str8shot

As much as I applaud Guy Spier's efforts to get an equity committee established, there is no getting around the fact that sticking with Horsehead in 2015 as the operational blunders snowballed and management credibility crumbled was nothing less than a ridiculously huge error of commission. One that I unfortunately made as well. Hopefully there will be a settlement for equity holders a couple of years from now to recoup a buck or two per share as a result of management's gross negligence and misleading statements.

Youngmoney was right on this stock long before this recent take. Here is an article dated Jan 2015 that I only stumbled on late in 2015, after I'd already followed Pabrai into no man's land when he doubled down in Aug 2015. http://y0ungmoney.blogspot.com/2015/01/not-fan-of-horsehead-holdings.html His last paragraph was ominous and unfortunately in my case, dead on: Many value investors are interested in ZINC because Mohnish Pabrai is the company's largest shareholder. Pabrai has good long-term returns, but he's also had his share of losing investments, so I hope that investors aren't outsourcing their due diligence to him. Lesson: Never ever outsource due diligence - review available information and use your own guidance system. Otherwise buy index funds.

Thanks BlackLab7. Below is the content from the link above for those without access to law360.com: Law360, Wilmington (May 2, 2016, 7:01 PM ET) -- Equity holders of Horsehead Holding Corp. got their wish Monday when a Delaware bankruptcy judge granted their request for an official committee to represent their interests in the metal processor’s Chapter 11 case, following impassioned pleas from some stockholders. During a hearing in Wilmington, stockholders appearing pro se before U.S Bankruptcy Judge Christopher S. Sontchi made their cases for the appointment of an equity committee in the case, a request that was earlier denied by the U.S. trustee. The stockholders, led by Guy Spier and Phil Town, argued that a new zinc processing facility in North Carolina is worth much more than Horsehead contemplates it is worth in its Chapter 11 plan. To prove the value is there, Spier said that the stockholders need resources to do it. “You’d be sending us into a punching match with Muhammad Ali with one hand tied behind our backs, at the very least,” Spier said of stockholders’ chances in a valuation fight without a committee being appointed. Town, manager of a small hedge fund that owns Horsehead stock, said the valuation the company’s financial advisers have come up with is far below what the company may actually be worth. The $550 million North Carolina plant that was idled in January after months of maintenance and operational issues kept it from reaching its full capacity is the main area of disagreement between the equity holders and the company. Town, Spier and the 250 stockholders who filed joinders to Spier’s motion for an equity committee believe the plant can be restarted and bring Horsehead back to profitability. Horsehead said it would take about $80 million and three years to get the facility back up and running and producing 155,000 tons of zinc per year, its intended capacity. In its Chapter 11 plan, the company lists the plant as having no value. In his argument before the court, Town pointed to an independent valuation assessment by KPMG that surmised the plant could be worth more than $500 million to the company, making Horsehead as a whole worth more than $1 billion. Horsehead attorney Ryan Preston Dahl of Kirkland & Ellis LLP said the KPMG report was flawed because it used outdated data and that a valuation report produced by the company’s financial advisers showed the value of the company at between $255 million and $305 million. He said the equity holders didn’t factor in the investment necessary to restart the plant into their financial outlook. If they did, Dahl argued, they would come to the same conclusion that they would be hundreds of millions of dollars out of the money with no hope of a recovery in the case. “We recognize the hardships that result from a bankruptcy,” Dahl said. “The appointment of an equity committee remains the extraordinary exception and not the rule.” Dahl pointed to case law that has held that it is inappropriate to appoint an equity committee in a case for the sole reason of determining a valuation of a debtor’s business. Judge Sontchi said in his ruling that he may be exposing himself to some scrutiny by allowing the committee in this particular case. “I’m going, frankly, out on a limb here from a standpoint of where the law puts me,” Judge Sontchi said. “To put it bluntly, something doesn’t smell right to the court.” He pointed to the equity holders’ arguments and comments from some of the dozens of supporters who filed joinders to the committee request to bolster his own decision. In the arguments and comments, equity holders said they felt Horsehead executives had misled them about the status of the plant and the company’s liquidity situation. A sudden drop in the company’s trading value near the time of the bankruptcy filing was cause for concern, Judge Sontchi said. “I don’t know what happened,” Judge Sontchi said. “I don’t know if there was inappropriate behavior.” Horsehead Holding Corp. and several subsidiaries filed for bankruptcy protection in February, listing $420.7 million in debt consisting mainly of secured note liabilities. The company pointed to a falling commodities market for zinc and nickel and the issues at the North Carolina plant as the reasons behind its bankruptcy filing. An investor has filed a putative class action suit in Delaware federal court accusing company executives of misrepresenting its liquidity position and the extent and severity of the problems at the North Carolina facility. Horsehead is represented by Laura Davis Jones, James E. O’Neill and Joseph M. Mulvihill of Pachulski Stang Ziehl & Jones LLP, and James H.M. Sprayregen, Patrick J. Nash Jr. and Ryan Preston Dahl of Kirkland & Ellis LLP. Spier and Town appeared pro se. The U.S. trustee is represented by Tim Fox. The case is In re: Horsehead Holding Corp. et al., case number 1:16-bk-10287, in the U.S. Bankruptcy Court for the District of Delaware.

