Business Risks and Inherent risks of Chemeq Ltd

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BUSINESS AND INHERENT RISKS OF CHEMEQ LIMITED:

1. The factory of Chemeq in Rockingham has not got unconditional regulatory approval of the factory. The building and running of the factory is uncertain and when it will be profitable is even more unforeseeable. The business risk is that the factory may either not get approval or it may get a much delayed approval. The financial reports do not mention that the factory is in violation of any regulation and this amounts to a misstatement. The inherent risk is "The financial reports do not mention that the factory is in violation of any regulation and this amounts to a misstatement". The investigative task for this risk is that audit should determine when the factory will be able to start production, what regulatory aspects are preventing it from going full steam and how much more time it will take to reach full production. The level of this risk is high.

2. The business risk is that Australian Securities and Investment Commission has brought action in the Federal Court alleging continuous disclosure breaches against Chemeq. In sharp contrast the annual report of the company states in its annual report that the 'entity is is subject to a range of environmental regulations. During the financial year, all reporting requirements under all relevant legislation were met. There were no incidents which required reporting." This appears to be a misstatement. The inherent risk is that 'entity is subject to a range of environmental regulations. During the financial year, all reporting requirements under all relevant legislation were met. There were no incidents which required reporting.". The investigative nature of the audit task is to ascertain the truth in the charges made by the Australian Securities and Investment Commission. This is a high risk.

3. Since June 2002, Chemeq has spent so much cash in getting the plant up that it has almost exhausted its capacity to raise share capital. This is a major business risk. It has raised capital eight times since June 2002. The basis of the risk is that major consultants have downgraded the Chemeq stock and have advised investors that the price may fall. The inherent risk in 3 is that the company's impaired capacity to raise capital is not mentioned. This weakens the very foundation of the company and may lead to serious liquidity crisis. This is a medium level risk.

4. As the prices of the stock have been falling, the company has now turned to Mizuho International, a Japanese bank for a $60 million rescue package. This is a major business risk. The company is taking this funding through the use of convertible bonds. After the first conversion takes place Mizuho could take up to 40 percent of the company. The inherent risk in 4 is that the company does not mention in the annual report that Mizuho could take up 40 percent of the company with the first conversion. There is a serious risk that the company may be then be controlled by Mizuho and its management may be taken over by the bank. This is a high level risk.

5. In addition to the convertible bonds, Chemeq has agreed to pay Mizuho an interest at the rate of 8.5%! This is a serious risk because this interest is payable quarterly and will directly affect the liquidity of the company. Chemeq may even ...