ZINC - Horsehead Holding Corp

[Green King]

I don't think this is as easy as you say it is. But good luck.

[rishig]

I was at Pabrai's annual meeting this weekend. I enjoyed being at the meeting. Mr. Pabrai is very generous by allowing non fund investors like us to attend the meeting.

 

Horsehead's CFO was at the meeting and I asked a question during the Q/A about Horsehead's balance sheet and ability to withstand pain as they go through the transition period and possibility of using non-core assets as a source of liquidity if needed. The CFO said that the balance sheet is on his mind, the debt is held by few concentrated investors, they believe in the company and refinancing the debt when it comes due in 2018 should not be an issue [provided the credit markets don't shut down]. For the non-core business, its a good business and it generates cash for them. They would want to keep it that way. [i.e. if liquidity is needed, it will come from additional debt or equity raise].

 

Interestingly after I asked the question, Mr. Pabrai asked a very important question to the CFO. At current zinc prices, for the company to break even, at what capacity does the new plant need to operate? CFO said it is near 70-75% [!!].

 

Just a FYI. No position in ZINC.

[RadMan24]

I was at Pabrai's annual meeting this weekend. I enjoyed being at the meeting. Mr. Pabrai is very generous by allowing non fund investors like us to attend the meeting.

 

Horsehead's CFO was at the meeting and I asked a question during the Q/A about Horsehead's balance sheet and ability to withstand pain as they go through the transition period and possibility of using non-core assets as a source of liquidity if needed. The CFO said that the balance sheet is on his mind, the debt is held by few concentrated investors, they believe in the company and refinancing the debt when it comes due in 2018 should not be an issue [provided the credit markets don't shut down]. For the non-core business, its a good business and it generates cash for them. They would want to keep it that way. [i.e. if liquidity is needed, it will come from additional debt or equity raise].

 

Interestingly after I asked the question, Mr. Pabrai asked a very important question to the CFO. At current zinc prices, for the company to break even, at what capacity does the new plant need to operate? CFO said it is near 70-75% [!!].

 

Just a FYI. No position in ZINC.

 

That makes sense, thanks for sharing.

[BG2008]

I was at Pabrai's annual meeting this weekend. I enjoyed being at the meeting. Mr. Pabrai is very generous by allowing non fund investors like us to attend the meeting.

 

Horsehead's CFO was at the meeting and I asked a question during the Q/A about Horsehead's balance sheet and ability to withstand pain as they go through the transition period and possibility of using non-core assets as a source of liquidity if needed. The CFO said that the balance sheet is on his mind, the debt is held by few concentrated investors, they believe in the company and refinancing the debt when it comes due in 2018 should not be an issue [provided the credit markets don't shut down]. For the non-core business, its a good business and it generates cash for them. They would want to keep it that way. [i.e. if liquidity is needed, it will come from additional debt or equity raise].

 

Interestingly after I asked the question, Mr. Pabrai asked a very important question to the CFO. At current zinc prices, for the company to break even, at what capacity does the new plant need to operate? CFO said it is near 70-75% [!!].

 

When was Pabrai's meeting? 

 

Just a FYI. No position in ZINC.

[rishig]

The meeting in LA was yesterday, Sept 12th.

[Green King]

Management has failed in their predictions, true.  But that doesn't mean you can't rely on their current status reports and you have data points that point to the eventual success of the technology.

 

ZINC may not be an infinite compounder, but what does that have to do with the return?  Is a bond that yields 20% of no interest to you because it doesn't compound?

 

I don't know why people keeping using the word binary.  Again, Alex already spelled out a non-binary outcome.  Varying levels of efficiency will yield varying levels of profit.

 

The issue is time and budget and, yes, it needs to be handicapped.  Model possible cash flow shortages, how it will effect valuation/capital structure and decide whether the expected outcomes work for you. 

