China Armco Metals (NYSE AMEX:CNAM)

SAN MATEO, Calif., Jan. 5, 2012 /PRNewswire/ -- China Armco Metals, Inc. (AMEX: CNAM) ("China Armco" or the "Company"), a distributor of imported metal ore and metal recycler with a new state of the art scrap metal recycling facility in China, today provided an update on its trading business.

By December 31, 2011, China Armco had secured and shipped three orders to deliver chrome ore to trading firms serving iron and steel producers in China. The orders included a combined volume of 24,000 tons with an aggregate value of approximately $3.89 million. 2 additional shipments of a combined volume of 8,000 tons with an aggregate value of approximately $1.72 million are to be delivered by the end of the first quarter of 2012.

Commenting on the company's performance, Mr. Kexuan Yao, Chairman and CEO of China Armco stated "While China's economy is experiencing many challenges in a variety of sectors, we are working hard to adjust our operations and to reallocate our resources in response to this changing environment. As a result of our management team's efforts, we are pleased to be seeing a steady progress in our trading business. With iron ore price stabilizing to a certain degree in the fourth quarter of 2011, we are cautiously optimistic about the strengthening of our businesses as China's economic conditions improve and its monetary policies are relaxed. Capitalizing on our more than 10 years of experience, our growing brand name excellence in the industry and strong relationships with over 150 customers in China, we remain well positioned to benefit from the long-term growth associated with the Chinese steel industry."

Second Quarter 2011 Results

• For the quarter ended June 30, 2011, net revenue advanced 82% to $31.0 million, led by a 251% increase in metal recycling sales to $22.1 million.
• Net loss for the second quarter of 2011 was $1.3 million, or $0.08 per diluted share, compared to a $0.2 million loss, or $0.02 per share, in the same period last year.

Business Updates

The scrap metal recycling business resumed normal operations in January 2011 after the provincial government eliminated power restrictions that were in effect from September to the end of December of 2010. In addition, sales increased substantially from the first six months of 2010 to approximately 62,000 MT in the first six months of 2011. The Company ended the quarter with 10,000 MTs of recycled scrap steel yet to be delivered. Management continues to believe that the secular shift to more environmentally friendly energy production materials and methods will drive the underlying demand for recycled steel.

In June 2011, the Company signed an operating agreement with Lianyungang Hebang Renewable Resources Co., Ltd., an unrelated third party, to lease storage and production capacity at Hebang's facilities located in Guanyun City, Jiangsu province. The agreement allows China Armco to secure and store raw materials at a reasonable cost while reducing the cost of transportation. Guanyun City is located approximately 60 miles (direction) from the Company's metal recycling facilities in Lianyungang.

SAN MATEO, Calif., June 7, 2011 (GLOBE NEWSWIRE) -- China Armco Metals, Inc. (NYSE Amex:CNAM) ("China Armco" or "the Company"), a distributor of imported metal ore and metal recycler with a new state of the art scrap metal recycling facility in China, today announced the preliminary unaudited operating results for the first two months of the second quarter of 2011.

In April and May of this year, China Armco sold 25,000 metric tons (MT) of recycled steel products to 3 customers. The Company has recognized approximately $14 million of net sales in its recycled steel business through the first two months of the second quarter. Approximately 80% of the tonnage sold in April and May were completed using pre-selling contracts.

In addition, the Company recorded $7.1 million of revenue in its metal ore trading business. Client activity remained solid, as reflected in the 41,000 MT of metal ores sold during the first two months of the second quarter.

"Our recycling business picked up from a seasonally slow first quarter," said Mr. Kexuan Yao, CEO and Chairman of China Armco. "We are seeing continued interest from customers to increase the amount of recycled metals purchased. So far this year, we have signed 2 new recycling customers who agreed to our pre-selling strategy. As we increase production and make further improvements in our operational efficiencies, we expect measured improvements in our profitability."

First Quarter Results:

• For the quarter ended March 31, 2011, compared to same period of 2010, net revenue rose 479% to $49.7 million due to strong trading revenues.

Mr. Kexuan Yao, Chairman and CEO of China Armco stated, "Our first quarter reflects the strength of a diversified business model and our ability to secure meaningful new customers which culminated into a return to profitability. We expect a ramp up in sales in both our metal trading and recycling businesses under a backdrop of robust steel production and demand across China. Developing strong relationships with strategic customers and suppliers such as Mineracao Usiminas S.A. ("MUSA"), will enable us to fully leverage our operating model to generate incremental revenue and profitability."

• Net income for the first quarter of 2011 was $0.6 million, or $0.04 per diluted share, compared to $0.1 million or $0.01 per share for the same period last year

Fourth Quarter Results:

• For the quarter ended December 31, 2010, net revenue decreased 29% to $24.5 million due to the Lianyungang provincial government imposing power restrictions starting in September 2010

"We made progress during 2010 despite unforeseen industry challenges," said Mr. Kexuan Yao, Chairman and CEO of China Armco. "We finished construction of our state-of-the-art metal recycling production facility and secured new iron ore trading customers. The relationships we are developing with key customers and suppliers worldwide provide a solid foundation in which to grow both of these businesses. As more steel mills in China increase their use of scrap metal to comply with the government's mandate to reduce harmful emissions, we are optimistic in capturing market share while ramping production volumes and associated operating profits."