You nailed it. +1

A man who, off the cuff at a rally, with little knowledge and/or contemplation of the facts and implications, blurted out that everyone should boycott Apple until they cooperate with the Feds. He probably didn't consider that his staff uses iPhones and iPads to run his campaign. Reporters on hand said that after the rally said staff were still using their devices. And we haven't heard Teflon Don repeat this silly idea since. He's symbolic of today's culture - offering outrageous sound bytes with no substance. In the end I think Rubio overtakes him. Regardless Apple will be fine.

Spier must think there's a chance to recover orders of magnitude times the current $.20 per share based on the net asset value of over $400M on the balance sheet. If they get $50M for the equity, that would be a 5X. So for Spier's 1.32m shares, it's a question of $264k in the hand versus $1.32M if they got $1 per share. And double that if $2 per share. Spier must like the risk/reward payoff potential. So do you think he is buying? :) No idea. But if he concluded that he'll have a pretty good shot at getting a bigger piece of the equity pie going forward, then he may have added some dirt cheap shares to his pot.

Spier must think there's a chance to recover orders of magnitude times the current $.20 per share based on the net asset value of over $400M on the balance sheet. If they get $50M for the equity, that would be a 5X. So for Spier's 1.32m shares, it's a question of $264k in the hand versus $1.32M if they got $1 per share. And double that if $2 per share. Spier must like the risk/reward payoff potential. Based on both Pabrai and Spier's track record on Horsehead, I'd say Guy Spier is a little bit on the optimistic side here. Based on book value there is certainly lots of value here but how the Moorseboro plant will actually be valued in restructuring process would be key to me. Unfortunately, this is still a dysfunctional plant so you can argue much less value for it as the way it is right now if you are a noteholder who want to wipe out the equityholders... Agreed. They have around $780M in PPE on the balance sheet, the majority of which is Mooresboro (which requires AT LEAST another $80M to hopefully reach capacity). So how much value can you assign to this poorly performing asset that has a history of springing leaks faster than they can plug them? Not much.

Spier must think there's a chance to recover orders of magnitude times the current $.20 per share based on the net asset value of over $400M on the balance sheet. If they get $50M for the equity, that would be a 5X. So for Spier's 1.32m shares, it's a question of $264k in the hand versus $1.32M if they got $1 per share. And double that if $2 per share. Spier must like the risk/reward payoff potential.

Here is one way to think about this. Let's look at EBITDA generated over the past few years from operations and look at the capital structure: Operations: 20142013201220112010 Net Sales454442436451382 Cost of Sales415415433377306 SG&A2422212319 EBITDA155-185158 EBITDA Margin3.2%1.1%-4.1%11.3%15.2% Capital Structure: Sept 2015in $ millions DIP Financing80 Senior Secured: Macquarie Credit Facility59 Zochem Credit Facility8 Credit Agreement18 10.5% Senior Secured Notes205 Total Senior Secured291 Senior Unsecured: 9% Senior Unsecured40 3.8% Convertible Notes92 Total Senior Unsecured132 TOTAL503 Here are two key questions that the restructuring committee / bankruptcy court will ask: (1) What is conservative valuation of the business in order to protect the creditors? (2) What is conservative debt the business can support given the operational risks of bringing up a plant and exposure to commodity prices? For (1), to the creditors, it does not matter what the fair value of the business is, they just want to protect their principal, so they tend to use the most conservative valuation. Assuming they still trust the restructuring plan of bringing up the plant in 18 months (which is a big question), EBITDA that can be generated from the business is ~$100M. A conservative senior secured creditor will basically give no more than 2-3x EV/EBITDA valuation to the business in the best case given that EBITDA generation is at least 18 months away. So, that gets you $200-$300M in EV. For (2), management will want to use the opportunity of Ch. 11 to de-risk the company. Given that current business generates about $15M in EBITDA in the best case in the last 5 years, debt post restructuring should be no more than $50-$100M. So, use these two variables, and you have one possible (and in my opinion, likely) outcome: EV: $300M Target Debt: $100M Target Equity: $200M DIP Financing Recovery (100%): $80M Senior Secured Recovery (7%): $20M Senior Secured Equity (100%): $200M Senior Unsecured Recovery (0%): 0 Unless, the committee awards a higher valuation to the business, it is unlikely that unsecured recover anything. In fact, given that the secured holds most of the unsecured notes, it is in their best interest to award a low valuation, so they can get most of the equity. There is very little risk of hold out since they control the unsecured. My 2c. I have no horse in the race, but I am following the case just to learn how the restructuring takes place. Here is one of the best books on distressed debt investing: http://www.amazon.com/Distressed-Debt-Analysis-Strategies-Speculative/dp/1932159185/ref=sr_1_3?ie=UTF8&qid=1455737140&sr=8-3&keywords=Stephen+Moyer Nice distillation Rishig. Absent a far higher determination of EV, it's hard to see a scenario where the current stockholders would get a slice of the equity pie post-restructuring.

