Alloy Steel Update

Ugly tape for Alloy Steel International (OTC BB: AYSI.OB) on a down day. Looks like a flat-lining EKG. No company-specific news today, but there have been some tentatively positive indicators related to the metals sector recently¹. Picked up a few more shares today at .29.


¹E.g.,

- Temasek, the $134 billion Singaporean sovereign wealth fund, recently hired Chip Goodyear, former CEO of blue chip miner BHP Billiton, as its new chief (Wall Street Journal: Temasek Shakes Up Its Top Ranks -- Ho Ching Out, 'Chip' Goodyear In at Singapore Fund; a Commodity Push?)

- China bought a stake in (over-levered) blue chip miner Rio Tinto (BBC: China takes a stake in Rio Tinto)

- The Baltic Dry Index was up 147% year-to-date as of February 17th (Bloomberg: "Shipping Index Surge Signals Commodity Currency Gains"). It's up about 166% as of today (but still down steeply from its 2008 highs).

On the other hand, the continuing global recession is obviously bearish, and as reader Sivaram noted in a recent comment thread ("Mohnish, How Are You Feeling"), Mohnish Pabrai mentioned in his annual investor letter that he has turned bullish on the commodity sector, which, given his recent track record, could be considered a bearish indicator.

BHP Offers Bleak Guidance

From Bloomberg (Hat Tip: LF), "BHP First-Half Profit Drops 57% on Prices, Write-downs". Excerpt:

The global recession has curbed demand for metals, ending the six year commodity boom that delivered record profits for mining companies. The global economy is worsening and weakness in commodity prices will persist, BHP said today.

[...]

BHP has joined Xstrata Plc and Rio Tinto Group in closing mines, cutting output and slashing jobs because of the recession. Freeport-McMoRan Copper & Gold Inc., the world’s largest publicly traded copper producer, last month posted a $13.9 billion fourth- quarter net loss after the plunge in metal prices and the company wrote down the value of some mines and assets.

“If the demand outlook continues to weaken, we will continue to take actions that are required,” Kloppers told journalists on a conference call. “It is difficult to predict when this particular business cycle will turn up.”

This isn't good news for Alloy Steel International (OTCBB: AYSI.OB) in the near-term, as BHP is one of its biggest customers. The mid-term outlook, if BHP sticks with its plan to expand its iron ore production in Western Australia by a third by 2011, may be better.

Alloy Steel should report its fiscal 1Q earnings later this month, so we'll see if it has been able to stay profitable in this environment. Assuming the finished goods on Alloy Steel's year-end balance sheet represent Q1 sales (admittedly, a big assumption -- they could represent orders that were canceled or delayed for several more months), figuring a 40% gross profit margin on them, and then assuming that AYSI's net income equals about 18% of revenue (the case for fiscal '08), I get a guess of ~$192k in 1Q earnings, or about 1 cent per share.

The photo above, of one of BHP's mining areas in Western Australia, comes from BHP's website.