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