• Net income for the fourth quarter of 2010 was a loss of $1.6 million, or $0.11 per diluted share, compared to $3.1 million or $0.31 per share for the same period last year.
• Diluted earnings per share was a $0.16 loss and $0.51 for the year ended December 31, 2010 and December 31, 2009, respectively.

Business Outlook

China Armco continues to make steady progress in both its metal trading and recycling businesses. In the fourth quarter of 2010, the Company secured and delivered two orders of iron ore with a combined volume of 42,000 metric tons and an aggregate value of $4.7 million. On March 17, 2011, the Company delivered its first shipment of 150,000 metric tons of iron value valued at $19.8 million from Mineracao Usinimas S.A. ("Usiminas"), one of the largest steel producers in Brazil. The strategic relationship with Usiminas provides China Armco with a significant potential growth conduit as it is the first company to help Usiminas to export its iron ore to China.

The metal recycling business resumed normal operations in January 2011 after the provincial government eliminated power restrictions that were in effect from September to December of 2010. In addition, it has added 6 new metal cutting machines since the beginning of 2011, bringing the total to 18. We expect these machines will allow the Company to reach its designed recycling capacity of one million metric tons per year.

Management began migrating its metal recycling customers to its pre-sold model starting in January 2011. Under this new sales strategy, customers pay China Armco approximately 100% of the total purchase price in advance by issuing a commercial bill from a related bank, thereby locking in a set volume and price. This allows the Company to use the proceeds to pay for raw materials, thereby reducing its working capital needs and providing enhanced visibility into future production volumes. 2 customers have transitioned to the pre-selling model so far, and the Company continues to actively solicit existing and new customers.

As of December 30, 2010, we had invested a total of approximately $33.9 million for the acquisition of land use rights, construction and equipment purchases for the Facility.  We expect to expand the production capacity at the Facility in the future and expect to build or acquire additional facilities in the future, depending on market conditions.  We have not set a timeframe for this expansion. 
 
We have not yet determined how we plan to finance this future expansion if we determine to proceed with it.  Unless we can obtain additional financing on terms we deem favorable to us, we will be unable to complete any such expansion or construct additional facilities in the future, and there can be no assurance that we will be successful in obtaining any such additional financing, or that such financing would be on terms deemed to be desirable to our management.  Moreover, in the event we do obtain such financing, there can be no assurance that such investment will result in enhanced operating performance or produce significant revenues and related profits in the future.

In addition, we will continue to need to fund future capital expenditures for our existing operations, service our debt and purchase the raw materials required in our recycling operations.  We have historically financed our cash needs primarily through the sales of our common stock and warrants, internally generated funds and debt financing.  We collect cash from our customers based on our sales to them and their respective payment terms.

SAN MATEO, CA--(Marketwire - January 6, 2011) - January 6th - China Armco Metals, Inc. today announced it has received confirmation that local government imposed power restrictions for energy intensive industries and steel producers will be lifted in January 2011. With the announcement, the Company's scrap metal recycling business can return to full operations.

The central government imposed energy restrictions in at least 18 provinces beginning in September 2010 in an effort to meet the energy consumption and emissions targets set by the National 11th Five Year Plan (2006-2010), which significantly impacted output in the steel industry and the operations at China Armco. 

"We are pleased to receive news that the power rationing will be phased out," said Mr.Kexuan Yao, the Company's Chairman and Chief Executive Officer. "These restrictions temporarily affected our operations in the third and fourth quarters of 2010, and we are encouraged to be operating on a full time basis. We will now be able to rapidly accelerate our growth in this area of great potential."

China consumes over 500 million tons of steel annually and is the largest in the world. 100 million tons of scrap steel are utilized in this production per year and currently Chinese producers only meet 60% of this demand annually. The Company's recycling operations, which can process up to one million tons of metal scrap per year, is expected to contribute substantially to the company's revenues.

SAN MATEO, CA--(Marketwire - December 21, 2010) -  China Armco Metals, Inc. today announced it expects the Company to produce and sell approximately 25,500 tons of recycled steel with an aggregate value of approximately $12 million in the fourth quarter of 2010.

China Armco's fourth quarter orders to sell 25,500 tons of recycled steel are from 5 customers. The central government recently announced that the power rationing for energy intensive industries and steel producers will be phased out and the Company is optimistic about being able to be operating on a full time basis in the near term.

"We are encouraged by recent actions by the central government to relax the power restrictions," remarked Mr.Kexuan Yao, the Company's Chairman and Chief Executive Officer. "Recycled steel produced through our state-of-the-art production facility, which uses less electricity and emits less air pollution than steel produced through traditional iron ore processing, is poised to benefit from the central government's new policies. We are working diligently to secure additional scrap metal in order to service the pent up demand for recycled steel in China." 

