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June 3, 2010 Dear Friend,
The attached report
contains our notes from visiting the Richburg, SC titanium
and superalloy rod and bar rolling mill and the Bakers, NC
plasma arc melting and vacuum arc remelt titanium furnaces
and premium forging facilities. We discuss the technical
specification of ATI Alloy 425 versus conventional titanium
6% aluminum and 4% vanadium alloys, and the specifications
of superalloys 718, Waspaloy and ATI Alloy 718Plus.
We "guess" that the prior
peak roughly $500 mm each 2006 and 2007 annual titanium EBIT
margins consisted of about $200 mm in windfalls from prior
titanium sponge input contracts that cannot be duplicated,
about $200 mm in melting profits, about $100 mm in volume
benefits from fuller fabrication and forging facilities
utilizations and a minority of ATI's prior sales at elevated
peak "spot" prices perhaps as high as $50 per lb.
Thus, the 24 mm lb
Rowley, Utah and 10 mm lb Albany, Oregon titanium sponge
plants will have to "earn" in 2012-2015 at least $200 mm to
"replace" the easy profits from the cheaper sponge input
contracts of the earlier era. Further, large ATI titanium
volume commitments to the Boeing 787 and other very large
programs reduce volumes available for "spot" sales, should
super lucrative or elevated spot prices similarly return.
ATI Alloy 425, ATI Alloy 718Plus, marketing of titanium
armor, entry into fastener inputs and other
new initiatives will "earn" premium value added profits.
It is possible ATI earns
easy profits again as scrap prices increase with larger
commercial aerospace output, and elevated finished
product "spot" sales return. However, ATI has a credible
business plan with differentiated products to earn a margin
without easy windfalls too. Our $65 per share price target
excludes possible "easy windfall" profits, and we discuss
near-term risks such as the pace of Boeing's 2011 model 787
delivery schedule and the Obama May 27th moratorium on
offshore drilling that we estimate impacts 5% to 10% of
ATI's sales.
Faithfully,
John C. Tumazos, CFA
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Copyright © 2008 John Tumazos Very Independent Research,
LLC
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