Questions for the CEO of Alloy Steel International?

On the off chance any of you have a question for the Hank Reardon of wear plates, leave it in the comment thread below. Mr. Kostecki has apparently indicated through an intermediary a willingness to chat with me.

Alloy Steel's 10-Q

The company (OTC BB: AYSI.OB) swung to a loss of ($437,951) on sales of $1,307,160 in the quarter ending June 30^th, but the 10-Q includes this news:

The Company has recently been advised of its successful tender for a significant contract with BHP Billiton Ltd, with the first order release being received by the Company to the value of approximately $3,200,000 subsequent to the reporting date.

Alloy Steel was also the subject of this longer, recent post.

Alloy Steel's 10-Q

Alloy Steel International (OTC BB: AYSI.OB) filed its 10-Q today (summary; full filing). Another break-even quarter: $39,000 of net income on $1,479,774 of sales. As I mentioned in a recent post ("Run Silent, Run Deep"), I had expected a loss this quarter, so I'm (mildly) pleasantly surprised the company was able to break even during what might turn out to have been the worst quarter of the current global recession. Judging from the price action today though, others had higher expectations. Management offered this comment on the quarter and the company's prospects going forward:

The decrease in sales for the period is representative of the general downturn being experienced in the world economy. The number of orders received by the Company have declined as demand for our product reduced as various mining companies announced that new mining projects were being delayed and/or existing mining projects were being wound back until demand for commodities increased. The Company has submitted tenders for the supply of Arcoplate where possible and is confident that these will be successful with orders likely to be received in the next three to six months. The Company has continued to promote its product in the market place as a superior option for maintenance, as well as seeking entry into other markets which were previously limited by the Company’s ability to meet the demand existing prior to the economic downturn. The Company is confident of being able to present its product well in these new markets, and anticipates additional orders will be generated from these new locations.

Updated Altman Z-Score for Alloy Steel

In a previous post ("Using the Altman Z-Score to Calculate the Risk of a Company Going Bankrupt"), we described the Altman Z-Score model for manufacturing companies:

The Altman Z-Score is a model developed in 1968 by NYU Finance professor Edward Altman (pictured above) to predict the likelihood of a company going bankrupt within the next two years. According to Investopedia,

[R]eal world application of the Z-Score successfully predicted 72% of corporate bankruptcies two years prior to these companies filing for Chapter 7"

In creating the Z-Score model, Professor Altman studied an initial sample of 66 firms, half of which had gone bankrupt, and looked for the balance sheet and income statement ratios that had the most predictive value. Dr. Altman settled on these five ratios¹:

T₁ = Working Capital / Total Assets
T₂ = Retained Earnings / Total Assets
T₃ = Earnings Before Interest and Taxes / Total Assets
T₄ = Market Value of Equity / Total Liabilities
T₅ = Sales/ Total Assets

He then assigned weightings to them based on their predictive values to create his model:

Z Score Bankruptcy Model:

Z = 1.2T₁ + 1.4T₂ + 3.3T₃ + .6T₄ + .999T₅

Based on this model, a Z-score below 1.8 means bankruptcy is likely within two years; a Z-score between 1.8 and 2.99 is a gray area; and a Z-score above 2.99 means there is little likelihood of bankruptcy within the next two years.

In that post, we noted that the Altman Z-Score for Alloy Steel at the time was 4.89. I re-ran the calculation today using the updated numbers and got an Altman Z-Score of 4.19. Unsurprisingly, it's lower than last time, given the drop off in sales and earnings, but still well above the 2.99 level, above which the model predicts little likelihood of bankruptcy within the next two years.

The Stock Also Rises

As a commenter on the company's Investor Hub message board noted, Alloy Steel International (OTC BB: AYSI.OB) was up 39.29% today on 6x average volume. It's nice to see the stock move up for a change, particularly with its earnings release expected next week, but I think this says more about the inherent volatility of an illiquid, low-float, micro-cap stock than anything else. I still expect the company to post a loss when it reports its quarter. Maybe there will also be some encouraging forward-looking statements though. We'll see.

A Macro Trend in Western Australia

A few weeks ago, I bought shares in Alloy Steel International (AYSI.OB -- I'll post a write-up of it here soon), a company based in Western Australia. Since then, I've started to follow the news from Perth. The big news recently has been the huge natural gas explosion on Varanus Island earlier this month, that has reduced Western Australia's gas supplies by 30%. Today, Perth Now reports that Australia's Treasurer predicts that this will hamper economic growth in Western Australia and throughout the country for the rest of the year. Alloy Steel is scheduled to open a new mill this summer, so this could affect its ability to run at full capacity.

Another article in Perth Now points to a macro trend worth noting: "Population explosion makes Perth the prime mover". Excerpt:

A NEW study has found Perth is growing at the fastest rate of any city in Australia's 200-year history.

Monash University population expert Bob Birrell said Perth's population would increase by 43 per cent between 2005 and 2021, taking the number of people living in the city from about 1.5 million to more than 2.1 million.

Dr Birrell said that would constitute the fastest rate of growth of any Australian city, at any time.

"This is absolutely massive, completely unprecedented,'' Dr Birrell said.

"It's a massive task for building infrastructure."

Time to start researching what local companies will benefit from this macro trend (infrastructure companies obviously are the first to come to mind), and then drill down further for potential investment opportunities. I'll post a follow-up after I've done some homework on this.