Through November 30, 2010, China Armco has secured and shipped three orders to deliver iron ore to trading firms serving iron and steel producers in China. The orders include a combined volume of 112,000 tons with an aggregate value of approximately $17.1 million. "We are seeing a steady progress in our trading business," said Mr. Kexuan Yao, Chairman and CEO of China Armco.

"With iron prices stabilizing in recent months, steady industrial production growth in China, and the ending of current power conservation plans enacted by the government for the steel industry, we are cautiously optimistic about the recovery. Our diverse and stable supply of metal ores and non-ferrous metals from 10 international suppliers, our more than 10 years of experience and strong relationships with over 150 customers in China position us well to capitalize on the long term secular growth of the Chinese steel industry."

China Armco Metals, Inc. today announced that the Jiangsu Provincial Government has recently initiated additional rolling blackouts for the Lianyungang enterprise zone where its wholly owned subsidiary, Armet Renewable Resourced Co., Ltd., operates its metal recycling facility. As referenced in our September 10, 2010 press release, the power restrictions were initiated by the province to meet annual central government industrial energy usage targets. The energy usage targets are part of China's Eleventh Five Year Plan (2006-2010) which ends on December 31, 2010. While the facility will still have access to power when the restrictions are in place, it is unclear at this time as to the number of hours per day and days per week when power will be available and whether the restrictions will be in place for the remainder of 2010. Similar power restrictions have been implemented by at least 18 other provinces in China affecting numerous industries.

The energy restrictions will significantly reduce our recycling capabilities in the fourth quarter and has also impacted our distribution business. As steel manufacturers throughout China are also experiencing similar restrictions, we are seeing reduced demand in the markets for a number of ores and companies delaying purchase decisions. Due to the uncertainties as to the extent and duration of the current power disruptions, management cannot estimate its financial performance for the remainder of 2010 and is therefore withdrawing its financial guidance for the full year of 2010. On January 1, 2011 China's Twelfth Five Year Plan (2011-2015) will become effective eliminating the need for the current restrictions.

Commenting on the announcement, Mr. Kexuan Yao, CEO and Chairman of China Armco Metals, Inc., stated, "While the government's decision to restrict power will further the negative impact on our 2010 performance and we do not have sufficient clarity to assess the full impact in 2010, we do know that it will certainly end before the beginning of 2011. We believe there will be sufficient demand in 2011 for our scrap metal to enable us to quickly recover following this interruption and we intend to rapidly ramp up our production utilization rates in the coming quarters."

GeoTeam® September 2010 Rodman & Renshaw notes:

China Armco Metals (NYSE AMEX:CNAM)

• Recycling operations will be disrupted due to electricity restrictions. The restrictions could run up to 30 days (or even longer?). Product not produced in QIII won't be available for sale in QIV. Quarterly results may remain lumpy.
• Testing and adjustments played a part in the recent slow down in recycling shredder in past quarter.
• Slow down the in September will effect 3rd and 4th quarter
• The downgrade in guidance was worst case scenario
• Next 12 months should see significant impact from new facility
• Awaiting drilling results of Australian mine venture. Should be known by end of year.
• With respect to SAIC, SAT and SEC reporting, explained possible differences between US and Chinese GAAP, impact of VAT accrued and paid and intercompany transactions; but didn't know if there was a problem reconciling the filings or not. They understood this is an issue that has to be dealt with.
• 1.5 million warrants with exercise price of 5.00
• 1.5 million warrants with exercise price of 7.50

GeoInvesting Question

Please address the fact that, as referenced in the below excerpt from your filings, you require funds to complete recycling expansion. How are you going to pay for this?

"We need additional financing to fund expansion of our recycling facility and working capital for our metal ore business which we may not be able to obtain on acceptable terms. We need to raise additional capital to carry out our plans to expand the capacity of our recycling facility and increase the volume of our purchases of the metal ore we resell."

Company Response:

With regards to the financing, the company did a Guaranty Cooperation Agreement with a steel company to free up its balance sheet to help deal with receivable and trade financing credit lines. See June 17, 2010 8k

Recent transactions filed by Andrew Wardon:

113,600 shares between September 17 and September 21, 2010.

China Armco Metals announced that the Jiangsu Provincial Government has scheduled rolling blackouts in September for the Lianyungang enterprise zone where its wholly owned subsidiary, Armet Renewable Resourced Co., Ltd., operates its metal recycling facility.  The power restrictions are being initiated by the province to meet annual central government industrial energy usage targets.

The energy restrictions will significantly reduce our recycling capabilities in the fourth quarter which is expected to impact its revenue in 2010 by as much as $40 million.  This has caused management to revise its financial guidance for the full year of 2010 which is now expected to exceed $140 million with net income exceeding $8 million.
 
Commenting on the announcement, Mr. Kexuan Yao, CEO and Chairman of China Armco Metals, Inc., stated "While the government’s decision to restrict power will negatively impact our performance over the course of this month, we believe our recycling operations will quickly recover following this interruption as we ramp up our production utilization rates.  With current steel prices remaining favorable to our operations, we see a strong outlook for the quarters ahead after this short term interruption is behind us.”