 

I am just curious how can someone believe anything the management says at this point given their track record. Secondly given the nature of this business how could there be any compounding in this business give there is a limited supply of raw material that needs to be secured with contracts. This is simply a binary bet on whether the plant will operate as promised by management on time and on budget which is impossible at this point to handicap given the management's track record.

 

I skate to where the puck is going to be, not where it has been.

 

Wayne Gretzky

 

[jimjam]

Thanks, rishig, for the report from Pabrai's meeting!

 

Just a clarification about this quote:

 

Mr. Pabrai asked a very important question to the CFO. At current zinc prices, for the company to break even, at what capacity does the new plant need to operate? CFO said it is near 70-75% [!!].

 

Does this mean

(1) The plant needs to run at 70-75% of nameplate capacity to break even?

OR

(2) The plant is currently running at 70-75% of the capacity necessary to break even?

 

Thank you!

jimjam

[Green King]

GK, since your Gretzky quote appears to be a response to my comments, perhaps you can clarify it's relevance?  You've already stated that you don't know where the puck is going for ZINC or that it's not easy for you to ascertain.

 

Management has failed in their predictions, true.  But that doesn't mean you can't rely on their current status reports and you have data points that point to the eventual success of the technology.

 

ZINC may not be an infinite compounder, but what does that have to do with the return?  Is a bond that yields 20% of no interest to you because it doesn't compound?

 

I don't know why people keeping using the word binary.  Again, Alex already spelled out a non-binary outcome.  Varying levels of efficiency will yield varying levels of profit.

 

The issue is time and budget and, yes, it needs to be handicapped.  Model possible cash flow shortages, how it will effect valuation/capital structure and decide whether the expected outcomes work for you. 

 

I am just curious how can someone believe anything the management says at this point given their track record. Secondly given the nature of this business how could there be any compounding in this business give there is a limited supply of raw material that needs to be secured with contracts. This is simply a binary bet on whether the plant will operate as promised by management on time and on budget which is impossible at this point to handicap given the management's track record.

 

I skate to where the puck is going to be, not where it has been.

 

Wayne Gretzky

 

There is no point knowing what is happening with Zinc from management. Since management doesn't know what will happen with it in any degree of certainty. (Given the recent history we can say that this is not something simple, easy and part of a normal operation. )

 

Investing is about knowing undervaluation or value creation with a degree of certainty. (hence were the puck is going) Therefore this is not a possible investment, Maybe a good speculation.

 

 

[Agrippa07]

Thanks, rishig, for the report from Pabrai's meeting!

 

Just a clarification about this quote:

 

Mr. Pabrai asked a very important question to the CFO. At current zinc prices, for the company to break even, at what capacity does the new plant need to operate? CFO said it is near 70-75% [!!].

 

Does this mean

(1) The plant needs to run at 70-75% of nameplate capacity to break even?

OR

(2) The plant is currently running at 70-75% of the capacity necessary to break even?

 

Thank you!

jimjam

 

I assume that it means the plant needs to run at 70%-75% to break even.

[cmlber]

I was at Pabrai's annual meeting this weekend. I enjoyed being at the meeting. Mr. Pabrai is very generous by allowing non fund investors like us to attend the meeting.

 

Horsehead's CFO was at the meeting and I asked a question during the Q/A about Horsehead's balance sheet and ability to withstand pain as they go through the transition period and possibility of using non-core assets as a source of liquidity if needed. The CFO said that the balance sheet is on his mind, the debt is held by few concentrated investors, they believe in the company and refinancing the debt when it comes due in 2018 should not be an issue [provided the credit markets don't shut down]. For the non-core business, its a good business and it generates cash for them. They would want to keep it that way. [i.e. if liquidity is needed, it will come from additional debt or equity raise].

 

Interestingly after I asked the question, Mr. Pabrai asked a very important question to the CFO. At current zinc prices, for the company to break even, at what capacity does the new plant need to operate? CFO said it is near 70-75% [!!].

 

Just a FYI. No position in ZINC.

