Register for free to join our community of investors and share your ideas. You will also get access to streaming quotes, interactive charts, trades, portfolio, live options flow and more tools.
Register for free to join our community of investors and share your ideas. You will also get access to streaming quotes, interactive charts, trades, portfolio, live options flow and more tools.
There seems to be a flight out of micro caps now; it's not limited to Alloy Steel. I'm seeing it in some of my other holdings. These are tough times: you buy when something looks cheap and then it gets even cheaper. But the key, IMO, is to focus on the underlying business prospects and the balance sheets. In these respects, Alloy Steel still looks solid.
The factor that will do more to drive business, IMO, is the new sales hire(s). Big ticket sales tend to have long lead times, but there's simply no way that Gene can tap all the potential markets for Alloy Steel solo. If wear plates make sense for iron miners, then they make sense for excavators, oil sands operations, etc., etc. You just need a knowledgeable and networked salesman to make the case.
Hopefully, they are hiring someone who already has contacts in the mining industry, but if so, it will still probably be several months after he's hired before we see the results. But those results could be big. Imagine if Alloy Steel gets the same market penetration in iron miners in North America and Brazil that it gets now in Australia?
OK, thanks. Tugrugs is great. Picked up some more Alloy Steel at $1.72 today, btw.
OK,
Thanks for the clarification. Assuming Alloy Steel buys a lease, where would it get the capital to operate the mine? Or would it turn around and sell most of its interest in the mine to mining company to operate the mine, in return for X% of the ore? Also, what does "OT" stand for in your comment?
Thanks.
Kubuto,
Are you suggesting that Gene is looking to buy a chromium mine, or just looking at another supplier? I can't imagine AYSI has the money to buy and run a mine, but I wasn't sure from reading your post. If you could clarify, that would be great.
Thanks.
Esaum,
Is this what you were looking for, or were you looking for a line in the management's discussion and analysis explicitly saying, "If you look at our finished goods number, you'll note that it's higher than normal"?
I don't know that it says that explicitly in the quarterly, but you are free to read it back-to-front yourself and see if you find that statement. Regarding my point that the finished goods number represents a significant amount of sales that will appear in the September quarter, recall my Q&A with Alloy Steel's CFO ( http://thehackensack.blogspot.com/2008/08/additional-answers-from-alloy-steels.html ):
Q: Why was the inventory (particularly the finished goods) number so high? Does this represent a pending shipment that should show up as revenue in the next quarter?
A: Inventory was built up in anticipation of a large order which has been received and revenue will emerge in the September quarter.
What's not to understand? The company was priced at $2.50-$2.80 based on expectations that it would beat the March quarter. When it fell short, the company was knocked down to under $1.50, when investors thought the growth story was wrong. After our Q&A with Alan, and the understanding that the inventory number probably represents a significant amount of sales deferred to next quarter, the stock rallied back to $1.75-$2.00. It will probably stay in this range until there's more news. A positive 8-K might push it over $2. Another quarter like the last one, and it will probably trade down to $1.25-$1.50. If you believe in the long-term story, that could be another buying opportunity.
The reason I believe in the long-term story is simple: if it makes sense for blue chip miners to use Arcoplate in Australia, then it makes sense for them to use it in Canada, Brazil, the U.S., and everywhere else. The Australian sales demonstrate the product's viability, and the lack of sales in the rest of the world represents a huge potential market. Once that's tackled, the 3-D cladding system is a natural cross-sale. After all, if it makes sense to use Arcoplate on your bulldozers, it makes sense to use the same material on in the inside of your pipes and chutes, etc.
Even if iron ore prices decline, as long as iron ore is profitable to mine, there will be a demand for wear plates. In fact, there may be a greater demand for increased efficiencies with tighter margins. Of course, Alloy Steel's technology also has applications in excavation, earth moving, etc. That's where the sales hires will come in.
Is that the John I think it is?
