You can argue with defective reasoning as I have in my life, or you can just let it be — like I’m going to. The fact is that you can make a lot of money by buying companies cheap. Or, at least I can. Or, at least I believe I can. I don’t claim to come up with my own material myself. Credit is due to Viking86 in allowing me to mostly use his cheatsheets. I was jotting down notes on reasons to own a few companies that I own, and I figured that they were worth sharing.
The case for China Armco (AMEX: CNAM):
1. Financial Backing
On June 11, 2010 China Armco Metals, Inc. (“we”, “us” or “our”) entered into a Guaranty Cooperation Agreement with Henan Chaoyang Steel Co., Ltd. (“Henan Chaoyang”), a related party, in order to provide additional liquidity to meet our anticipated capital requirements to fuel the expected growth of our recently launched scrap metal recycling facility and the expansion of our metal ore trading business in the coming years. Under the terms of this guaranty, Henan Chaoyang agreed to provide unlimited joint guarantees to our subsidiary, Armet (Lianyungang) Renewable Resources Co., Ltd., for up to five (5) years for a few credit lines below (I’ve adjusted them):
a. Bank of China Lianyungang Branch’s project loan in the amount of RMB 90 million (approximately $13.2 million) which was guaranteed in 2009,
b. Bank of Communications Lianyungang Branch loan in the amount of RMB 50 million (approximately $7.3 million) which was approved on June 10, 2010 and is in the process of closing,
c. Bank of Jiangsu loan in the amount of RMB 30 million (approximately $4.4 million) which is pending lender approval, and
d. ING Bank, N.V. Hong Kong Branch, $15,000,000 line of credit till Dec. 7, 2010.
e. Bank of China’s additional loan for working capital of RMB 130 million (approximately $19.0 million) which is pending lender approval. (This is in addition to the $13M of above)
f. *Also note that they were trying to renew the $12M facility through DBS (Hong Kong) Limited in March 31,2010
The Financial Backing Totals $39.9M as of right now and $70.9M in potential loans pending approval (Not sure about the $12M DBS as it wasn’t mentioned in the last 8-K. This is equivalent to $4.34 in stock price using the fully diluted shares below.
2. Guidance
a. China Armco Metals, Inc Reaffirms FY 2010 Guidance
Monday, 17 May 2010 07:11pm EDT
China Armco Metals, Inc reaffirmed its fiscal 2010 guidance and expects revenue to exceed $220 million with net income exceeding $12 million.
b. This breaks out to $0.74 in earnings for 2010 given the sharecount below. This is also implying 5.4% net margins. Historically, CNAM is pushing 7% margins and back when Gary Liu from China Direct was their IR, he was hinting at higher margins for their new line of business. I’m not crazy in thinking this way, am I? I was advised around 8-12% net margins on their new business line http://www.chinavesting.com/stocks/CNAM/DueDilligence.pdf
c. It is my understanding that they can easily expand using available land nearby. Given the current capacity, and the latest available prices, we are looking at $400M top line without expansion
3. Big Purchases
a. The CEO recently bought $2,000,000 (400,000 shares) at $5 on June 30, 2010. (These CEO purchases, especially this one could indicate one of two things: 1. that the company is in need of cash and the CEO needed to give the company $2M to finance something, or 2. That the CEO believes that buying the stock at $5 is a good way to say, “Hey, look over here, we are a steal!” [Anyone get that joke?])
b. The CEO also bought $5,000,000 (1,000,000 shares) at $5 on April 14, 2010.
c. Private Placement bought $10,000,016 (1,538,464 shares) at $6.50 May 28, 2010.
i. There are 1,538,464 5-year warrants at $7.50 (Will bring in $11,538,480).
4. Shares Outstanding
a. My calculations are rough, but I’m guessing 14.8M shares not including warrants and 16.3M shares fully diluted (not including the employee compensation programs initiated late 2009).
b. Further, on April 20, 2010 we entered into a Securities Purchase Agreement with nine accredited and institutional investors for the sale of 1,538,464 shares of our common stock at an offering price of $6.50 per share resulting in net proceeds to us of $9,112,973. We believe that we are in a well-capitalized position to finance our continued expansion.
Other resources: Notes on Apollo
http://www.proactiveinvestors.com.au/companies/news/7901/apollo-minerals-has-much-to-gain-from-china-armco-minings-investment-7901.html
http://investorshub.advfn.com/boards/read_msg.aspx?message_id=52316755
http://investorshub.advfn.com/boards/read_msg.aspx?message_id=52295630
Useful Resource for valuation:
http://investorshub.advfn.com/boards/read_msg.aspx?message_id=52209895&txt2find=cnam|2011
http://investorshub.advfn.com/boards/read_msg.aspx?message_id=48486365
http://investorshub.advfn.com/boards/read_msg.aspx?message_id=47780898
http://investorshub.advfn.com/boards/read_msg.aspx?message_id=47873212&txt2find=cnam|margins
http://investorshub.advfn.com/boards/read_msg.aspx?message_id=47778476
http://investorshub.advfn.com/boards/read_msg.aspx?message_id=48496837
http://investorshub.advfn.com/boards/read_msg.aspx?message_id=47386839&txt2find=cnam|12|margin
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My Forecast:
My Base Guidance: http://investorshub.advfn.com/boards/read_msg.aspx?message_id=49290164
http://investorshub.advfn.com/boards/read_msg.aspx?message_id=47386839&txt2find=cnam|12|margin
2010 & 2011 valuation model with revised FD :
I have revised my valuation model of CNAM for 2010 & 2011 taking into account full dilution including all 3.076M new offering shares (half stock and half warrants) on top of the 4.7M old dilutive shares for the worst possible scenario in order to come up with a conservative eps projection. This scenario results in a FD= 16.97M shares for 2010 and FD= 17.86M shares for 2011 compared to 10.1M O/S reported in the 2009 10K.