 

Rishig,

 

Thanks for sharing.  Do you know if the CFO was referring to cash flow break even for the "company", or for Mooresboro?  They had previously said cash flow break even for Mooresboro was 50% around $1/lb zinc. Inmetco Zochem and the dust hauling produce ~40m in cash flow, so that meant the company could generate ~40m in cash at 50%.  So 70-75% seems high for the company to break even.  Zinc prices are down 20 cents which would be a 50-60m impact if they were at full capacity.  But at 50% of capacity that should be an impact less than the cash flow from the non core businesses (i.e. The company should still break even at these prices but Mooresboro shouldn't).

 

[BG2008]

GK, since your Gretzky quote appears to be a response to my comments, perhaps you can clarify it's relevance?  You've already stated that you don't know where the puck is going for ZINC or that it's not easy for you to ascertain.

 

Management has failed in their predictions, true.  But that doesn't mean you can't rely on their current status reports and you have data points that point to the eventual success of the technology.

 

ZINC may not be an infinite compounder, but what does that have to do with the return?  Is a bond that yields 20% of no interest to you because it doesn't compound?

 

I don't know why people keeping using the word binary.  Again, Alex already spelled out a non-binary outcome.  Varying levels of efficiency will yield varying levels of profit.

 

The issue is time and budget and, yes, it needs to be handicapped.  Model possible cash flow shortages, how it will effect valuation/capital structure and decide whether the expected outcomes work for you. 

 

I am just curious how can someone believe anything the management says at this point given their track record. Secondly given the nature of this business how could there be any compounding in this business give there is a limited supply of raw material that needs to be secured with contracts. This is simply a binary bet on whether the plant will operate as promised by management on time and on budget which is impossible at this point to handicap given the management's track record.

 

I skate to where the puck is going to be, not where it has been.

 

Wayne Gretzky

 

There is no point knowing what is happening with Zinc from management. Since management doesn't know what will happen with it in any degree of certainty. (Given the recent history we can say that this is not something simple, easy and part of a normal operation. )

 

Investing is about knowing undervaluation or value creation with a degree of certainty. (hence were the puck is going) Therefore this is not a possible investment, Maybe a good speculation.

 

Green King, I largely agree with your assessment that we need to discount the management's message.  I also agree with you that ZINC within the last 12 months or so is an intelligent speculation that could turn into a value investment If and Only If they can ramp up production.  That is why I chose to use a Married Put (Long plus at the money puts) strategy the whole time.  Yes, the put premiums were expensive, and the stock being down is not pleasant.  But I'm down 10-15% on the position rather than 40-50% if I were long outright.  It is beneficial for my sanity and beneficial for my objectivity.  So, I think it's actually fairly astute of you to point out that this is an intelligent speculation from the very start and should be sized and treated like one. 

 

Where I disagree with you is the total discounting of management's statement.  I think we do have to take what they say with a grain of salt.  Our DD with industry participants revealed that people generally think highly of the management and their chief metallurgist.  Again, let's discount that given the fact that they have over promised and under delivered in a big way. 

 

What I'm trying to say is that we're all kind of big boys here on the board.  This investment obviously has more wrinkles than we initially thought.  To suggest that we pay no attention to management's commentary isn't right.  Let us process the information and we'll each handicap the situation independently.  That is the purpose of the board after all.  I don't follow it blindly.  It's a great gathering place where we can help each other stay on top of our investments.     

[rishig]

Thanks, rishig, for the report from Pabrai's meeting!

 

Just a clarification about this quote:

 

Mr. Pabrai asked a very important question to the CFO. At current zinc prices, for the company to break even, at what capacity does the new plant need to operate? CFO said it is near 70-75% [!!].

 

Does this mean

(1) The plant needs to run at 70-75% of nameplate capacity to break even?

OR

(2) The plant is currently running at 70-75% of the capacity necessary to break even?

 

Thank you!

jimjam

 

The CFO meant (1).

[rishig]

I was at Pabrai's annual meeting this weekend. I enjoyed being at the meeting. Mr. Pabrai is very generous by allowing non fund investors like us to attend the meeting.

