Investors stampede out of Chemeq

The share price of Perth veterinary drug-developer Chemeq Ltd (ASX:CMQ) lost over 25 per cent of its value when the company resumed trading today after a two-week voluntary suspension.

The capital raising and rights issue will raise less than half of the $55 million the financially troubled company was seeking when it temporarily halted trading two weeks ago.

On Friday, Chemeq announed it had successfully completed a placement of 4.1 million shares at AUD$2.40 a share, and intends to lodge a prospectus for a fully underwritten renounceable rights issue to raise $9.94 million, offering shareholders one new share for every 11 shares they hold.

It also announced the sale of AU$1.5 million worth of its novel polymeric antimicrobial to an agent representing major South African poultry producers, with the first delivery due in December.

Chemeq has now signed a memorandum of understanding with leading South African veterinarians to distribution of the antimicrobial to country’s pig industry, and to smaller poultry producers.

Founder and chief executive Dr Graham Melrose said the contracts confirmed market demand for Chemeq’s “unique and superior products”, and said the placement and rights issue should “defuse recent speculation about solvency and capital raising” that had negatively affected the company’s share price.

Melrose is putting his money where his heart is, supporting the capital raising by taking up the full entitlement for his 27 per cent controlling interest in Chemeq, sub-underwriting the rights issue at a personal cost of nearly $6.45 milllion - $1 million over and above his entitlement.

The rights issue and the capital raising will raise $30.1 million before issue costs, with the potential to raise another $30.1 million from the exercise of options.

The company has come under intense scrutiny from the Australian business media, with one article in The Australian even suggesting that it had been insolvent when it raised $10 million from a share issue at $4.55 a share in June.

Chemeq will use the proceeds from the raising mainly as working capital to roll out product, and to maintain its sales and marketing activity for the antimicrobial polymer, which is finally in commercial production after a delay of nearly six months, due to problems bringing the new Rockingham factory on line.

Melrose said Chemeq would not over-commit itself to the South African market, which in theory could consume the entire output of the new factory.

Commenting on the steep fall in the company’s share price – which at time of writing had fallen to $2.50, Melrose said, “We have always emphasised that investment in our company is a medium-term proposition.

“We would go so far as scorning the participation of those who seek an immediate return, because that’s not investing – it’s gambling.”

Melrose says the company hopes to obtain regulatory approval from the Australian Pesticides & Veterinary Medicines Authority before year’s end.