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Short interest in Orbite Technologies Inc. leaped more than 7,000 per cent during the first two weeks of September, rising to 3.4 million shares from 44,500 shares. The jump earned Quebec-based Orbite Technologies (formerly Orbite Aluminae Inc.) a spot on the Toronto Stock Exchange's short-interest data Largest Percentage Increases in Short Interest (Sept. 15).
Short sellers might be expressing skepticism about Orbite Technologies's endeavour to develop a commercially viable process for extracting high purity alumina (HPA) and other materials from clay and the waste of aluminum-smelting and other plants. HPA is used in LED lighting, cellphones, laptops, televisions and lithium-ion batteries.
Over the past five years, shares in the company have lost 95 per cent of their value due to developmental delays, cost increases, a lack of revenues, ongoing financing concerns, management changes and dilution of shareholders (share count has tripled to 370 million).
"Orbite has been plagued by just about every possible kind of disaster … that could encumber a public company," wrote James West in the Midas Letter on July 7, 2014.
Yet, Orbite Technologies is still standing. And it has continued to hone its technology under Glenn Kelly, who became chief executive officer in 2014. Indeed, he announced in April that the company was "back on track" – it was sending HPA samples to prospective customers and anticipating the completion of commercial production facilities by the fourth quarter of 2015. (The company reiterated its fourth-quarter completion target of these facilities in a Sept. 21 news release.)
As a result of its research and development program, Orbite Technologies has acquired a portfolio of intellectual properties. Of note are "18 patents and 107 pending patent applications in 11 different countries and regions."
A bought-deal financing (underwriter assumes the risk of floating new shares) raised a total of $15-million in April and May. It is rare for a company without revenues to get this kind of financing. Financing has also been obtained through the Quebec government, notably up to $30-million over three years in the form of refundable investment tax credits.
Company documents have, however, issued a warning. If further sources of financing cannot be obtained, it "would have an impact on the company's ability to continue as a going concern, as the company's current working capital … is insufficient to complete the construction and commissioning of the HPA plant."
Some analysts also have questions about the HPA market itself. As Jonathan Hykawy, head of investment-research firm Stormcrow Capital Ltd., said in an interview:
"Chinese suppliers have entered the field with a poorer, but much cheaper, grade of product that … threatens to steal the bulk of the market. It would seem to me to be a fairly poor market to pursue, with declining prices and margins, and insufficient demand growth to keep even the incumbent producers happy."
It should be noted that the company has issued convertible debentures and warrants, which creates the conditions for convertible arbitrage operations that involve the shorting of its common shares. (For example, if the stock is trading at $10.50 and the convertible debenture has a conversion price of $10 for the stock, an arbitrager can lock in a 5-per-cent gain by purchasing the debenture and shorting the stock). As of publication date, it could not be confirmed with the company if this type of hedging activity was material in the surge in short interest.
Orbite Technologies has the potential to deliver outsized gains, but company history and the state of the resource sector suggest caution. Investors might want to wait for greater signs that its new technology can produce HPA "at one of the lowest costs in the industry," according to company documents, "and in a sustainable fashion, using … aluminous clay, red mud, fly ash [and other waste products]."
Larry MacDonald is an economist, author and financial writer.