 

Horsehead's CFO was at the meeting and I asked a question during the Q/A about Horsehead's balance sheet and ability to withstand pain as they go through the transition period and possibility of using non-core assets as a source of liquidity if needed. The CFO said that the balance sheet is on his mind, the debt is held by few concentrated investors, they believe in the company and refinancing the debt when it comes due in 2018 should not be an issue [provided the credit markets don't shut down]. For the non-core business, its a good business and it generates cash for them. They would want to keep it that way. [i.e. if liquidity is needed, it will come from additional debt or equity raise].

 

Interestingly after I asked the question, Mr. Pabrai asked a very important question to the CFO. At current zinc prices, for the company to break even, at what capacity does the new plant need to operate? CFO said it is near 70-75% [!!].

 

Just a FYI. No position in ZINC.

 

Rishig,

 

Thanks for sharing.  Do you know if the CFO was referring to cash flow break even for the "company", or for Mooresboro?  They had previously said cash flow break even for Mooresboro was 50% around $1/lb zinc. Inmetco Zochem and the dust hauling produce ~40m in cash flow, so that meant the company could generate ~40m in cash at 50%.  So 70-75% seems high for the company to break even.  Zinc prices are down 20 cents which would be a 50-60m impact if they were at full capacity.  But at 50% of capacity that should be an impact less than the cash flow from the non core businesses (i.e. The company should still break even at these prices but Mooresboro shouldn't).

 

IIUC, the CFO meant breakeven for the company. Mohnish in his question explicitly clarified this - "At what capacity does the new plant need to operate for the company, not the plant, to breakeven." This was a public Q/A with about 100 people in the audience. I didn't ask clarifying questions. When the transcript of the Q/A is out, you will see the exact response from the CFO, but it was pretty much what I just said. If it does not match with what your prior understanding was, I recommend getting a clarification from the CFO by emailing IR. Given that I have no horse in the race, I did not go to the CFO in person after that.

[ERICOPOLY]

Just out of curiosity as a Dhando Holdings investor...

 

Does this fit the "tails I don't lose much" philosophy or can it be a lot worse as in "tails I lose everything"?

 

[AzCactus]

The coin is still in the air flipping, Eric.

[ERICOPOLY]

The coin is still in the air flipping, Eric.

 

Agreed.

 

However the phrase is "Heads I win, tails I don't lose much."

 

It is still a valid question irrespective of whether the coin has yet to be flipped, is still flipping, at the top of it's arc, near the ground, etc...

 

In other words, if it settles on tails, is this "I don't lose much"?

 

[kab60]

I sold my shares when I figured bankruptcy is a possibility - and I couldn't handicap the odds. Not saying it will happen but if they need to raise capital it will be extremely dillutive anyway. I don't know much about Pabrai but at this point I don't see how it's not a possibility that you'll "lose much".

[Homestead31]

probably worth pointing out that the statements made by management at Pabrai's event may be new to the public, but they were certainly not new to management, and management bought stock not long ago with full knowledge of these facts.

[petey2720]

Just out of curiosity as a Dhando Holdings investor...

 

Hi Eric, I'm wondering how do you know that Dhandho Holdings is an investor in ZINC?

[ERICOPOLY]

Just out of curiosity as a Dhando Holdings investor...

Hi Eric, I'm wondering how do you know that Dhandho Holdings is an investor in ZINC?

 

 

I don't.  However what are the chances that it's not given the guy calling the shots?

[Sunrider]

Probably worth pointing out that the stocks been under some more pressure since those comments ... maybe they were news to Pabrai as well and he's pulling the trigger and cutting losses ...?

 

probably worth pointing out that the statements made by management at Pabrai's event may be new to the public, but they were certainly not new to management, and management bought stock not long ago with full knowledge of these facts.

