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.
For 2010 I use 2 models. First model uses company's guidance of min. 220M revenue and min. 12M net income which equates to a Net Margin of 0.05%. As per my previous discussions, the guidance seems to me to be ridiculously low in both rev and net margin since we all know that:
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.
The second model is my own expectation for 2010. 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= 25 KT (KT= Thousand Tons)
2Q= 100 KT
3Q= 175 KT
4Q= 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% net margin for the recycling business and 6% 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) 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:
2010 Company guidance:
rev= 220M
net inc = 12M
FD= 16.97M shares
eps= 0.71 E
2010 my estimate:
rev= 100 + 46 + 100= 246M
net inc= 17.68M
FD= 16.97M shares
eps= 1.04 E
2011 my estimate:
rev= 534M
net inc= 40.3M
FD= 17.87M shares
eps= 2.25 E
Using my estimates (which I think are fairly conservative and could be easily exceeded considering the explosive demand for the products and the assumed fully diluted share count) and compared to the reported eps of 0.507 for 2009, we can probably expect an annual eps growth of 105% and 116% for the next 2 years.