Could be. This isn't a conglomerate with relatively smooth, predicable earnings though. It's a small company that will probably have lumpy earnings until it broadens its client base.
Incidentally, for those who are interested, I wrote a post on my site recapping the Alloy Steel situation: http://thehackensack.blogspot.com/2008/08/recapping-alloy-steel-situation.html
Check it out and see what you think.
One other thing: due to the price drop last week, Alloy Steel is now on the Magic Formula top-100 list.
Good points. I tend to agree with you about why that $600k order was on the 8K.
Looking at the big picture, there is huge upside for sales over the longterm. If Arcoplate makes sense for miners in Australia, it makes sense for miners everywhere. If Arcoplate makes sense, so does their 3-D cladding process to coat the inside of pipes with a similar alloy material.
If Alloy Steel were funded as lavishly as a dot-com start-up, they could hit all of these opportunities at the same time and grow faster, but then all that capital would dilute the crap out of the original investors. This way requires more patiences but will pay off more in the long run.
Just to play devil's advocate for a moment, is it *possible* that the company built up that inventory in anticipation of the FMG order? You're probably right, but I always like to kick the tires just in case. I guess we could make that another f/u question to the company to be sure, i.e., are the finished goods part of the orders announced in the last 8K
Also, one concern I have: the company released that 8K to announce a sale of $1.8 million and one of about $600k. Does that mean that every sale over, say, $600k, will get an 8K? What I'm getting at is that if the 8Ks represent the bulk of the quarter's sales, and investors expect that the sales announced on the 8Ks are just the tip of the iceberg, investors may end up getting disappointed. Again, just kicking the tires here. Interested in your thoughts on this.
Great, even better. So we ought to start with $1.8 million from Fortesque, plus ~$600k from the Malaysian order, plus ~$1.6 million from whatever order the finished goods represent next quarter.
Follow up questions for the CFO Alan Winduss.
I e-mailed him this earlier today. I doubt I'll hear back before next week, as it was after business hours on Friday in Perth by the time he received my e-mail.
Thank you for your prompted and detailed response to those questions. Two quick follow up questions:
1) Since you value inventory at the lower of cost or market, and Alloy Steel has profit margins of about 50%, could the $785k in finished goods represent about double that amount in deferred sales?
2) You noted that you are in negotiations with potential sales hires, and the 10QSB notes that "No significant change in the number of employees is anticipated in the next three months". Does this mean that you don't anticipate hiring these salesmen by the end of the quarter, or that you may indeed hire them, but if you do it won't represent a "significant change" in the number of employees (as "significant change" is defined for the purposes of the 10QSB)?
Thanks, I missed it myself at first. Chances are that $800k in finished goods represents most of the $1.8 million Fortesque order AYSI announced in its last 8K [correction: Gilead just pointed out why this was probably for a different order]. I've e-mailed a follow up question to the CFO to confirm, though I doubt he'll get too specific when speaking about next quarter. I'll post my follow up questions separately in a moment.
Gilead,
Looking at this again, I'm not sure it's right. The cost of "finished goods" should include all costs associated with building those finished goods, including labor. So with a ~50% profit margin, ~$800k in finished goods should represent about $1.6 million in sales next quarter.
I'm gradually buying more. Bought some at $1.70 yesterday, a little more at $1.75 today, etc.
Nice work Mike, Y.B., and Gilead.
Here are the answers from Alloy Steel's CFO, Alan Winduss, preceded by a recap of the questions, pasted from my site (http://thehackensack.blogspot.com/2008/08/additional-answers-from-alloy-steels.html)
In the last post ("Further Questions for Alloy Steel's CFO") we asked the CFO of Alloy Steel International (OTCBB: AYSI.OB) the following questions:
1) Why was the inventory (particularly the finished goods) number so high? Does this represent a pending shipment that should show up as revenue in the next quarter?
2) Did the natural gas shortage caused by the Varanus Island explosion reduce customer orders or affect deliveries in deliveries in the June quarter?
