From today's Margin Call column.Quantum's capital questSeptember...

From today's Margin Call column.




Quantum's capital quest

September 16, 2003
Indecently fit and tanned from his summer sojourn on the Continent, Frank Sources returned to a rampant market. In case of a correction, he was determined to guard himself against the infectious market exuberance.

In fact, he rather favoured some selected short positions for now. As for capital raisings, of which there were many, Sir Frank would only indulge when the pricing compelled him.

We were eager to learn his view on the latest quest for capital from the distinguished global renewable energy group Quantum Energy.

Perhaps timed to coincide with afternoon trading in the beautiful islands of the Maldives, Quantum released its annual results - accompanied by news of a $10 million raising - very late Friday evening Australian time on the final day of reporting season.

The result was a loss of $62.5 million on revenue of $7.8 million. Cashflow was $7 million negative. Quantum is looking to raise between $2 million and $13 million.

Frank read, and read. He barely stopped to sample his shiraz. But unable to contain our curiosity any longer we blurted out, "Frank, what do you think?"

"Admiration my son, sheer admiration." He shook his head.

"Will you be taking any stock in the offer? It's priced at 45c."

"I would consider borrowing some stock. Can it be shorted?"

"I don't think so. About 812 million of the 872 million shares are in escrow."

"Now let's see. What's the stock doing? Ah, alchemy my son. It was sold down today from 50c but just before the market closed, it jumped spectacularly from 47c to 49c. Incantations from the wizards of the bourse."

Sources noticed also that borrowing costs were $505,069 against the $3.8 million in debt. "The company appears to be burdened by rather large interest rates.

"How did this $60 million writedown in goodwill come about," he asked.

We explained that a Vanuatu-based company associated with the chairman Leo Respinger and chief executive Phil Sidney had bought Quantum Energy Systems (a heaters manufacturer in Newcastle) from a Hall Chadwick liquidator a couple of years ago for $1.1 million.

The asset, a few years and some remedial work, had subsequently been revalued at $61 million, then sold by Leo and Phillip into a stock market shell for 764 million shares.

The goodwill was promptly written off.

Frank was impressed. He was particularly awe-struck by the intrepid work of directors in revealing that they had sold more shares while announcing a $10 million issue.

"Simply breathtaking," he said while perusing the prospectus. "Not only visionary, but philanthropic.

"It says here that the company is inviting not only its sponsoring broker Bell Potter but "any other licensed securities dealer will also receive one option for every one share applied for in respect of monies raised from parties they introduce. The options will be exercisable at 45c up to 30 October 2005".

This was surely a keen invitation to get exposure to the global renewable energy sector as Quantum diversified from pool heaters in Newcastle into the enormous China market, thence the US, thence Europe, thence Africa -- as noted in the prospectus.

Frank Sources would never read a prospectus without reference to the section on related party transactions.

"Reimbursements made to Nece Pty Ltd, a company in which Phillip Sidney and Leo Respinger are directors, to reimburse expenses, at cost, paid on behalf of Quantum Energy Technologies Ptd Ltd - $366,942."

"Tell me, who is this Nece?" he asked.

"Nece directors are Phil, Leo and Drew Townsend, who is a partner at Hall Chadwick and director of Quantum," we told him. "A shareholder is Flinders St Investments whose directors are Hall Chadwick partners Drew Townsend, Geoff McDonald, Robert Elliott and Robert Brassil."

"It's an R&D company, I see," said Sources. "Nice."

His heart was glowing. Sources was an ardent admirer of companies with flair. Though, as the PE ratio was infinity, he would not be taking stock in the placement.

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http://www.theaustralian.news.com.au/common/story_page/0,5744,7276103%255E16942,00.html





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