Revenues for the second quarter of 2010 were $17.0 million compared to the $22.5 million recorded in the second quarter of 2009.

• In the second quarter we experienced a significant decline in metal ore sales as purchasers curtailed orders in light of these policies.

"Management sees these pressures easing in the coming quarters and has already seen a marked pickup in activity from customers.  The decrease in revenue is largely due to a sharp decline in customer demand midway through the second quarter of 2010 resulting from the Chinese government measures to restrain the real estate industry from overheating." 

• Net loss of ($248,000) for the second quarter of 2010 compared to a net income of $3.1 million recorded for the second quarter of 2009. This resulted in a loss per diluted share of ($0.02) as compared to earnings per diluted share of $0.31 in the second quarter of 2009.

"As a result, net The soft demand in the second quarter of 2010 coupled with a declining price environment caused severe pressure on the Company's gross margins resulting in gross profit margins declining to 1.2% in the second quarter of 2010 as compared to 18.3% in the second quarter of 2009."

"Additionally, there was a heavy concentration of sales of lower margin iron ore in the second quarter of 2010 compared to a large high margin shipment of chromium contributing substantially to gross margins in the second quarter of 2009."

Financial Forecast for Full Year of 2010

While performance in the second quarter of 2010 suffered from a number of macroeconomic factors, we have made significant strides in the launch of our metal recycling facility. Installation of equipment along with government approvals was completed in the second quarter of 2010 with some minor delays during our testing phase. However, we were able to deliver approximately 10,500 metric tons of finished product to end customers in the second quarter. Production will accelerate substantially in the third quarter and we are seeing a strong pickup in ore trading activity as well. Based on our current production and delivery schedules in metal recycling, coupled with current quoting activity in our trading operations, we anticipate a very strong performance for the remainder of 2010. The longer than anticipated testing phase in our metal recycling operations and soft second quarter has caused management to revise its financial guidance for 2010. Management now expects revenues for the full year of 2010 to exceed $180 million, with net income exceeding $10 million. Management expects its metal recycling operations to become the largest contributor to revenues, progressively accelerating in the second half of 2010.

Commenting on China Armco Metals' financial performance, Kexuan Yao, its CEO and Chairman, stated, "While the second quarter was particularly challenging, we have launched our recycling operations and see production accelerating. We have significantly strengthened our balance sheet and secured significant additional borrowing capacity, giving us a great deal more financial flexibility to rapidly grow our business. We intend to make every effort to maintain a high rate of production for the remainder of 2010. As we head into our traditionally stronger quarters we believe we are poised for a period of significant earnings growth and we intend to deliver on our aggressive plan for the benefit of our shareholders."

Please note: On July 6, 2010, the GeoTeam® removed all Chinese stocks that were on GeoBargains and GeoSpecial lists to respective Radar lists as we complete our "quality assessment."

***Very Important GeoTeam note. We have yet to verify if the Chinese filings for ChinaHybrid stocks we monitor match respective SEC filings. We are in the process of completing this task. Although we are not totally convinced that SAIC filings are an accurate represenation of financial statements the issue is impacting stock prices. Conservative investors may want to limit exposure or buy put options on stocks, that have this availability, as insurance against long positions, until we publish our findings. Odds are we will identify some promising companies that will fail this litmus test.

see relevant articles

Added to the GeoBargain list on August 18, 2009 @ $2.39

Catalyst: Valuation was compelling; Excitement over the company’s new recycling business.
Peak performance: Reached a high of $11.10 on March 5, 2010
Current Price: $3.26

Current road block: CNAM has yet to put together an impressive string of strong EPS quarters; Issued 2010 net income guidance with no EPS guidance; Down the road, dilution could hamper EPS growth; Capital intensive business, debt to equity ratio is 57.1% which may limit P/E expansion; Investors may have to endure a weak 2010 second quarter before business ramps up in the third quarter and fourth quarters;  Concerns that China's steel industry is faced with oversupply issues.

Of all the ChinaHybrids we monitor, CNAM had one of the wildest rides over the past year. The stock began its big run from the $2.00 area and catapulted to its high of $11.10 on March 5, 2010 as investors became enthused about the imminent launch of CNAM’s recycling venture and new contracts that could dramatically increase revenues. The recycling venture could also help smooth out the lumpy nature of its steel distribution business characterized by unpredictable order patterns from a few companies.

The stock has retraced almost all of gains amidst a weakened stock market and a recent dilutive capital raise completed at $6.50 per share. So what has CNAM done with some of the money thus far? It made an investment in an Australian iron ore exploration company, whose mine is believed to contain quality iron ore, instead of using the money to immediately grow its business. As far as we are concerned, CNAM has enough on its plate and should not embark on a somewhat risky investment that only may pay off in the future...especially when management justified its recent capital raise by claiming it needed to secure sources of supply to fill anticipated demand. Furthermore, the company has a history of reporting sporadic quarterly results.

