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 In the case of China Armco Metals (CNAM), the “good things” turned out to be incredible gains over the past few weeks after a very long period of dormancy. China Armco Metals, Inc. is engaged in the sale and distribution of metal ore and non-ferrous metals throughout China and has entered the recycling business with the Company's acquisition of 22 acres of land for the construction and operation of a one million ton per year shredder and recycler of metals.
China Armco maintains customers throughout China which include the fastest growing steel producing mills and foundries in China. Raw materials are supplied from global suppliers in India, Hong Kong, Nigeria, Brazil, Turkey, the Philippines and Libya. The Company's product lines include ferrous and non-ferrous ore; iron ore, chrome ore, nickel ore, copper ore, manganese ore and steel billet. Upon completion and testing of its new facility late in the fourth quarter of 2009, China Armco Metals expects to launch operations in its steel recycling and scrap metal recycling business early in 2010.
The recycling facility is expected to be capable of recycling one million metric tons of scrap metal per year which will position the Company as one of the top 10 largest recyclers of scrap metal in China. ARMCO estimates the recycled metal market as 70 million metric tons.
Shares of China Armco have traded at the $2-$3 levels for over six months from August of 2009 through February of 2010. With very little volume and not much attention from Wall Street, the volatility in China Armco was just too great. The fact that company was traded on the OTC Bulletin Board certainly didn’t help. However, we couldn’t just ignore the company.
That is why China Vesting added China Armco Metals (CNAM) to our Dragon Undervalued Index in early February and since that time shares have skyrocketed from the mid three dollar range to a high of eleven dollars. The bulk of the gains can be credited to the company’s senior listing on February 10, 2010 along with very strong fundamental developments within the China Armco’s steel scrap recycling division.
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Volume has picked up tremendously with average daily volume over the past 90 days at 676,943. In a word….China Armco has grown up and its time the company takes it place at the next level. China Vesting is graduating the company to its Tiger Mid & Small Cap Index where it will join the most popular U.S. listed China based companies.
Shares of China Armco Metals have since pulled back to the mid $8 levels and we think this is the perfect opportunity to establish a position in a company poised for hyper growth.
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China Armco (as of its last quarterly filing) had 10,100,000 shares outstanding with float of just 4,220,000. From Dec 29, 2009 till February 20, 2010 a total of 1,913,100 shares traded. This represents 45.3% of the float over a 36 day trading period. That comes out to an average of 53,141 shares per day which is hardly anything to get excited about.
Then from February 23, 2010 to March 3, 2010 things started getting interesting with a seven day trading volume total of 2,908,000 or 68.9% of the float. That equals out to a daily average of 415,428 shares. It took 36 trading days to turnover 45.3% of the float while it took 7 days to turnover 68.9% of the float. With the entire float turned over in those 41 trading days it wouldn’t take too much guessing to see what was coming next.
On March 4, 2010 volume in China Armco exploded with 7,119,800 exchanging hands. This was followed up a 7,633,600 share day then another high volume trading day with volume at 4,736,700. In three trading days 19,490,100 shares traded hands and the float was turned over 4.6 times. The stock also made a dramatic move from $3.63 per share on February 19 to a high of $11.10 on March 5th.
With such a high float turnover rate a new set of shareholders came into the stock and a new base was established. However over the next few trading days China Armco began a steady decline from March 15th to March 18th. Over those four trading days 4,202,000 traded hands but the stock took a beating from the mid $9 levels a few days back to a low of $7.05 per share on March 18th. It didn’t make sense that a stock with such a high float turnover would experience this kind of decline. What was going on?
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On March 5, 2010 China Armco filed a post amendment registration:
We are registering 2,481,649 shares of our common stock issuable upon exercise of outstanding warrants at an exercise price of $5.00 per share. We issued these warrants to investors in conjunction with our private placement completed on August 29, 2008. We are registering the shares of our common stock underlying warrants issued to the placement agents, their employees and other persons acting on behalf of the placement agents to purchase 242,265 shares at $5.00 per share. These warrants were issued in conjunction with our private placement completed on August 29, 2008.
