In my opinion, looking at the 4C Quarterly released on Friday it includes another indicator that MND are setting up a takeover:
“Loan Facilities
AnaeCo entered into a Supplemental Loan Agreement with Monadelphous Group Limited (ASX:MND) to access funding amounting to $4.6 million (announced on 6 February 2015). This was in addition to existing borrowings of $3.0m at that time.
During the quarter this facility was extended by a further $2.0 million (new Supplemental Loan facility limit of $6.6 million) and during the quarter AnaeCo borrowed $3.1 million of this facility.
Total borrowings from MND at 30 June 2015 amount to $8.0 million principal and $581,373 accrued interest.
Reconciliation of movements in principal borrowings from MND for the year to 30 June 2015:
Opening balance 1 July 2014 $ 2,000,000
Borrowings $ 8,549,000
Repayments $ (2,549,000)
Closing balance 30 June 2015 $ 8,000,000
At MND’s election the whole or any part of the outstanding loan may be converted to equity in AnaeCo Limited, subject to shareholder approval. The conversion price will be one of (a) the 10 day volume weighted average price of shares in AnaeCo Limited as at the conversion date, (b) the share price applicable to the then most recent rights issue or capital raising undertaken by AnaeCo Limited, or (c) such other price agreed between MND and AnaeCo Limited prior to the finalization of a notice of meeting pursuant to which AnaeCo shareholder approval is to be sought.”
Note that the R&D Tax Rebate(s) received during the last 3 financial years has been as follows:
2013: $ 4,908,000
2014: $ 8,048,000* - Note expenditure on R&D spiked during the preceding financial year due to payments of $7.528m and $4,684m for the WMRC DiCOM Expansion Project (refer Jun 13 Quarterly)
2015: $ 4,590,000
Average: $5,848,667 Median: $4,908,000
Therefore it seems that MND have now lent ANQ more than they are able to recoup through reliance on the R&D Tax Rebate (currently ANQ’s only substantial form of income. E.g. excluding bank interest, etc.)
Some might argue that MND could simply be relying on the R&D Tax Rebates over the next few years, however ANQ won’t exist in a few years if they don’t start receiving other forms of income (or extreme cost cutting – which would limit R&D capabilities and subsequently the size of any R&D Tax Rebate).
If ANQ fails MND will lose millions in value from the loans and equity. So given their direct knowledge of the WMRC Project viability and ANQ’s position, the idea that they are throwing good money after bad is highly unlikely to say the least.
Much more likely is that MND recognise the imminent completion of the WMRC Project and are looking to put ANQ on the hook (indebted to MND) for as much as possible, while concurrently the Share Price is ‘suppressed’ to ensure maximum volume once conversion is completed.
ANQ currently have $728k in cash and $1.6m remaining via the loan, so enough to potentially see out the current quarter. Practical Completion of the WMRC Project should be 11-12 weeks after commencement of performance trials. First income will obviously be beyond that. So ANQ could quite conceivably be indebted to MND for (say) another $2m, taking the total loan value to $10m (for ease of calcs in this example).
I suggest the possibility of a lower R&D Tax Refund this year due to the point of evolution we are at with the tech, so let’s allow (say) $4m for that (approx. 20% less than the median for the R&D Tax Rebates above).
When it comes to approving the conversion of debt to equity
ANQ shareholders could have no other alternative than voting to approve because if they don't ANQ will be insolvent and would be placed in liquidation (short of finding funding from another source).
So if the conversion takes place at 0.3c with MND picking up the hypothetical $4m from the Oct 2015 R&D Tax Rebate, reducing total loaned to $6m, this is the potential outcome:
Existing shares: approx. 2,600,000,000 MND 15.04% (390,000,000)
New Issue to MND ($6m @0.3c): approx. 2,000,000,000
Total Shares: 4,600,000,000 MND 51.95% (390,000,000 + 2,000,000,000) = 2,390,000,000
If MND decide to have the whole loan $10m converted to equity (i.e.: leave ANQ with the R & D funds for cash flow etc.) this is the potential outcome:
Existing Shares: approx. 2,600,000,000 MND 15.04% (390,000,000)
New Issue to MND ($10m @0.3c): approx. 3,333,000,000
Total Shares: 5,933,000,000 MND 62.75& (390,000,000 + 3,333,000,000) = 3,723,000,000
So sticking to the theory that MND are looking to convert these loans into equity in ANQ, after this plays out MND will own somewhere between 52% - 63% of ANQ....so they will have total control in terms of the direction strategy, board of directors etc.
Looking forward IMO there are a number of scenarios including as follows:
- MND own 52% - 63% of a "lemon" i.e.: the performance trials fail....if this happens everyone loses. Given MND's inside knowledge of the plant and their effective control of ANQ, I expect (trust) that scenario 1 is unlikely, in so far as MND need to close this off so they can move forward. Whilst dragging it out will help their loan conversion (possibly including further loan extension(s) to ANQ as they let ANQ bleed) and takeover percentage, the value for them lies in future projects, so taking too long risks burning bridges in that regard. I think they will make these performance trials work no matter what it takes. IMO, the prime focus with this 'maintenance' period is likely to be them taking the opportunity to ensure the plant is prepped to its absolute optimum operating state, thereby mitigating risk of failure during the performance trials.
- MND own 52% - 63% do not takeover but effectively control ANQ.....in this case MND shares have cost them say 0.3c each or possibly a bit more but definitely less than 0.4c......they then need to push the Share Price significantly higher (or progress ANQ’s potential ‘pipeline’ projects) in order to extract value and or profit....if this happens shareholders can at least expect a significant rise from the current SP.
- MND own 52% - 63% and decide to takeover ANQ acquiring the remaining percentage of shares.....if this happens MND will need to pay a premium because many of the top 20 paid 1.2c during the 2013 Credit Raising........ if this happens shareholders can at least expect a significant rise from the current SP.
- MND allows ANQ to 'fail' in some significant way which causes a capitulation in the SP. MND could then convert their loan at say 0.2c or even 0.1c which would ramp their equity percentage right up. The reason I think this is extremely unlikely is that to do this would almost certainly involve releasing seriously bad, or even ‘catastrophic’ news re the WMRC Project and doing this (depending on exactly how it's done) could irreparably damage the goodwill that would come with the ANQ/DiCOM technology, negating MND's potential future value (and their reason for committing so much money and equity in ANQ).
So in conclusion us (retail holders) are just spectators now that MND have control and they will dictate the outcome...however apart from the first scenario it should more than likely end up being favourable from the current position if we hold and let it play out.
All in my opinion and theoretical only. Please always do your own research.
Cheers
Freighter
