My Take
My last post was the week prior to the release of the 3Q Results where I commented on the rash of power outages throughout Albania. Their Nov 29th Management Discussion & Analysis provides an honest update as to their progress to date.
CASH
On September 30th, they had $700,000 on hand after having spent $2.1 million in the previous 3 months (a one-time charge of $250,000 to Berkeley, $255,000 for Albania which their JV partner will pay back, etc).
Their burn rate was about $400,000 per month, mostly attributable to the travelling back & forth to Europe & the Middle-East. It doesn't take a rocket scientist to figure out that if they only had $700,000 at the end of September, and burn through $400,000 a month, they are left with negative $100,000 on December 1st.
DEBT FINANCING
Although they were cash poor, I was hoping that they were going to get the debt financing in time without having to go to the Equity Market to raise more cash.
Although they told me personally over the phone that they were going to go down the debt financing road, they finally put it in print within their Q3 Management Discussion & Analysis report.
Nevertheless, upon closer examination, I see that they got caught up in a catch-22 in the last minute:
In order to acquire debt financing, one would have to have enough assets to put up as collateral. They do have that in the form of exclusive oil exploitation rights for 30 years within a 24,000 square KM area within Iraq, and a minimum guaranteed supply contract from the Al-Salah ad Din Province for their topping facility. On SEDAR, you can download the entire agreement with the Province. All of the signatures are there; however, what is missing is the rubber stamp needed from the Iraqi National Government.
A new National Government was just formed last month. As per law, no documents can be stamped until the new government is in session, which won't happen until January. So what we have here is an agreement in principle, which is missing the rubber stamp needed to make it official. Nevertheless, without this rubber stamp, they are unable to provide any collateral in order to get the loan. Had the government not changed, they would have had their rubber stamp; hence the loan.
It's obvious that Sonoro's management also thought that they were getting the loan this year. They knew of their financial situation -that they would be cash poor by December 1st- and would have done a Private Placement in October had they thought this would have become reality (when the share price was trading above $0.40). They were actually buying additional shares for themselves on the open market right into the second week of November. Why would they do that if they didn't think they had the loan? Nevertheless, they will still get the loan, but it will now be in the new year. I don't see anything that would preclude the new government from rubber stamping the agreement, especially since this new government is all about bringing investments into Iraq.
ALBANIA
What can I say other than that this is a frustrating exercise. After a very short negotiation session, Richard convinces an Albanian company to partner up with him, where they provide all of the capital to bringing the plant into production. The Albanian company dives in with both feet. Then we run into problems which is beyond their control and could not have been foreseen: Ash Cloud restricting their travelling to Europe, Albania Government's new policy on Environmental Assessments, power outages due to Albania's changing to a new power grid system, etc. All the while, their JV partner sinks money into this, without ever doing any due diligence in ensuring that the Sonic Reactor can do what Sonoro claims it can.
So the machine is now up and running, but requires an oil cooler to run 24/7. Before the JV Partner pays anymore money, they are now sending the batch samples to a lab to confirm what Sonoro has been stating all along. They then thereafter want to first find a buyer for their batch samples, before they spend the additional $400,000 needed for the oil cooler. It will get done, but this will delay the process by a few more month. As far as I am concerned, it's been delayed by so much thus far, what is an extra 3 months?
I suggest for the future that they no longer get into these types of JVs. Instead, once the pilot plant is up and running, and the world sees what the Sonic Reactor can actually do, they get into the business of selling the Reactor to customers with a royalty program attached to the amount of barrels of oil upgraded using the Reactor (much like the EIG agreement). In other words, don't upgrade the oil yourself, but get a piece of the action for every barrel that is upgraded. As such, they won't have to worry about capitalisation to building new plants, finding buyers, or be dependent to the price of oil. You might make less, but at least it's guaranteed without the headache.
NEW PRICE TARGETS
Although they were most probably caught off-guard and now require an equity financing, this should be their last. $5 Million should last them something like 10 months, if you include a drilling program in Iraq. It will provide them with enough cash, that they won't have to force those 18-cent warrants once the share price appreciates over 36 cents again. My prediction is that the share-price will stay around the 25 to 27-cent level for the next week or so. As we get closer to the closing of the placement, it will go back up to 30 cents, and over 30 cents in the new year. Once they get the Iraqi rubber stamp, it will trade in the 35 to 45-cent range. The Albanian news will finally make it break out.
Earlier this year (March 2010), I had predicted 20 cents by the end of summer and 50 cents by Christmas, but that was based on Albania being on-line. Given the recent delays, we'll probably now only see that price around Easter. Nevertheless, that's a 100% appreciation from this price level. Management is committing at least $1 Million of their own money in this Private Placement, so you know that they believe it's going to happen. Where it is trading today, will most probably the cheapest share price we'll see from here on in.