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2,723,914 warrants exercisable at $5.00 per share were being registered and subsequently the registration was deemed effective. It is no wonder the stock felt pressure and dropped so precipitously for no fundamental reason. However, on March 19 shares of China Armco bounced back for the first time in five trading sessions up from $7.11 to $7.83 per share on volume of 2,550,900. It’s safe to say that the warrants have all been exercised or there is very little left.
It should be a matter of time before the company announces that they were able to raise a significant amount of capital from the exercise of warrants. We would not be surprised if the figure is $10,000,000 or more.
From looking at the tape it is extremely impressive that a potential 2,723,914 shares hit the bid relentlessly and shares of China Armco were able to withstand the pressure.
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China Armco has always been a great story with decent but not stellar fundamentals. For the year ending December 31, 2008 revenues were $55.3 million while net income was $3.33 million which is a net profit margin of just 6%. Hardly an exciting business but the growth has always been about the company’s state of the art steel scrap recycling plant.
However, investors that buy story stocks are always happy to see some fundamentals behind the company before the story comes into fruition. Unfortunately, in 2009 the fundamentals in China Armco’s distribution business felt tremendous pressure with 2009 Q1 revenues of $5.358 million which squeaked out a gain of $128k. Things turned around the following quarter with the distribution business producing revenues of $22.5 million with net income of $3.370 million.
At that point everything seemed to be in the clear but the following quarter the distribution business let investors down again. Revenues for 2009 Q3 came in strong at $27.312 million but net loss for the quarter was $830k.
China Armco’s distribution business is quite volatile but the real story has been and continues to be the steel scrap recycling plant. Then it finally happened….on March 4, 2010 made a massive announcement:
Armet Renewable Resource Company, Limited, the Company's wholly owned subsidiary, has signed a contract to supply a major Chinese steel producer with up to 230,000 tons of scrap steel in 2010. The contract calls for the delivery of up to 23,000 metric tons of scrap steel per month for 10 months beginning in March of 2010. Based on the current spot price of scrap steel, this supply contract is valued at over $100 million.
Furthermore:
Management anticipates this supply contract will allow the company to sell all of the initial production from its recently completed 1 million ton recycling facility during the first several months of operation. Additionally, management anticipates reaching a full capacity run rate sometime in the fourth quarter of 2010. At full capacity the facility is capable of processing approximately 1 million metric tons of scrap steel per year or over $400 million annually at current prices.
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This means that the $100 million contract comes in at $10 million per month in revenue. What is not known at this time is the gross profit from this contract. If China Armco is able to maintain its distribution business and produce $3 million a year in net income the steel scrap recycling plant should do the rest.
The entire world knows China has an almost unquenchable thirst for steel. The move to greener solutions such as China Armco’s steel scrap recycling plant makes us confident that reaching its annual capacity of $400 million is quite possible. The recycling facility is expected to be capable of recycling one million metric tons of scrap metal per year which will position the Company as one of the top 10 largest recyclers of scrap metal in China. ARMCO estimates the recycled metal market as 70 million metric tons.
There are currently 10,100,000 shares outstanding but we know the number is higher due to warrant exercises. Let’s assume all the warrants were indeed exercised bringing the total share count to 12,823,914 shares outstanding. Based on Friday’s close of $7.83 per share the market capitalization is $100,411,246 million.
This is where some assumptions need to be made:
If the distribution business is able to maintain and the steel scrap recycling business produces a net margin of 10% then for 2010 the potential net income could be $13 million. $10 million would be from the $100 million dollar contract that runs 10 months from March 2010 till the end of the calendar year. The remaining $3 million in net income would come from the distribution business.
That would work out to a forward PE of 7.723 based on 2010 estimates. Being that there are three quarters left in the calendar year it would seem plausible that China Armco would be able to sign more contracts for it steel scrap recycling plant. One fourth of the capacity is already spoken for and if China Armco can get anywhere close to reaching capacity then we predict the company will be the best performing company in the Tiger Mid & Small Cap Index for 2010.
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