re: kpmg valuation What is the value of CMQ shares? Existing CMQ...

re: kpmg valuation What is the value of CMQ shares? Existing CMQ shareholders and potential investors SHOULD READ the conclusion reached by KPMG who was commissioned by the CMQ board in 2005 (refer to ASX announcement 18.02.05). On page 80 of the 104 page document under the heading “ Potential value of a CMQ share based on the Company’s Internal Cash Flow Analysis” KPMG’s definition of “Worst case scenario” as:
This scenario assumes minimum capital capability available to the company, sufficient only to support an expansion of manufacturing capacity to 50TPA. The worst case scenario also assumes a significant scale back in operations and delays in receiving the requisite regulatory approvals and hence market acceptance of CMQ’s products relative to the base case.

KPMG concluded at 11.13 : On this basis the low and high conversion price of the Tranche 1 Bonds can be argued to represent a premium to the potential value of a CMQ share to the Base Case, Downside Case and Worst Case. In simple language, KPMG’s concluded that the 60 cents bond conversion price represents a PREMIUM to the potential value of a CMQ share to the Base case, downside case and worst case.

Let us examine whether the CMQ situation today is worst than the KPMG’s Worst Case Scenario specified in KPMG’s valuation:
1) “delays in receiving the requisite regulatory approvals” - (Refer to CMQ announcement on 1/03/06 for PROOF of delays far worst than what could be envisaged at the time of KPMG’s valuation.

2)”Scale back in manufacturing capability” Refer to page 2 of CMQ’s newsletter dated 15/03/06 QUOTE “We expect to achieve nameplate capacity later this year”. The 20tpa nameplate capacity was expected to be achieved shortly after the KPMG’s valuation. This should sound LOUD SIRENS especially when on 1 Feb Mr Williams was VERY CONFIDENT of achieving before 31 Mar QUOTE “We are now VERY CONFIDENT that the plant will achieve 100% nameplate capacity in the first quarter of this year”. What is the real problem for Mr Williams to postpone this 2nd quarter & then to ‘later this year’?

3) minimum capital capability available to the company, sufficient only to support an expansion of anufacturing capacity to 50TPA.
CMQ does not have the funds to expand to 50tpa (notwithstanding current technical difficulties of achieving 20tpa let alone 50tpa). Liquid assets (Cash) on 30/04/06 is $33M and CMQ is required by the bond holders to have in excess of $24M at 30 June 06 and owe the bond holders $60M. At the cash burnt of $2 to 3M, there is NO CAPITAL available for expansion. It is near impossible for CMQ to raise capital from the ASX with the bond holders potential dilution of close to ½ the company. And the bond covenants prevent CMQ from raising secured debt and must ask for Satrk’s consent for unsecured debt above $200,000.

There is no doubt each and every of the ‘worst case scenario’ painted by KPMG is surpassed.


Thus the value of a CMQ share is:

KPMG’s valuation of $0.60 in Jan 05 (that has a PREMIUM in it) x 89.2M shares = $53.52M Less $9.919M cash in the bank in Jan 05 with no debt; Less $27M debts (CMQ has $33M cash but owe $60M in bonds in Jan 06) = $16.6M
Shares outstanding today = 101.8M
Therefore KPMG's valuation of shares = $0.163 per share

To this KPMG valuation we need to assess the effect that the company is in a worst shape than the KPMG worst case scenario especially if CMQ failed to satisfy the revenue covenant by 30 June.