3) Did the construction of the new mill affect quarterly revenues? E.g., were workers pulled off of production to help with the construction of the new mill?
4) Are there any other specific factors which contributed to the 40% sequential decline in revenues from the March quarter to the June quarter, or is this just a result of 'lumpiness' of revenue?
5) Do you expect that higher revenue quarters will have higher margins, as a result of better allocation of fixed costs?
6) Did you hire a salesman this past quarter (I noticed you were recruiting one in Western Canada)? Was that part of the increased sales and administrative labor costs you cited as a factor in the higher SG&A?
7) Are you considering any measures to increase communications with shareholders? I know you mentioned during our previous correspondence that you were working to complete the investor section of Alloy Steel's website, but are you considering holding quarterly conference calls or issuing periodic press releases?
Here are his responses:
In response to your questions today:-
1. Inventory was built up in anticipation of a large order which has been received and revenue will emerge in the September quarter.
2/3/4. The gas problems had a small effect on orders but more particularly clients were looking at their own budgets and holding off ordering until after June 30. June 30 is the financial year end in Australia.
These factors plus in this industry there are other variables like the timing of plant shutdowns for repairs and the construction of new plant which we cannot predict; will cause fluctuations in quarterly revenue.
5. While overhead is better absorbed in high revenue quarters, it maybe that some high revenue sales have a lower profit mark up which affects the bottom line
6. We are currently negotiating with parties with the view to employment as sales persons for mainland USA and Canada.
7. Website is still unfortunately still a ‘work in progress’; we are looking at a various IR firms to possibly use for communications. We have been and will increase frequency where there is something to communicate in lodging 8Ks.
This provides some helpful clarity, particular the answer to 1), which is encouraging. I may have a follow up question re 6). I'll post any follow up Q&A in the comment thread below.
No problem guys, I'll keep you let you know as soon as I hear back.
Some of you guys may also be interested in the comments thread after this post on my site: http://thehackensack.blogspot.com/2008/08/alloy-steel-international-reports.html
I'd post the whole thing here, but it's long, so if you're interested, check it out.
Just sent an e-mail to the CFO, Alan Winduss. I sent it to him mainly because he's the one who responded to my questions last time. Here's what I wrote:
Thank you again for answering my questions last month. If you would be kind enough to answer a few questions about Alloy Steel's 10QSB released today, I would be grateful.
1. Why was the inventory (particularly the finished goods) number so high? Does this represent a pending shipment that should show up as revenue in the next quarter?
2. Did the natural gas shortage caused by the Varanus Island explosion reduce customer orders or affect deliveries in deliveries in the June quarter?
3. Did the construction of the new mill affect quarterly revenues? E.g., were workers pulled off of production to help with the construction of the new mill?
4. Are there any other specific factors which contributed to the 40% sequential decline in revenues from the March quarter to the June quarter, or is this just a result of 'lumpiness' of revenue?
5. Do you expect that higher revenue quarters will have higher margins, as a result of better allocation of fixed costs?
6. Did you hire a salesman this past quarter (I noticed you were recruiting one in Western Canada)? Was that part of the increased sales and administrative labor costs you cited as a factor in the higher SG&A?
7. Are you considering any measures to increase communications with shareholders? I know you mentioned during our previous correspondence that you were working to complete the investor section of Alloy Steel's website, but are you considering holding quarterly conference calls or issuing periodic press releases?
Thank you again for your attention and your time.
Gilead,
I'm asking them specifically your question about the reason for the increased inventory and finished goods numbers. I'll let you know when I get a response.
b9moleculre, I'll bring up the point about conference calls and investor communication. Last time I corresponded with the CFO, I asked about the investor section of their website (which still isn't up).
The inventory build-up is a big question, and I'll ask about it. I assume its for an order that hasn't delivered yet, but I'll ask to clarify.
