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China Armco Metals, Inc. Common Message Board

  • rato_branco@ymail.com rato_branco Jun 18, 2010 12:46 AM Flag

    On a Closer Look, Deal is Very Bullish

    At first sight, some may be scared by the delivery of 500,000 shares to the steel company, but on a closer look, the deal is quite favorable for CNAM.

    CNAM is basically paying a large steel player to insure it's debt so that it can get access to favorable financing. Similar to a credit default swap. CNAM is using shares to buy a credit default swap on its debt with the steel company as counter party, and then giving that swap to the bank so that risk is taken off the bank's balance sheet and so that favorable financing becomes possible.

    The cost of the swap is about 4% of the value of the loan. Hardly unreasonable.

    For a great comparison, look at the state of Illinois. The cost of a credit default swap on Illinois debt right now is 3.08%. CNAM, a company with $14M in net tangible assets, is paying 1% more for a swap on its debt than the state of Illinois. Hardly a bad deal.

    Credit default swaps on small caps aren't cheap. The counterparty (the steel company) is taking on risk, similar to the risk that we take on, they are going to want a stake in the upside.

    If you think about it, 4% is pretty low for 5 year insurance. I certainly wouldn't be interested in insuring CNAM's credit risk for a measley 4% return.

    The bottom line is, CNAM needs capital to push through with its growth plan, and there is no other way the debt markets will give it to them other than through this kind of arrangement. No bank is going to give a company with $14M in net tangible assets an unsecured loan for $45M. Absolutely no way in hell that will happen. Especially not in China, where the government is forcing banks, including Bank of Communications, the source of this loan, to clamp down on new credit issuance. Moreover, no company is going to walk in and put its neck on the line without compensation in the form of upside.

    So before people get riled up about dilution, think deeper about the matter. This is a skillful navigation of the debt markets. It's hardly the norm--most chinese small caps would just dump shares on the market to get the cash. But CNAM is carefully doing everything possible to ensure that it preserves as much of the upside as it can. Shareholders should be happy that the CEO has this kind of business sense. As expected, he's taking care of himself, as he has more invested in this company than anyone--indeed, he is the majority owner.

    On a separate note, the deal is also attractive because a customer now has a stake in the company. That creates relationships and incentives that can be favorably leveraged going forward.

    Very slick IMO. These guys are serious and are on their game.

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    • Wow RATO you are the only smart guy out their then why with every latest deal the stock price falls further what are people thinking that's right everyone is stupid priceless

    • You'll be covering soon.

    • You are a moron. He put 5mm in because of what he is yanking out. Go figure it out yourself so I don't have to go through all the filings to explain it. New suckers are born everyday.

    • Your premise, "This is a SCAM, PERIOD" has never been demonstrated. So everything you spew on this board has zero credibility.

      The CEO would not put $5M of his own money into it if CNAM were a scam.

      Let's have this conversation after the Q3 report in mid-Nov. and we'll see if you're still singing the same silly tune.

    • you people are so stupid it is not even funny. THIS IS A SCAM. PERIOD. Scrap metal demand???Huh??? If it was so high, then margins would be better dipshts. They have no contracts, nothing. I'll bet you many of these alleged deals are cosigned and funded by related parties. I am not going to waste my time checking, but the numbers speak for themselves. Stock closed at another low today and will continue to go lower, suckering in more and more idiots who think it is a value play.

    • Given that CNAM right now is trading at a ttm P/E of just under 8, even if we just give it a P/E of just a little over 8 by 2011, on roughly 2.10 EPS (or much better if there's a second recycle plant), that would make this at least a $17 stock and well worth buying now at these low prices....

      Scrap metal demand in China is and will be huge.
      CNAM is well-positioned to exploit it. As one poster at I-Hub has said, this could be a billion-dollar company within a few years.

    • >>Do you seriously think a co. with this much growth potential is going to continue to trade at a 1-year forward P/E of 4??

      Yes, I think it can, given it's business (metal scrapping). Please find me some other chinese small caps in the metals or materials business that trade in the 10. 12. 15 PE range and I can be convinced otherwise.

    • emikulaninec

      Isn't it clear that the only reason the shorts have succeeded in getting CNAM down to a trailing P/E of 8 is because revenues from the huge new scrapmetal biz are not YET incoming?

      Do you seriously think a co. with this much growth potential is going to continue to trade at a 1-year forward P/E of 4?? Think, not just of 100% capacity for its scrapmetal plant, but also a second plant on the same land, and, in the future, the easy possibility of creating one or two more plants on other cheaply leased land?

      Remember that numerous other strong-growth China companies are allowed P/Es well over 10, 12 or 15.
      CNAM in March had a P/E for a while of over 40.

      When the scrapmetal revs. begin to come in, perhaps as early as Q2, but especially in Q3, there's no reason why this shouldn't move up to a trailing P/E of 12 and a forward P/E of at least 8. See, at that point, the shorts won't have an argument. They won't be able to continue to yell "scam."

    • value I agree with your #'s but I disagree with your price target. Most chinese small caps trade a huge discounts for a variety of reasons (corruption, dilution, failure to pay dividends, etc).

      If CNAM is earning $1 this year and $2 next I think a fair price target for them is $6 - $8 this year and $8 to $12 next year.

      Also keep in mind that I think it is highly likely CNAM will report some kind of delay / interruption in the scrapping business in Q2 due to the government slow down activity. I think a reduction in overall 2010 projections is almost certain.

    • great post! talk about a company vertically integrating. CNAM owns part of their supplier and now their customer will own a small part of them with big financing benefits attached.

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