[ColdCapital]

It seems pretty clear Dhando and Stonetrust are ZINC holders from the 8/19/15 Form 4 Notes:

 

(1)  Securities reported for Dalal Street, LLC (the "LLC") represent Common Stock beneficially owned and held of record by 3 private funds (Pabrai Investment Fund 2, L.P., Pabrai Investment Fund 3, Ltd. and Pabrai Investment Fund IV, L.P.) managed by the LLC, Mohnish Pabrai and Harina Kapoor JTWROS and 7 managed accounts (Aikyum, Inc., Harina Kapoor IRA, Monsoon Pabrai, Momachi Pabrai, The Dakshana Foundation, Dhando Holdings Corporation ("Dhandho") and Stonetrust Commercial Insurance Company (a wholly-owned indirect subsidiary of Dhando)) managed by Mr. Pabrai. Mr. Pabrai is the managing member of the LLC and the President of Dhandho. The LLC, private funds, managed accounts, Dhandho and Mr. Pabrai (the "Reporting Persons") are each beneficial owners. The Reporting Persons disclaim beneficial ownership, within the meaning of Section 16 of the Exchange Act, or otherwise of such portion of the Common Stock in which the Reporting Persons have no actual pecuniary interest therein.

[Green King]

GK, since your Gretzky quote appears to be a response to my comments, perhaps you can clarify it's relevance?  You've already stated that you don't know where the puck is going for ZINC or that it's not easy for you to ascertain.

 

Management has failed in their predictions, true.  But that doesn't mean you can't rely on their current status reports and you have data points that point to the eventual success of the technology.

 

ZINC may not be an infinite compounder, but what does that have to do with the return?  Is a bond that yields 20% of no interest to you because it doesn't compound?

 

I don't know why people keeping using the word binary.  Again, Alex already spelled out a non-binary outcome.  Varying levels of efficiency will yield varying levels of profit.

 

The issue is time and budget and, yes, it needs to be handicapped.  Model possible cash flow shortages, how it will effect valuation/capital structure and decide whether the expected outcomes work for you. 

 

I am just curious how can someone believe anything the management says at this point given their track record. Secondly given the nature of this business how could there be any compounding in this business give there is a limited supply of raw material that needs to be secured with contracts. This is simply a binary bet on whether the plant will operate as promised by management on time and on budget which is impossible at this point to handicap given the management's track record.

 

I skate to where the puck is going to be, not where it has been.

 

Wayne Gretzky

 

There is no point knowing what is happening with Zinc from management. Since management doesn't know what will happen with it in any degree of certainty. (Given the recent history we can say that this is not something simple, easy and part of a normal operation. )

 

Investing is about knowing undervaluation or value creation with a degree of certainty. (hence were the puck is going) Therefore this is not a possible investment, Maybe a good speculation.

 

Green King, I largely agree with your assessment that we need to discount the management's message.  I also agree with you that ZINC within the last 12 months or so is an intelligent speculation that could turn into a value investment If and Only If they can ramp up production.  That is why I chose to use a Married Put (Long plus at the money puts) strategy the whole time.  Yes, the put premiums were expensive, and the stock being down is not pleasant.  But I'm down 10-15% on the position rather than 40-50% if I were long outright.  It is beneficial for my sanity and beneficial for my objectivity.  So, I think it's actually fairly astute of you to point out that this is an intelligent speculation from the very start and should be sized and treated like one. 

 

Where I disagree with you is the total discounting of management's statement.  I think we do have to take what they say with a grain of salt.  Our DD with industry participants revealed that people generally think highly of the management and their chief metallurgist.  Again, let's discount that given the fact that they have over promised and under delivered in a big way. 

 

What I'm trying to say is that we're all kind of big boys here on the board.  This investment obviously has more wrinkles than we initially thought.  To suggest that we pay no attention to management's commentary isn't right.  Let us process the information and we'll each handicap the situation independently.  That is the purpose of the board after all.  I don't follow it blindly.  It's a great gathering place where we can help each other stay on top of our investments.   

