in late 2014. We remain convinced that this will be a profitable operation, when it actually goes into production.
Yet building, commissioning and then running a plant at a profit takes a lot of effort and a lot can happen between now and then. The price of a stock rises and falls due to many factors. When a great profit is made, take the profit.
When you have a gain of over 42% in such a short time, it is best to exit and look to re-enter when the stock moderates. Obviously, after watching the company’s stock price languish, a number of investors jumped on the bandwagon after we published our pick and in the space of a few days, drove the stock from $4.92 to $7.00.
The risk now is theirs while the profit is ours.
Technical Analysis
Courtesy eSignal
This is quite a stunning chart. The momentum of the stock has carried the price far beyond the 30 Day Moving Average, the 50 DMA and even the 180 DMA. Technical analysts will always caution that either a stock moves to its MA, or the MA moves to the stock.
In this case, the gap between the MA and the stock is large and caution is warranted. It is better to be safe than sorry. When the stock again touches its MA, it may be time to re-enter.
An Inverse Head & Shoulders Pattern
In looking at this stock chart, some might say that it is an inverse head and shoulders pattern, and that the stock should now continue moving upwards to the right of the pattern. There are two faults with this interpretation. First, there was a significant failure to move upward after the big rise, and instead weakness appeared with the stock losing almost $1 before recovering.
Secondly, while the stock meandered at the $7.00 level, which some might interpret as gathering strength, the stock broke below its support falling to $6.75 before somewhat recovering.
This is a stock that may not have the strength to maintain the current price in the short run.
Our Original CymorFund Investment Letter Stock Pick of September 27. 2013 follows
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) frommonosaccharides 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)
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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.
