Monday, March 22, 2010

CNAM: Standing Up To Pressure

Chinavesting, which is bullish on China Armco, mistakenly described the pressure on CNAM shares from over $10 back toward $7 as being "for no fundamental reason." The fundamental reason is that with an additional availability of nearly 2.5m shares, in which owners have a basis of $5 due to warrant exercises, the per-share metrics just took a plunge just as market mechanics were hammered by the exit of the shares' owners upon exercise.

CNAM, which had allowed the warrants' registration to lapse, re-registered the shares available under the warrants and owners exercised them. The fact that CNAM has maintained a price well over the $5 exercise price is a good sign for the market's psychology of CNAM. Comparing current prices to prior years' revenues, as Chinavesting does, is a disservice to potential investors. CNAM's future isn't about its old business, but about the new business CNAM just launched -- the business funded with the proceeds of the private offering that gave rise to the warrant exercise -- the new business that makes CNAM one of the largest metal recyclers in China. That CNAM has pre-sold the first three months of factory output with a $100m steel supply contract shows how different CNAM's new business is: in 2008, annual revenue was but $55m.

The next time we see a press release on a CNAM steel supply contract, the magic that drove CNAM from under $4 to over $10 is likely to revisit the shares as the company proves its success in the new business isn't a fluke, but the new normal. At $5, CNAM was trading at a P/E of 10 off trailing estimated earnings. With earnings likely to multiply with the dawn of CNAM's new recycling operation, so too should we expect to see share price multiply.

Of course it's easy for me to talk: my basis is in the realm of $3. Still, I'd like to see it fly. Based on recent performance – not just the stock price pops, but the landing of contracts – I think the flight plan is looking sound.

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