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Don't Throw Alloy Steel Out With The Bathwater

Thinley Wangchuk profile picture
Thinley Wangchuk


  • Arcoplate is a differentiated product that is used by large mining companies.
  • Based upon the 2014 EBIT, AYSI trades at a EV/EBIT ratio of 2.
  • Exposure to the mining industry has brought prices down to value territory.
  • ROE (5-year average) = 19.4%.
  • Cash = 55% of shareholder equity.

Alloy Steel

Alloy Steel International, Inc. (OTCPK:AYSI). (Alloy Steel) is a manufacturer of Arcoplate (AP). The company is a provider of anti-wear and hang-up solutions to the mining and bulk materials industries, based in Perth, Western Australia. Arcoplate is accepted in the mining and mineral processing industries to protect a host of fixed plant and mobile equipment applications. Arcoplate is being used by large mining companies (i.e. Newmont (NEM) and Rio Tinto (RIO)).

Management - Mr. Gene Kostecki was the inventor of Arcoplate; sadly he passed away on 5/19/14. His children Steven Kostecki and Andrew Kostecki serve as Managing Director/Chief Executive Officer of Alloy Steel International and as President of Operations/Brand Development Manager in North America, respectively.


Alloy Steel manufactures a differentiated and good product. Return on equity for the last 5 years has been excellent - averaging 19.4%. Although I will be discussing AP and how it fits into the wear market, I do not think it is the most important part of this thesis considering the capitalization structure.

The company has a large exposure to the mining industry, but after closer inspection, it seems that a lot of the decline in commodity price has been discounted into the price of the stock. Due to the company's large cash balance and normalized earnings, AYSI seems to be trading at an attractive price.

Looking forward, one of the most important keys in this thesis is how management will allocate the excess cash and FCF. So far the company has done a mediocre/below-average job as I will explain towards the end of the article.


AP is marketed to customers as a wear and material hang-up solution. The company's product differs from competitors as its alloy chromium-carbide-rich overlay layer is created using a single-pass computerized process. This process creates a stronger metallurgical

This article was written by

Thinley Wangchuk profile picture

Analyst’s Disclosure: I am/we are long AYSI. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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