Wanted to get this out again before I go and enjoy the start of my long weekend.
It goes without saying that holding shares in BIOAQ through the completion of this process poses significant risk. In my opinion, I would say the odds of a positive outcome for shareholders is slightly better than 50/50. I want to state the odds as more favourable, but this is under CCAA and anything could quite literally happen.
I have no contact with anyone in the company, but I have worked extensively in Sarnia. I am a biochemist located in Toronto and I have worked for large, multinational, public chemical companies my entire 9.5 year career (Therapure/DuPont/Univar). I know how difficult it is to build this type of operation and launch the commercialization of a bio-produced, future building block chemical. Those not in the chemical industry just don't know how great an impact these materials have on our daily lives. They are everywhere - our clothes, furniture, cars, food, personal care products, medicine, etc.
I have done a great deal of DD for myself. Do I have Canadian corporate insolvency experience? Not really, but I have reviewed the public documents with a friend who is a M&A lawyer. What I found interesting was how much weight they put on PWC's reputation and evaluation of the company. Cash flow issues are nothing new to the chemical industry. Projects are born with a need to finance large and risky projects with a far-off pay-back horizon. This is because the industry's discoveries and advances have been the result of substantial research and development efforts, while the industry's production has been highly capital intensive. BioAmber have barely been operating (25-50%) in Sarnia for less than 3 years. They hit 70% capacity for the first time Q1 2018. Those of us who have researched (bio)succinic acid know the huge, emerging growth potential of the market. BioAmber is a pioneer in the industry and still is regarded as a leader in sustainable chemicals.
Their gross margin on the sale of biosuccinic acid is not the issue. Cost analysis was done for years leading up to the commercialization scale from their pilot plant. They take everything into account from global economy and currency/commodity changes to potentially major feedstock shortages. The problem with emerging markets and products is the high cost and lengthy amount of time it takes to qualify new end users. These new end users have been using petrol derived chemicals for decades and now have to sample/test/educate their own customer base. Then, those end users have to seek approval from that customer base to make the transition. Combine that, with the ill advised cash purchase of the rest of the plant from Mitsui (30% stake) in 2017 by the previous CEO, with the fact they just finally got to achieve 70% capacity in 2018 and you run into fairly standard cash flow issues.
The availability of financial resources, and the conditions under which these resources are provided, will ultimately save BioAmber. The CCAA proceedings monitored by PWC will achieve this goal for creditors and the company. It could likely result in management being long gone, but the company may survive. Perhaps the whole company is liquidated via a buyout? Maybe a JV or majority equity stake for the plant and business operations? All options are on the table
Reading through the PWC reports, particularly the fifth one, I can relate to why some would have a difficult time understanding what is happening at this point. Legal jargon is tough to comprehend for us not educated in the field of study. It is frequently used to create ambiguity and distort current information in situations like this. The Monitor can't just come out and reveal a detailed buyout until it is officially closed and public. They have to use broad, general terms that outline every possible scenario, often leading with the worst outcome. It's pretty obvious, one way or another, what would happen if they provided more comprehensive and exact information.
I think everyone can agree that it doesn't make much sense for the liquidation of their plant to take this long and for the court to grant a stay on taxpayers dime. It also wouldn't make sense for an existing chemical company to purchase just the standalone plant, without the proprietary technology and patents to successfully grow their bio-succinic business. Not to mention the NOLs and expansive qualified customer base already established. Unfortunately, I don't have the knowledge to comment on any corporate tax savings regarding the various potential outcomes. What I do know is that all of the hardship has been endured over the last 12-18 months by BioAmber to get Bio-SA to full commercialization scale. Who wants to buy BIOA at a discount and take over operations in Sarnia? We know at least 2 bidders that potentially do.
Good fortune to all, and enjoy the long weekend!
SS
