Margin call will kill them off if executed IMO.Chemeq has no...

Margin call will kill them off if executed IMO.

Chemeq has no cure for Dr Melrose
Michael West
September 15, 2006
GRAHAM Melrose was worth $190 million, on paper, when Chemeq shares peaked in 2003. Now his margin lender owns that paper and the company that Melrose founded is close to being crushed by a margin call.

Caught in a pincer movement between bondholders owed $60 million and Primebroker Securities, the margin lender to Dr Melrose, Chemeq shares continue to wane.

Hong Kong group, Stark, can convert its bonds - issued to help finance the development of a factory at Rockingham, Western Australia - to 49.9 per cent of Chemeq shares at any time (their floor price is 60c) or redeem them in 2008.

Were Primebroker to offload Dr Melrose's 26 per cent stake into the market, the result could devastate the share price.

After 17 years, Dr Melrose retired from Chemeq last month. He confirmed this week that the loan was "in the order of $6 million" but said he had fulfilled ASX disclosure requirements and did not respond to queries on the prospect of further margin calls.

Chemeq's new CEO David Williams said the matter was a private one for Dr Melrose and his margin lender, Primebroker.

"I'm obviously concerned (about the potential overhang)," Mr Williams said, "but the best thing I can do is to concentrate on our new strategic direction. I expect that when we deliver (on the strategic review) that will be reflected in the market price."

The margin lender, a Chimaera Capital subsidiary, had no comment.

Since Chemeq briefly touched $8 in June 2003, the stock has been in retreat. Dr Melrose had to borrow against his holding in August 2004 when Chemeq raised $30 million through Ord Minnett. Chemeq had run out of cash again to fund its Rockingham factory and take its antimicrobial technology through to commercialisation.

Ords did a $10 million placement and $20 million rights issue, and as part of the capital raising, Dr Melrose agreed to underwrite the shortfall in the rights issue.

He took the 2.5 million share shortfall at $2.40 a share. The stock kept falling. Further delays to commercialisation and an ASIC prosecution helped pushed Chemeq from $2.40 to 33c.

Dr Melrose had agreed to put up his 23.7 million share holding in Chemeq as security for the $6 million loan from Primebroker to finance the extra 2.5 million shares in the shortfall at $2.40 apiece. Back in October 2004 when the deal was consummated, Chemeq shares were fetching $2.40, which priced Dr Melrose's holding at $57 million.

He had used this $57 million in shares as collateral for the $6.1 million loan.

That represented a conservative LVR (loan to valuation ratio) of 10.7 per cent at the time. But as the stock fell, so did the value of Dr Melrose's security.

In February this year, Primebroker issued a margin call. Chemeq was trading at 69c so the asset value was no longer $57 million but $16.4 million. Further, the loan had possibly increased.

The company and Dr Melrose were unable to confirm details of the loan amount or whether any further security had been lodged.

The challenge for Chemeq, especially if the stock falls further, is convincing the margin lender not to sell it on-market to cover the loan. Given the reduced liquidity in Chemeq shares, selling a $9.2 million holding would be hard without big damage to the stock price.