 

That was smart move going into it via Married Puts Btw i liked your comments on Sandridge energy before the collapse on oil . If management is able, than the probability of success goes  down since it shows how hard this really is. Nature is no kind mistress and science is the hardest thing to do in this world.

 

To be honest i was think about going into Zinc via call options given the bimodel outcome that will likely occur before the ramp up. Until i realized that successful ramp-up was price into the stock at the time with minor variability based on management's numbers and the option premium was high and additional low hanging fruit after ramp up was limited.  Overall there was not enough margin of safety.

[Homestead31]

Probably worth pointing out that the stocks been under some more pressure since those comments ... maybe they were news to Pabrai as well and he's pulling the trigger and cutting losses ...?

 

it is certainly possible, but I doubt it.  Pabrai has written / spoken about staying with an investment even if the intrinsic value goes down assuming the gap to intrinsic value is wide.  We know that Pabrai bought stock in the $12-14 range a year or so ago, implying he thought the company was worth in the mid to high 20s.  The company then did a dilutive equity raise, and he recently bought stock in the $7-8 range implying he thought the stock was worth at least $15 or so.... likely much more because he has said that the margin of safety must get wider and wider as he gets down to his last dollars.  Lets agree with the analysis from a few pages ago that explains under what circumstances ZINC would be worth in the high 20s, and then acknowledge that there is a very real risk of a cash crunch before they reach that potential due to continued problems with the plant and global zinc prices due to chinese slow down.  From Pabrai's public statements we know that he would consider these unfortunate, but temporary problems.  There is a very real risk of a dilutive equity raise in the future - so lets imagine that the share count doubles, which would cut the estimate of IV in half.    That brings the estimate of IV down to low-mid teens, which is more than 100% upside from current levels. 

 

I realize that thinking this way is very painful - very difficult to do - b/c it is tempting to want to avoid the risk of the short term loss if their is a dilutive equity raise.

 

But I also think that Pabrai has a super human ability to remain rational, and I believe what I laid out above is the rational way to view it.  yes IV may be 50% lower, but absent tax loss harvesting, I would say it is a mistake to sell now b/c there is still significant upside to IV even in the event of a dilutive raise.

[ERICOPOLY]

Probably worth pointing out that the stocks been under some more pressure since those comments ... maybe they were news to Pabrai as well and he's pulling the trigger and cutting losses ...?

 

it is certainly possible, but I doubt it.  Pabrai has written / spoken about staying with an investment even if the intrinsic value goes down assuming the gap to intrinsic value is wide.  We know that Pabrai bought stock in the $12-14 range a year or so ago, implying he thought the company was worth in the mid to high 20s.  The company then did a dilutive equity raise, and he recently bought stock in the $7-8 range implying he thought the stock was worth at least $15 or so.... likely much more because he has said that the margin of safety must get wider and wider as he gets down to his last dollars.  Lets agree with the analysis from a few pages ago that explains under what circumstances ZINC would be worth in the high 20s, and then acknowledge that there is a very real risk of a cash crunch before they reach that potential due to continued problems with the plant and global zinc prices due to chinese slow down.  From Pabrai's public statements we know that he would consider these unfortunate, but temporary problems.  There is a very real risk of a dilutive equity raise in the future - so lets imagine that the share count doubles, which would cut the estimate of IV in half.    That brings the estimate of IV down to low-mid teens, which is more than 100% upside from current levels. 

 

I realize that thinking this way is very painful - very difficult to do - b/c it is tempting to want to avoid the risk of the short term loss if their is a dilutive equity raise.

 

But I also think that Pabrai has a super human ability to remain rational, and I believe what I laid out above is the rational way to view it.  yes IV may be 50% lower, but absent tax loss harvesting, I would say it is a mistake to sell now b/c there is still significant upside to IV even in the event of a dilutive raise.

 

It sounds like you are saying the "TAILS I DON'T LOSE MUCH" case is that the stock doubles from here.

 

Is there really not a realistic case where you lose?