Aquamarine Fund held 1.32 million shares of ZINC as of 12-31-2015 according to the link below and the whale wisdom site. Guy can speak to his current holding. https://www.holdingschannel.com/13f/aquamarine-capital-management-llc-top-holdings/

low gas prices have driven SUV demand and should these prices rise later this year/2017 that could adversely impact demand. and we know that the auto industry is cyclical and very capital intensive, as is typically the case with commodity businesses, which makes it more challenging to achieve outsized returns. continual recalls are another unattractive feature. Pabrai has stated that because the trend of growing demand for vehicles, he liked GM and FCAU because they'd come out of bankruptcy and had better capital structures. GM is executing pretty well but right now the market is hating on the auto industry. my point is other things equal, why invest in crappy industries where you can seemingly find great values? Pabrai sold PKX at a sizable loss and got taken to the woodshed on ZINC. and while GM is simply out of favor, these are all crappy industries. the recent Pabrai pick that has done well is Google. Because it was a no brainer.

Munger's two cents on GM from his DJCO annual meeting on Feb 10, 2016 - not his favorite industry to invest in: http://www.bloomberg.com/news/articles/2016-02-10/berkshire-s-munger-says-gm-faces-brutally-competitive-market This Munger quote from a Valuewalk excerpt from the same meeting - on BRK's investment in General Motors: “That’s simple. GM is in the Berkshire portfolio, because a young man who works for Warren likes it, and Warren lets them do what they please. When he was a young man, Warren didn’t like when old men told him what he couldn’t do. So he refrains from that with our young men. I haven’t the faintest idea why he likes it. Maybe it is cheap and there’ll be another god damn government bailout. The industry is too competitive. Everyone relies on the same suppliers, and cars last long time with little service, and leases of cars are all at cheap rents. This has the earmarks of a commoditized and difficult market and will shrink one of these days. If I was investing, I would want something way the hell better than others, and that’s hard to find.” More and more I'm compelled to invest in really good businesses at a fair price versus fair businesses at a good price, which can end up being value traps.

I haven't done any work on this topic, but.....some possibilities: - lack of confidence in one's analysis/hedging - humility knowing one's analysis might be wrong - operating with a thesis but not the research Good answer. I agree those are possible (albeit not probable) explanations. I mean, having a variant perception is inherently a non-humble standpoint. Shouldn't the research be the basis of your thesis? Why bother forming a thesis on something you haven't done any research on, given how prone to biases and whatnot we are? You are setting yourself up for confirmation bias, commitment & consistency bias and all those other things. It's a capital mistake to theorize before you have data, as Sherlock is famous for saying. Do you agree that it might be a good idea to have some sort of threshold in mind (in terms of analysis/research) that needs to be reached before forming a conclusion on any particular subject? Granted this threshold is subjective and should probably be a moving target. But still it seems like something worthwile. Interesting thread. Facts describe the past in objective terms (e.g., sales declined 10% y/y). Interpretations of past events are projections, and futuristic assumptions and recommendations are also projections. Projections are based on mental and/or intuitive models. The basis for futuristic projections may vary, but the depth of knowledge of the facts and the degree of analysis done need not correlate to how accurate the projections will ultimately be. Great analysis using an irrelevant or biased model may be worse than lesser analysis with a more appropriate model. Also a more robust model may require less data points (and analysis) so long as the most important variables can be calculated properly. Two people can look at the same facts (data) and come to different conclusions. It depends on the models being used to filter the projections. I don't know what compelled me to post this and perhaps the above is obvious to many. Others may disagree. I'm clearly influenced by Munger on this topic.

I don't want to derail this thread, but I don't think 15 months is a long enough time to make a determination on whether the market prices reflect intrinsic value. ($ZINC aside) Just sharing my experience. In my view GM is undervalued at current prices, and GOOG as well. Even at today's prices I wouldn't be interested in FCAU. As for PKX, Munger sold out last year (in the $70s I believe) calling it a commodity business that no longer had a sustainable advantage, and Buffett sold out of PKX quite some time ago.

Here's my experience with cloning Mohnish positions (started in Oct 2014): >ZINC - lost 95% and sold out Jan 2016 (exacerbated when I doubled the original position by averaging down, cost basis was $10) >PKX - lost 20% and sold out in early 2015 (cost basis was $70, sold at $56, stock now around $38 so nearly 50% below original purchase price) >FCAU - i didn't learn of it until it was disclosed in the 13F in early 2015 and it was $14 then, so I never bought it; it would be a losing position if I had bought it then >GOOG - i blew this one, nearly bought it around $530 in May 2015 but didn't, it's around $700 now so I missed a 30% plus gain >GM Series B warrants - still own this one, cost basis about $14.25, currently at $11.73, so down 18% thus far. GM getting no love. So bottom line, in the group above, for me the only winner would have been GOOG. And ironically, the one position that really qualified as a good/great business at a fair price was GOOG, and I passed on it because I decided to allocate additional capital to ZINC, viewing it as having an asymmetrical upside with relatively low downside risk (which was obviously a miscalculation). Where's a time machine when you need one? Once I dispense with the GM series B warrants at some point, my cloning of Pabrai positions will be done.