We would like to gain a better grip on EPS growth which we are not sure will reach our 30% growth requirement on a quarterly basis, especially in the 2010 second quarter, as CNAM reported 2009 second quarter EPS of $0.33. However, based strictly on a P/E analysis CNAM would be considered cheap by most investors and substantial operational gains should start occurring in the 2010 third quarter. Also encouraging is that the fact that the CFO exercised out of the money warrants, maybe a sign of confidence. Investors should keep in mind that as the stock eclipses $5.00 and $7.50 they will have dilution from outstanding warrants to contend with. (see April 23, 2010 research note).

Aggressive long-term investors who are not concerned with quality issues may find CNAM a stock worth betting on with the potential for significant returns. Risk adverse investors may be more comfortable waiting to see how quality issues play out and perhaps paying higher prices before making a substantial investment.

Time line for liquidity needs is uncertain:

"We do not have any commitments for capital expenditures at March 31, 2010. As of March 31, 2010, since inception we have invested a total of $31.0 million for the acquisition of land use rights, construction and equipment purchases for the first phase of our scrap metal recycling facility. While we expect to expand the production capacity of our recycling facility, we have not set a time frame for this expansion. Also, we have not determined how we plan to finance this future expansion and unless we can obtain additional financing, we will be unable to complete construction of additional phases of our scrap steel recycling facility."

Also, consider that as of March 31, 2010 the balance sheet was not that pristine: 

• Current assets to current liabilities was weak at 1.45
• Debt to equity ratio was 37.7% (short-term and long-term debt)

This helps shed some light on why CNAM may have required its April financing deal.

Our intent over the short-term is to build a check list to assess the risk position of firms in the ChinaHybrid space. For the time being this will consist of the following: (this list is likely to grow substantially)

- Is the company's auditor ranked in the top 100?
- Is the auditor located in the U.S.A? If located in China the PCAOB (Public Company Oversight Board) may be denied access to investigate the practices of the auditing firm. Short sellers have been using this information as a tool to validate their opinions.
- Are the company's internal controls satisfactory?
- Are their any outstanding legal issues?
- Do the company's top ten customers represent less than 10% of revenues?
- Operating cash flow divided by current liabilities is greater than one. The higher the better. (we will use annualized cash flow run rate and eliminate non-cash charges from account liabilities ).
- Cash divided by Current Liabilities is greater than one. This is the most conservative liquidity ratio.
- Is the company buying back stock?

Commenting on China Armco Metals' financial performance, Kexuan Yao, its CEO and Chairman stated, "We are pleased with our performance in the first quarter. While it is traditionally our weakest quarter, we increased sales over 59% from the same period in 2009. We anticipate that as our recycling ramps up throughout the year and our distribution business builds on the favorable trends from the first quarter of 2010, we expect to see record performance for our company in the coming years. We are in the strongest financial position in our history and intend to put our capital to work to further fuel our growth."

As a result of a strong comparative performance in the first quarter of 2010 with continued strong demand in our distribution business coupled with the launch in the second quarter and anticipated ramp up in production at our newly operational scrap metal recycling facility, management is maintaining financial guidance with revenues for the full year of 2010 exceeding $220 million with net income exceeding $12.0 million. Management expects its metal recycling operations to become the largest contributor to revenues progressively accelerating in the second half of 2010.

At first glance, the GeoTeam® is not overly impressed with China Armco Metals private placement proposal announced on April 21, 2009. It appears that the deal, coupled with existing in the money warrants, could potentially increase the share count from 11.7 million to between 17.9 and 19.4 million.  The Company needs to provide more details on how it will overcome potential dilution. We would have preferred that the company maximize its share price through the execution of its current growth plan and obtain better pricing for a capital raise in the future. GeoBargain status will depend on the availability of further details. We are also unsure on where EPS for the 2010 first quarter will be. Seasonality and the volatility of its distribution are factors to consider. In the end the real story for CNAM is the growth expectation from its recycling business which should begin to play a factor soon.

This in another example of what we feel is some of the irresponsible fund raising activity taking place in the China Hybrid space and the one thing that could potentially derail P/E expansion that we began to see in this sector.  We will write more about this topic soon.

As the deal has yet to close, we would urge the company to reconsider its decision, unless it is in dire need for capital or has plans to pursue immediately accretive moves with the funds.

Disclosure: GeoTeam Long CNAM

Commenting on this financial performance for 2009, Kexuan Yao, China Armco's Chairman and CEO stated, "Our efforts to maintain business relationships and work with our customers in the uncertain period late in 2008 and 2009 coupled with our ability to secure necessary credit facilities, enabled us to thrive and expand as China recovered throughout 2009. Commodities sales and metal production continues to increase creating a very favorable environment for the future. We are excited to launch the operations of our scrap metal facility and believe we have laid the foundation for an extended period of expansion in both top and bottom line performance for the remainder of 2010 and beyond.