Regarding the headcount, the 10Q says they don't anticipate there will be a significant change in headcount over the next three months, but doesn't specifically say whether or not they hired someone last quarter. I'll ask to clarify.
Re-thinking this, and looking again at the 10Q, I think AYSI essentially answered question #5 with this,
"Factors contributing to the increased [SG&A] expenditure for both the three month and nine month periods ended June 30, 2008, were increased travel expenditure to assist marketing and increased labor costs for sales and administrative employees."
I'm going to drill down and ask if the company went ahead and hired that new salesman they were recruiting for in Western Canada.
KlausVT makes a good point about question #1, but I am going to ask that question anyway, just for clarification.
If anyone has any other questions they want me to ask, let me know within the next half hour or so. Thanks.
A conference call would be nice, but in lieu of that, let me know any questions you have in addition to the ones Gilead asked and I'll ask them of the company.
I agree that the lack of visibility made today's drop steeper than it would have been otherwise, but it probably also made last quarter's rise steeper than it would have been otherwise. Less visibility = greater volatility.
Good questions, Gilead. If anyone has others, let me know, and I'll consolidate them into one e-mail to the company and then post the answers here. Might be easier to get a response from one e-mail than from a bunch of different e-mails asking the same questions.
If Alan or Gene were reading this board now, what questions would you have for them regarding today's release?
Filled.
Just placed a limit buy order at $1.70. Wish I had followed my gut and placed one at $1.50 before the open.
Some mining operations were idled because of the reduced supplies of natural gas. Others switched to more expensive diesel-powered generators.
You're probably right.
If all the bears were smart enough to sell yesterday, that should reduce selling pressure today .
Not much visibility here in the near term, although the story sounds great over the long term. E.g., what will the Mongolia JV contribute to earnings next year? Could be big, but who knows? I'll see what the price action looks like before I put in a limit order.
According to Australia's central bank ( http://www.rba.gov.au/ ), the inflation rate there is 4.5% and their equivalent of our fed funds rate is at 7.25%. Why would they need to raise rates when real rates are already significantly positive? Especially since an even stronger Australian dollar would make their exports more expensive.
Still here. For those who are interested, here's an <a href="http://thehackensack.blogspot.com/2008/08/update-on-varanus-island.html">update on the Varanus Island situation</a>. Bottom line: repairs are going slightly ahead of schedule and natural gas flows should be about 20% higher later this month than previously expected. Still won't be until the end of the year before repairs are complete though.
Another thought: as a picks & shovels play on mining, AYSI seems to have avoided (so far) the correction in the share prices of the miners.
I spoke with the CEO of USEG earlier this month. If you want to read my notes on our conversation, I posted them here: http://thehackensack.blogspot.com/2008/07/conversation-with-ceo-of-us-energy-corp.html
Thanks, Littlefish.
Littlefish,
Do you mind if I post your answer about MXC on my site? It's always interesting to hear the story behind a multi-bagger.
That's true, gilead -- natural gas provides about 22% of our electricity -- but at the time I invested in the natural gas royalty trust, I had been looking at a nitrogen-based fertilizer producer as well, and after looking into its raw costs I started looking at natural gas. The other reason I was interested in natural gas is that it looked cheap relative to its historical relationship with crude oil. According to a Rice University study from last fall, the historical ratio of oil to natural gas is 7.5 to 1, i.e. a barrel of oil has tended to trade for the same price as 7.5 million BTUs (7.5 MMBtu) of natural gas (the energy content of a barrel of West Texas Intermediate crude oil is about 5.8 MMBtu). Last time I checked (which was a couple of months ago) the ratio was close to 11 to 1.
Thanks a lot, Littlefish. I can't imagine anyone will be bored by the explanation of how you (re)found a multi-bagger. I came to be bullish on natural gas partly for the same reason you did (I saw it was a big input for some fertilizer producers), but instead of hitting it out of the park with something like MXC, I bought a micro cap royalty trust, TIRTZ.OB.