Wednesday, December 23, 2009

Alloy Steel's 10-K


Alloy Steel International (AYSI.OB) filed its 10-K today. I haven't had a chance to go over it in detail yet, but it looks like the big BHP deal that was announced during the AYSI's Q4 contributed less to earnings that quarter than expected. If my arithmetic is correct (the company didn't break out the Q4 numbers in its annual), Q4 earnings came in at 1.86 cents, which is well below my guess of record earnings that quarter, and well below the result of my small survey which found that earnings of about 5.6 cents would be needed to support the stock price above $2.20. I would expect the stock to drop below $2 today, but we'll see.

The 10-K does note that,

The gross profit and subsequent operating profit has been affected by the expensing as required under US GAAP of the materials consumed in the testing and tuning of the new mill. This would amount approximately to $900,000.


$900k = ~5.2 cents per share, so it could be we all underestimated how much the testing and tuning would eat into earnings in Q4. Then again, as the company doesn't break the numbers down by quarter, it's unclear how much of that cost was incurred in Q4. Something to consider going forward, considering that the company has announced plans for building additional mills next year: the ramp-up costs for the expansion related to the BHP deal and other business may eat into earnings more than previously anticipated in the next few quarters.

Update: Initially, I wasn't going to mention this, but its mention by a commenter on iHub made me think of something: the company also announced in its 10-K that it anticipated hiring 3 additional manufacturing workers in the next year. That's good news on its face, but it does make me wonder if they are still planning to build additional mills next year -- I'd think they'd need more than three additional manufacturing workers to run one new mill, let alone the two mentioned in September's press release. Just e-mailed the company, asking to confirm if they are still planning on building those two new mills in 2010.

Second Update: Alloy Steel's Malaga headquarters is shut down for its Christmas break, but I was able to get a hold of Alloy Steel's Brisbane-based International Manager Gregg Muller. Gregg says Alloy Steel's domestic sales reps report to him and he also handles international sales, freeing up Gene to focus more on R&D and manufacturing. Gregg was kind enough to spend an hour on the phone with me just now, and he answered a number of questions. Some notes from our conversation follow.

New mills:

- The third mill is currently about 3/4ths built. Gregg says these mills take about four months to build and another two months to test. They take that long to build because Alloy Steel builds the mills itself, partly to protect its proprietary technology, and partly because they have to build components that they can't get off the shelf. Greg estimates the third mill will be producing product by March or April. After that, he believes the company will start building the fourth mill. He says the third mill will be bigger than the second mill. Not sure, but he believes the intent is to finance the construction of mills three and four out of cash flow, as the previous one was.

Additional employees:

- Greg says it only takes 3 employees per shift to run a mill. The mills are computer controlled, and not labor intensive. At maximum capacity, they would run two 12 hour shifts. Prior to the Christmas break, the mills were running about 18-20 hours per day. He anticipates they might approach 24 hours per day by the end of January. Prior to the BHP deal, they were down to about 10 hours per day. Gregg agreed that it would seem the company would need to hire more than three additional workers to run two new mills.

Current international business:

- Greg said the company has been active working with distributers in Chile and India, and he expects to close deal with a Brazilian distributer when he travels there in February. He started talking with this distributer six months ago. That distributer would be supplying Vale in Brazil, in addition to possibly other companies.

Indonesia:

- The outpost in Indonesia will start as a sales office, which is scheduled to open at the end of January. Greg says it only takes about 12 days to ship product there from Perth. If all goes well, Gregg says the company may build a mill in Indonesia toward the end of next year. If so, that would be the company's fifth mill.

Mongolia:

- Greg was last in Mongolia in October. The largest undeveloped copper mine in the world Oyu Tolgoi finally got the go-ahead from the Mongolian government a few months ago, after 7 years of delays. Gregg has heard that they are expecting to be moving dirt by 2011. Alloy Steel is looking to circle back with Geomandel in 2010 so they are ready for 2011. Also talking to OEMs that will be working on the project.

3-D cladding process:

- Not currently manufacturing or marketing it; currently focused on wear plates. Believes it could be a logical follow-up product sale to current clients down the road though. Might get more tweaking by Gene before then.

New developments with Super Arcoplate:

- Greg says they can now produce plate with a thickness of 1.25 inches, or 31 millimeters. He says they are trying to perfect producing a plate with 1.5 inch thickness, which will get them into casting, and open up new business possibilities. The 3rd mill is being set up so that it can produce plate an inch and a half thick once that level of thickness is perfected.

3 comments:

DaveinHackensack said...

Put in a limit order for a few more shares near today's low.

Anonymous said...

Dave, you have Gene's ear. Perhaps you can implore him to issue a PR explaining the 10-K and GIVE GUIDANCE. They have a responsibility to their shareholders after all.

DaveinHackensack said...

Didn't get the limit order at $1.51 filled -- I was a little too niggardly with that limit price. Pleasantly surprised to see this close over $2, despite the weaker than expected earnings number and lack of guidance/elaboration from the company.

Anon,

I wouldn't say I have Gene's ear. He has been kind enough to respond to my e-mails on some previous occasions. Other times, he has kept his own council. I agree that a PR would be helpful here.