Source: Marketwire (March 31, 2010)

The Supply of Manganese Ore Has Potential of Generating Distribution Revenue of U.S. $180 Million Over Next 16 Months

Commenting on the contract, Mr. Kexuan Yao, CEO and Chairman of China Armco Metals, Inc., stated, "Securing this contract is a significant step forward for our company's metals distribution operation as we move through 2010. With the ability to sell this product into China under favorable terms we have significantly strengthened our overall supply capabilities. Upon successful delivery over the term of the contract, we are in a position to significantly boost our top and bottom line performance for the remainder of 2010 and well into 2011. We look forward to building on our relationships with this and other international suppliers in the coming months as we continue to see a strong environment for industrial metals in China."

Source: Marketwire (March 23, 2010)

GeoBargain CNAM reported third quarter results this morning. EPS results were not near as strong as expected.

Currently, China Armco derives all of its business by acting as the middle man between suppliers and buyers of steel.  The Company makes its profit on the “brokering margin” it makes when it resells to the buyers of steel products. In our article on November 20, 2009, we postulated that CNAM would report a nice quarter due to pre-announced order bookings for the third quarter and a stabilization in steel prices. As it turns out, sales did beat our expectations and steel prices did remain stable. Unfortunately, the companies “brokering margins” suffered. Apparently there was some give back in margins that were abnormally high associated with a surge in steel prices from the 2009 first to second quarter.  Also, CNAM's distribution business has the tendacy to be fueled by orders from a few customers, so it is possible that unfavorable pricing on a contract to one customer could affect margins. Results also took a hit from a one time tax adjustment that we view as a non-operating factor. 

The good news is the China Armco issued year end guidance that infers a very strong 4th quarter and offered bullish comments about 2010. Otherwise, a decision to keep CNAM as GeoBargain would have been a challenging decision. The stock may take a short-term hit, but it has always been a 2010 story, which is when its new recycling business will kick in.  This should give the Company a new source of revenue and diversify its customer base.

Management is witnessing strong sales momentum in the fourth quarter, traditionally the strongest quarter of its distribution business, and now anticipates:

• Full year 2009 revenue ranging between $90 million and $95 million
• Net income ranging between $4.5 million and $ 5 million.
• Management also anticipates that its metal recycling operation will be completed and tested sometimes in December of 2009 and ramp production starting in the first quarter fueling substantial growth in 2010.

This EPS guidance would imply fourth quarter EPS guidance of $0.19 to $0.24

Commenting on the company's financial performance, Kexuan Yao, CEO and Chairman of Armco Metals stated, "We are pleased with the top line performance we achieved in the first nine months of 2009. Our bottom line was adversely affected by two items which we do not anticipate will recur in the future. More importantly we see strong momentum in the fourth quarter coupling with the launch of our metal recycling business setting the stage for what we believe will be a very prosperous 2010. We are excited to enter this new business line and look forward to providing more information about these operations after they are launched in the near future."

Source: Marketwire (November 24, 2009)

China Armco Contract Momentum Fuels Optimism

In line with our common theme that clues can offer valuable insight into the future performance of a company, we have come across a few promising hints regarding China Armco Metals 2009 third quarter financials yet to be released.

Commenting on the contract, Mr. Kexuan Yao, CEO and Chairman of China Armco Metals, Inc., stated, "We are pleased to deliver larger sized orders to the steel industry as we look to build on the strong sales efforts we are making in the third quarter. We are carrying strong momentum into the busiest sales period of the year for our industry and remain very optimistic about our prospects for the remainder of this year and into 2010. We believe the environment for our customers remains strong and our anticipated metals recycling business launch places the company in a position to experience record performance in the coming years."

In its 2009 second quarter, China Armco reported EPS of $0.33 on sales of $22.5 million.  Thus, we are speculating that 2009 third quarter results will be at least as good as the 2009 second quarter.  

Keep in mind that there are two wild cards that could influence our assumption.  First costs may have been incurred in the third quarter due to the construction of the Company's new recycling facility. Second, although the revenue picture is strong, we do not have concrete information on the change in the price of steel from the 2009 second to third quarter, which varies by region and local demand. 

However there is information that indicates that the overall pricing trend as has at least stayed constant:

Source: www.indexmundi.com
Although iron ore prices have been lower in 2009 as compared to 2008, the general sentiment is that a continued increase in demand will eventually drive steel prices higher in upcoming quarters. While these trends may indicate the direction of raw material costs, China Armco's revenue ultimately depends on its ability to negotiate steel prices with its customers in any environment. Given the continued growth of steel demand in China, coupled with elevated iron ore prices over the longer term, China Armco stands to benefit from the economic recovery taking place domestically. Over the last 10 years, iron ore prices have trended to the upside, demonstrating that the long term pattern will continue in the same direction.
Source: www.indexmundi.com

In the coming months, China will be establishing its own index to price iron-ore, as explained in a recent Xinhua article outlining the need for a national metric for steel prices.

...China's Rizhao International Iron Ore Trade Center in Shandong province signals that the establishment of the country's first iron ore price index...