1) the new 2010 contract value for recycling is already $100M (10 months of 23,000 Tons each to be delivered b/w Mar and Dec 10 at $435/Ton value, 2) 2009 revenue = 86.9M representing a 57% yoy growth of the distribution business, 3) net margins for both 2008 and 2009 was 6% without the most recent sourcing contract for brazilian manganese ore securing 16 months of supply at a low price and the more recent multi-year contract with ATT securing the supply of different metal ore types from different countries at a favorable price in the face of a predicted 40% avg price increase of ores in 2010. This all means that the distro business will enjoy a nice increase in both revenue and margin as compared to previous years.
Based on the announced plan to ramp up capacity of the new recycling plant to 100% capacity = 1M Tons/yr by 4Q, we can assume the following 2010 quarterly production based on a linear ramp up:
1Q= 10% capacity= 25 KT (roughly equal to 1st month of the new contract=23KT)
2Q= 40% capacity= 100 KT
3Q= 70% capacity= 175 KT
4Q= 100%capacity= 250 KT
Since the $100M contract will deliver 69 KT per quarter starting April 2010, there will be some excess production that can be sold to the market. Assuming only 1/3 of the excess production per quarter is sold at the current market price of $440/ton, I came up with a total of 46M annual revenue for the excess production of recycled scrap. For the old distro business, I assume a 15% revenue increase vs. 2009 resulting in 100M revenue. I also assume 8-12% net margin for the recycling business and 5-7% for the distro business to determine the net income. For 2011, I assume 90% of recycling plant capacity will be sold at a very conservative 2011 estimated price of $460/ton (based on the existing plant only, no capacity expansion included in estimate a, but is included in a totally wild guess b) and a 20% increase of distribution revenue vs. 2010. This results in 414M for the recycling business and 120M for the distro business for 2011. Here are the results:
Total 2010 production= 550 KT
Excess production after satisfying new contract= 550-230= 320 KT
assuming they can sell half of that for the year to other clients at same price of $440/Ton, results in 320×440/2=$70M
(These Estimates are non-GAAP)
Low End Estimate 2010
2010 rev= new contract + sale of excess prod + existing reselling business(assumed =82M in 2009)
rev= 100 + 0 + 100= 246M
2010 net inc low end= 100(.08) + 0(.05) + 100(.05)M=$13.0M
2010 net inc low end EPS = $15.3/16.97M FD = $0.766
Realistic Estimate 2010
2010 rev= new contract + sale of excess prod + existing reselling business(assumed =82M in 2009)
rev= 100 + 46 + 100= 246M
2010 net inc low end= 100(.10) + 46(.06) + 100(.06)M=$18.76M
2010 net inc low end EPS = $18.76/16.97M FD = $1.11
High End Estimate
2010 rev= new contract + sale of excess prod + existing reselling business(assumed =82M in 2009)
rev= 100 + 46 + 100= 246M
2010 net high end= 100(.12) + 46(.07) + 100(.07)M=$22.22M
2010 net inc high end EPS = $22.22/16.97M FD = $1.31
2011 Estimates
Low End
2011 rev= recycling + (sale of excess prod doesn’t exist=0) + existing reselling business(assumed =82M in 2009)
rev= 414 + 120= 534M
2011 net inc low end= 100(.08) + 100(.05)M=$39.12M
2011 low end EPS = $39.12/17.87M FD = $2.18
2011 Estimates
Realistic
2011 rev= recycling + (sale of excess prod doesn’t exist=0) + existing reselling business(assumed =82M in 2009)
rev= 414 + 120= 534M
2011 net inc = 414(.10) + 120(.06)M=$48.6M
2011 EPS = $48.6/17.87M FD = $2.71
2011 Estimates
High End
2011 rev= recycling + (sale of excess prod doesn’t exist=0) + existing reselling business(assumed =82M in 2009)
rev= 414 + 120= 534M
2011 net inc high end= 414(.12) + 120(.07)M=$58.08M
2011 high end EPS = $58.08/17.87M FD = $3.25
Here’s the beauty of the whole thing… Imagine that they double their capacity for their recycled scrap business via expansion?
2013
Realistic
2013 rev= recycling + (sale of excess prod doesn’t exist=0) + existing reselling business(assumed =82M in 2009)
rev= 828 + 150= 978M
2013 net inc = 828(.10) + 150(.06)M=$90.0M
2013 EPS = $90.0/20.0M FD = $4.50
The alternative argument if you still think that this is expensive is to use a reverse argument.
A $4 stock without any growth should have earnings of $0.50 to be in equilibrium. Last year’s net income was around $5M. The current fully diluted market cap of 16.97M Shares * $3.63 is $61M. That said, note their guidance is $12M. That puts the market cap at $96M for a company that isn’t going to grow past that. So, basically we are trading at a P/E of 5.65 for a company that is growing at over 100% in net income in 2010, and likely to grow at least 50% in 2011 (Without doing anything that they haven’t planned to do).