Friday, July 01, 2005

The Brandrill story

Primer on my investment outlook

Here are more details about Brandrill Conv Notes that I own (BDLG on the ASX) and a brief outlook on the investment.

Convertible Terms and Conditions
The Mandatory Converting Notes have a face value of 5 cents and pay
an 8.5% interest p.a. payable at 30 June and 31 Dec each year. The Notes
may be converted at the Note holders election by completing and submitting a
Note Converison Notice to Brandrill before 30 September 2005, or they will
mandatorily convert on this date. Interest from Jun-Sep 2005 will be paid
at this date.
* The conversion ratio is calculated as the face value of the Notes
divided by the Volume Weighted Average Share Price (VWASP) for the 20
trading days prior to the conversion date (expressed as a decimal eg 5 cents
is expressed as 0.05). The formula is subject to, if the VWASP is less than
10 cents then it is deemed to be 10 cents, and if the VWASP is greater than
$5.00 then it is deemed to be $5.00.
Price action of BDLG

As per the Conversion terms, BDLG should trade at 0.5 times the price of the stock BDL IF BDL trades below 10cents. Recently due to lots of odd lots and illiquidity, BDLG has been trading at a 10% discount to its immediate conversion value. Thus, if BDL traded at 0.066 cents, BDLG traded at 0.030 cents instead of 0.033 cents.
Also, since I bought BDLG in June, I was eligible for the 6 months interest of 4.25% on BDLG + 2.125% 3 months interest if I held to maturity till September 2005. Thus, I receive approx. 0.0032 cents back as interest payment per Note. This brings my breakeven cost per BDLG to 0.030 - 0.0032 = 0.026 - 0.027. I am able to enter BDL at 0.0268 X 2 = 0.054 while the market value is 0.066.
Thus, by buying BDLG in June I opened a position in BDL at a discount of about 16-17% to market value.

Conversion advantage of BDLG

Look carefully at the conversion terms. Realistically, the price of BDLG should act thus :-
If weighted average price of BDL < bdlg =" 0.5"> 10 cents then BDLG = 5 cents

BDLG conversion takes the weighted average price of the last 20 days. I'm going to hold onto BDLG until the last moment for the interest payments due. Its possible that prices spike above 10 cents, and you think that prices will hold there for an extended period. Guess What!! Since Brandrill uses the 20 day weighted average for conversion, you can fax the conversion form to Brandrill and try to get an even lower price for conversion.
It will take a couple of heavy trading days above 10 cents to pull the 20 day weighted average price above 10 cents, giving an investor ample warning before conversion.

Brandrill outlook

Brandrill has had a chequered history. It entered receivorship (bankruptcy) a couple of times in the past two years. A summary can be found here. The Company management thinks that the company is undervalued. This outlook can be found here.
This is my outlook. If you look at new IPOs in the ASX, every day a few new mining companies get listed or raise cash for exploration. Money is pouring into exploration compared to the last few years. There is a shortage of drills and personnel, since everyone around us decided to do MBAs and degrees in Computer Science.
Do you know anyone going to university for a degree in Metallurgy or Geology ??
Brandrill has drills (Duh), people, experience and contracts. They screwed up royally the last few years but they have a tailwind. During the tech boom, I was in Silicon Valley. TONS of companies got money for the next big things in networks. Most of them went bust, BUT THEY ALL SPENT MONEY ON EQUIPMENT. Companies that supplied to these startups made money. With Brandrill, who cares if there is a bump on the upward path of commodities prices. The money being raised now will be spent on exploration. Since Brandrill will supply drills and contractors to these Johny Come Latelys, Brandrill will make money even none of the newbies strike gold. I believe the stock is substantially undervalued, and the Conv Note is giving an entry point at a bigger discount!!!


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