Jointly invested in by five local private companies pursuing bulk commodity transaction in Shandong, the center mainly provides electronic commerce services for iron ore suppliers and steelmakers. Its registered capital totals 20 million yuan ($2.93 million).

The trade center offers services including electronic transaction, information exchange, quality inspection, storage, transportation, insurance, and settlement for the two parties in iron ore trading, according to Wang Lei, head of the preparation team for this program.

"As the biggest iron ore importer, China has not set an iron ore price index to date. The iron ore trade center will promote orderly iron ore imports and standardize activities of trading parties, and gradually facilitate China to launch its own iron ore price index in the future..."

Data from China Customs shows that the country imported 443.7 million tons of iron ore in 2008, half of the world's overall iron ore exports volume over the year, and the imports in January-April period in 2009 hit 188 million tons.

(Xinhua, May 22, 2009)

China Armco's 2009 investor presentation documents the potential of the Company's metal recycling leg, Armet Renewable Resource Co., Ltd.

Source: China Armco

The GeoTeam is left to infer that current and future events are encouraging for China Armco, a company that is in the right industry at the right time.

Disclosure: Long CNAM

We are extremely pleased to have secured this $12 million credit facility. We see continued evidence that the Chinese economy is on the road to recovery and there has been an increasing demand for commodities coupled with a rising price environment. We believe this additional financial flexibility will enable us to opportunistically grow our distribution business and significantly improve our overall operating results.

Our sales efforts in the second quarter benefited from a strong rebound in several key metal markets. We believe this momentum will continue in the coming quarters and we intend to make every effort to improve our operating results further. We believe our expanded credit lines, coupled with the anticipated launch of our scrap metal recycling facility later this year places the company in the strongest financial position in its history and poised for an extended period of exceptional growth for the benefit of our shareholders.

• Price = $2.95
• Trailing GAAP EPS = $0.40
• Geo calculated Fully-Taxed Trailing non-GAAP EPS = $0.28
• Geo 2009 fully taxed EPS Estimate= $0.64 ^b
• P/E based on Fully-Taxed Trailing non-GAAP EPS = 10.54
• P/E based on Geo 2009 fully taxed EPS Estimate= 4.61

1. CNAM meets 9 out of 10 GeoBargain® Requirements
   
   

   	Requirement	Comments
   	Recent 52-week High (generally within 3 months)	Must Reach $7.00
   	30% EPS Growth Rate a	2nd Qtr. 2009 EPS increased 250% Full year 2009 Geo estimate implies an EPS growth rate of 125%
   	10% Revenue Growth	2nd Qtr. 2009 revenue increased 71.8%
   	Strong Balance Sheet	As of 2nd Qtr 2009
   YES	Positive Cash Flow	$ 17.1 Million as of 2nd Qtr. 2009
   YES	Debt to Equity Ratio less than 20%	0.0% (We still need to verify)
   NO	Current Ratio is at least 2:1	1.3:1
   	Return on Equity is at least 15%	6 Months Trailing 18.6%
   	Minimum Pre-tax Operating Margins of 8%	15% as of 2nd Qtr. 2009
   	Preferably Under 50 Million Shares	10.1 Million shares as of 2nd Qtr. 2009
   	High Insider Ownership (generally greater than 15%)	>15%
   	Limited Institutional Ownership (generally less than 20%)	<20%
   	P/E Divided by Growth Rate (PEG Ratio) is Less Than 1. a	0.063

   
   

2. Recently reported a substantial increase in revenues and net income for its 2009 second quarter.

   • Revenues increased 71.8% to $22.5 million
   • GAAP EPS increased 38% to $0.33
   • Geo calculated tax-adjusted non-GAAP EPS increased 250% to $0.21
   
   
3. China Armco should directly benefit from the China stimulus plan.  On July 16, 2009 China released figures stating that GDP growth for the 2009 second quarter came in at 7.9%, easily surpassing expectations and giving some indication that the government's quick and aggressive response to the global recession is taking hold. (Source: GeoTeam report, Capitalizing on China's Stimulus Plan - Part I)
   
   
4. Favorable industry trends as discussed in the China Armco's filings:
   
   
   • Steel- We believe that domestic steel production will continue to witness significant growth as China continues to grow. The steel industry is an important basic industry of the national economy of China, and plays a vital role in the recent industrialization efforts of the country. Production volume in China has more than doubled within the past five years. China’s share of the world's steel production continued to grow in 2008 representing 38% of the world's total crude steel production.
   • Recycling- The energy saved by recycling reduces the annual energy consumption of the industry by approximately 75%, which supports the government's energy conservation goals. The PRC identified the scrap metal recycling industry as a way to minimize the use of scarce natural resources and reduce energy consumption and emissions in the steel manufacturing industry.  In China, the scrap metal recycling industry is highly fragmented with no dominant player.
   
