The Power of Positive News

Earlier this year, when Alloy Steel CEO Gene Kostecki complained to me via e-mail about short sellers shorting his company's stock, I noted in a post ("Run Silent, Run Deep") that the best way for a company to foil short sellers would be to release positive news. Alloy Steel International (AYSI.OB) did just that today when it issued this press release about an hour ago, announcing it landed a huge long-term contract to supply its proprietary product to BHP Billiton, "Alloy Steel International Signs Supply Agreement With BHP Billiton". From the release:

PERTH, AUSTRALIA--(Marketwire - 09/08/09) - Mr. Gene Kostecki, Chairman and CEO of Alloy Steel International (OTC.BB:AYSI - News), today announced that Alloy Steel Australia (Int) Pty Ltd a wholly owned subsidiary of Alloy Steel International Inc. has signed a long term strategic supply agreement with BHP Billiton to supply Arcoplate Wear Resistant Super Alloy Wearplate for iron ore mining operations in Western Australia.

The initial product taken will be for the multi-million dollar expansion of their operations in the Pilbara area of Western Australia. The first product releases issued by BHP have been for value in excess of $5 million in the past 7 weeks. It is anticipated that over the next five years the value of Wearplate could be in excess of $50 million.

Since the announcement in August 2009 of Alloy Steel's successful commissioning, the increased level of interest in the new production mill shown in Arcoplate has been outstanding, according to Mr. Kostecki. Most of the major iron ore miners in Western Australia have enquired about booking production time for their own expansion programs and maintenance programs and are expected to order the full range of Arcoplate thicknesses.

Since commissioning the new Arcoplate mill, it has been working at full capacity satisfying the demand for the new 3/4 inch or 20mm material whilst the other Arcoplate mill has been fully utilized with the ongoing demand for the thinner overlay materials.

As a result of the increased level of interest in Alloy Steel's Arcoplate product by local and international mining companies, the Directors of Alloy Steel are planning for a further two production mills with substantially increased capacity to come on line in early 2010.

Another Alloy Steel Post

In a post a couple of weeks ago ("Alloy Steel Update"), we quoted an e-mail from the CFO of Alloy Steel (OTC BB: AYSI.OB) in which he intimated that the company might file an 8-k or issue a press release about its fiscal fourth quarter results within the next week. At this point, since there's been no announcement from the company, it's likely we won't hear anything until Alloy Steel files its 10-k later this month. Alloy Steel's lack of emphasis on shareholder communication isn't new; the company still hasn't set up the investor relations section of its website. If you click on one of the tabs under the "Investors" heading on Alloy Steel's website, your taken to a generic page on the website of the company's outsourced IR web vendor (the stock image above is from that generic page.

In a discussion about Alloy Steel on its Investors Hub message board , I mentioned that I was less concerned about the previous quarter's results (which I think will be positive) than I was for the company's prospects in '09, given the global recession and the grim news from the mining industry. A commenter who goes by the handle "Littlefish¹" explained why he was confident in the company's prospects during this downturn. Below is his explanation.

I have a lot of confidence in the company being around when things recover, excepting some kind of huge technological breakthrough in wear plates that puts all alloy wear plate into permanent obsolescence.

I don't have confidence in when they'll get around to putting out prelim or audited results though:) Except probably by the end of year. Hopefully much sooner but who knows. I don't want my eyes permanently crossed so am only going to cross them for one night.

If you look at the company's operating history, it is vanilla plain clear to see they know how to weather tough times. They survived years (especially 2001-2003 tough times) on practically nothing (IMO).

Unlike many micros out there, I would say the likelihood of them making it thru the next year readying themselves for a hopeful recovery at SOME point is extremely likely.

They've been thru this before with the Aussie miners. Plus now they have a little bit of chance to get themselves into new markets. They haven't borrowed from any banks. They have no dilutive instruments. They got thru 2001-2003 w/o diluting or borrowing from lenders.

And they have mostly paid for the 2nd mill already with internally generated cash. Worst case, knowing Gene's fiscal responsibility, they could just operate one mill until a 2nd is needed and adjust headcount to keep pace with what they have for work.

What is the WORST operating earnings loss they have reported in their operating history? One thing seems pretty clear with about 8 years of filing as a public company, they don't lose much money regardless of economic conditions and sales. And have tight cash flow management.

Plus without debt and with prior history of having opertaing income even on $500K revs Qs (I think even $400K Qs if I recall), I just don't think we'll see them evaporate. The cash they have IMO they will hold or spend judiciously. If they spend it, hopefully it is to finish off the 2nd mill and/or branch out to sales in US etc.

As ambu [another I-Hub commenter] mentions, they've probably missed out on some revs growth during this last commodity bonanza go-round by being so cautious. But it also means they should be fine in this downturn.

I think this company will be in a better position than before IF/WHEN we get a recovery (because of capacity upside, cash on hand for a change).

BUT when is that recovery? Who knows.

What would be a strong endorsement to the product quality and potential IMO is to see sales actually grow in this mining industry/commodity blowup. It won't be easy but one avenue to seeing that happen would be by tapping into markets they don't sell into much now (like the US).

As I mentioned in a previous post (Vaalco Energy Update), I sold a few shares of Vaalco to free up some cash to buy some more Alloy Steel. My limit buy orders for Alloy Steel haven't been filled yet though.

¹"Littlefish" was the subject of a pair of posts here over the summer about his success with another micro cap stock, Mexco Energy: "How One Investor Found a Home Run Stock, Part I", and "... Part II".