   
5. Comments suggest that China Armco Metals can continue to show dramatic growth in coming quarters.
   
   
   • We are extremely pleased to have secured this $12 million credit facility. We see continued evidence that the Chinese economy is on the road to recovery and there has been an increasing demand for commodities coupled with a rising price environment. We believe this additional financial flexibility will enable us to opportunistically grow our distribution business and significantly improve our overall operating results.
   • Our sales efforts in the second quarter benefited from a strong rebound in several key metal markets. We believe this momentum will continue in the coming quarters and we intend to make every effort to improve our operating results further. We believe our expanded credit lines, coupled with the anticipated launch of our scrap metal recycling facility later this year places the company in the strongest financial position in its history and poised for an extended period of exceptional growth for the benefit of our shareholders.

Short-Term Potential value based on fully taxed adjusted trailing non-GAAP EPS

P/E 25 * $0.28 = $7.00
P/E 20 * $0.28 = $5.60

Short-term Potential value based on 2009 fully taxed adjusted Geo non-GAAP EPS Estimate

P/E 15 * $0.64 = $9.60

^a CNAM is not paying a full U.S. tax rate. Therefore, all EPS numbers have been adjusted by the GeoTeam to reflect a tax rate of 36%.

^b The GeoTeam is still investigating the possibly of dilution due to outstanding warrants. It initially appears that this becomes an issue if the stock reaches $5.00 per share.

These scenarios are not intended to be investment advice, but are scenarios based on some commonly used investment guidelines. They are provided to aid investors in making their own investment decisions.

Valuation Scenarios

Added to Geo Bargain list on August 18, 2009. ($2.39). 

Data Inputs:

Fiscal Year Ends in December
2008 Tax-Adjusted non-GAAP EPS: $0.28

^a CNAM is not paying a full U.S. tax rate.  Therefore, all EPS numbers have been adjusted by the GeoTeam® to reflect a tax rate of 36%.

^b EPS numbers are non-GAAP.  Non-GAAP EPS Figures exclude certain non-operating gains and losses as well as certain non-cash items. Non-GAAP information should not be viewed in isolation or as a substitute for reported, or GAAP information . For a more complete explanation of the company's definition of non-GAAP please refer to its financial press releases. The GeoTeam® non-GAAP figures may, from time to time,  differ from company supplied figures.

^c The GeoTeam® is still ivestigating the possibly of dilution due to outstanding warrants.  It initially appears that this becomes an issue if the stock reaches $5.00 per share.


Short-Term Valuation Scenarios

Peg Ratio Analysis - Common rule of thumb that PEG ratio should be less than 1.0

We are extremely pleased to have secured this $12 million credit facility. We see continued evidence that the Chinese economy is on the road to recovery and there has been an increasing demand for commodities coupled with a rising price environment. We believe this additional financial flexibility will enable us to opportunistically grow our distribution business and significantly improve our overall operating results.

China Armco Metals, Inc. is engaged in the sale and distribution of metal ore and non-ferrous metals throughout the PRC.

Please see the full release.

Commenting on this financial performance for 2008, Kexuan Yao, China Armco's Chairman and CEO, stated, "Commodities and metal production experienced a dramatic slowdown across all sectors which peaked in the fourth quarter of 2008. These declines impacted our ability to maintain and grow our revenues in that period. The costs of shipping ores as compared to the price of shipments increased dramatically, having a strong negative impact on operating margins, especially in the fourth quarter. Though we were not immune from this downturn and results were below our earlier expectations, we are encouraged by improvements in a number of metal prices in the first few months of 2009. We intend to work diligently to keep our cost structure low enough to weather this economic downturn and position the company for growth as metal markets rebound. We remain committed to entering a new market segment in steel recycling where there is a huge void in production capabilities and strong governmental support for the recycling metals industry in China."

The company did not provide 2009 financial guidance.

Source: Marketwire (March 26, 2009)

The Company now anticipates its full year net income for the year ended December 31, 2008 will range between $4.4 and $4.7 million. This revised guidance from the previous estimate of $6 million reflects lower than expected revenues due to a global economic slowdown which softened aggregate demand, and created an oversupply of ore in the market. Estimated fourth quarter 2008 net income is now estimated to be approximately $400,000 to $700,000. Based on 8.2 million shares outstanding, full year EPS estimates for 2008 are $0.54 to $0.57 per share.

Source: Marketwire (January 30, 2009)

"The company signed a Non-Binding Letter of Intent on May 22, 2008 to acquire 100 percent of Shanghai Armco & Metawise (HK) Limited ("Armco"), a privately held company based in Hong Kong, China. Armco imports, exports and distributes metal ores, and non-ferrous metal and is planning to expand its operations into the steel scrap metal recycling business.

Source: Marketwire (May 28, 2008)

The GeoTeam has verified that the reverse merger has been consummated.

Cox Distributing, Inc. (formerly trading under the symbol "COXD" on the OTC Bulletin Board) acquired 100 percent of Armco & Metawise (HK) Ltd, a privately held company based in Hong Kong and China, in June of 2008 through a share purchase agreement. Armco intends to expand its import and export activity within China as well as construct a steel recycling facility initially capable of recycling 1 million metric tons of scrap metal annually.

Source: Marketwire (July 16, 2008)