ZINC - Horsehead Holding Corp

[racemize]

For me, the thesis was that either the plant would work or zinc would go up, both of which seemed feasible.  It still might be the case and work out, but neither has happened so far. 

[tombgrt]

Well for the thesis to really work out, both had/have to happen. And so you have to multiple the individual odds of those two things happening. So for example if zinc going up had a 50% chance of happening and the plant fully working had a 50% chance, you are left with a 25% chance of real success (0,5 times 0,5).

 

Because of this dynamic you get a much lower chance of success versus much simpler investments where you don't have to factor in all those variables. The same was and probably still is true with Fortress Paper where they had other issues as well like the Chinese anti-dumping duties, cogen facility, etc. You have to guestimate all those odds and potential effects and that is something that is very hard to accurately do so I don't try to anymore.

[racemize]

Well for the thesis to really work out, both had/have to happen. And so you have to multiple the individual odds of those two things happening. So for example if zinc going up had a 50% chance of happening and the plant fully working had a 50% chance, you are left with a 25% chance of real success (0,5 times 0,5).

 

Because of this dynamic you get a much lower chance of success versus much simpler investments where you don't have to factor in all those variables. The same was and probably still is true with Fortress Paper where they had other issues as well like the Chinese anti-dumping duties, cogen facility, etc. You have to guestimate all those odds and potential effects and that is something that is very hard to accurately do so I don't try to anymore.

 

I don't think so.  It certainly would be doing just fine if the plant were working right now, so it doesn't require both.

[ERICOPOLY]

This story seems to look similar to what happened to Fortress Paper.

 

+1

 

Bingo! Market prices for the commodity changed while the plant was getting fixed. Double whammy.

 

The tide went out and they were swimming naked.  Something like that? 

[goldfinger]

Well for the thesis to really work out, both had/have to happen. And so you have to multiple the individual odds of those two things happening. So for example if zinc going up had a 50% chance of happening and the plant fully working had a 50% chance, you are left with a 25% chance of real success (0,5 times 0,5).

 

Because of this dynamic you get a much lower chance of success versus much simpler investments where you don't have to factor in all those variables. The same was and probably still is true with Fortress Paper where they had other issues as well like the Chinese anti-dumping duties, cogen facility, etc. You have to guestimate all those odds and potential effects and that is something that is very hard to accurately do so I don't try to anymore.

It seems to me, listening to management during conferences, update status and so on that the ability to get a plant running at close to maximum capacity is not a 50% chance kind of thing. As an engineer with more than 20 years of experience I would be amazed by such incompetence if they had started something that big with such odds. This not a new process and engineers are supposed to qualify that kind of risks very well in the long run. The end of a project, especially a complex one, always takes much longer to finish than the most of the project itself (80/20 rule for example).

They have hedged zinc prices until the end of the year and have been worried about commodity price since the beginning. They have assets to sell and additional debt capacity (~= 50M$). Management has showed relative confidence in the proposed fixes by buying stock with family money at the beginning of the month (CEO and CFO) which they haven't done much of in the past as far as I know...

It is true that the declining commodity price is putting pressure and changing the short term odds of dilution but it seems to me that you are putting them at a way to high number like the mister market basically is at the moment (the market is waking up to deflationary trends). If they can ramp at 75% in the next 3 to 6 months - seems do-able with fixes identified - things will look very different almost instantaneously.

[undervalued]

Well for the thesis to really work out, both had/have to happen. And so you have to multiple the individual odds of those two things happening. So for example if zinc going up had a 50% chance of happening and the plant fully working had a 50% chance, you are left with a 25% chance of real success (0,5 times 0,5).

 

Because of this dynamic you get a much lower chance of success versus much simpler investments where you don't have to factor in all those variables. The same was and probably still is true with Fortress Paper where they had other issues as well like the Chinese anti-dumping duties, cogen facility, etc. You have to guestimate all those odds and potential effects and that is something that is very hard to accurately do so I don't try to anymore.

It seems to me, listening to management during conferences, update status and so on that the ability to get a plant running at close to maximum capacity is not a 50% chance kind of thing. As an engineer with more than 20 years of experience I would be amazed by such incompetence if they had started something that big with such odds. This not a new process and engineers are supposed to qualify that kind of risks very well in the long run. The end of a project, especially a complex one, always takes much longer to finish than the most of the project itself (80/20 rule for example).

They have hedged zinc prices until the end of the year and have been worried about commodity price since the beginning. They have assets to sell and additional debt capacity (~= 50M$). Management has showed relative confidence in the proposed fixes by buying stock with family money at the beginning of the month (CEO and CFO) which they haven't done much of in the past as far as I know...

It is true that the declining commodity price is putting pressure and changing the short term odds of dilution but it seems to me that you are putting them at a way to high number like the mister market basically is at the moment (the market is waking up to deflationary trends). If they can ramp at 75% in the next 3 to 6 months - seems do-able with fixes identified - things will look very different almost instantaneously.

 

I am learning a painful lesson from ZINC, THRX, XCO and SD. I am beginning to appreciate the quote from Jim Rogers a lot more now.

 

Don't gamble; take all your savings and buy some good stock and hold it till it goes up, then sell it. If it don't go up, don't buy it.

[hobbit]

ZINC is a classic case of high uncertainty and low risk. The memo Pabrai put out on uncertainty vs risk a while ago helps to understand his thought process behind ZINC. If the price of zinc does not go to0.50/lb and stay there for an year , ZINC has a very good chance of succeeding.

[ERICOPOLY]

ZINC is a classic case of high uncertainty and low risk. The memo Pabrai put out on uncertainty vs risk a while ago helps to understand his thought process behind ZINC. If the price of zinc does not go to0.50/lb and stay there for an year , ZINC has a very good chance of succeeding.

 

It's a good philosophy and mindset but sometimes the risks are not quite so low.  He was left holding the bag on Delta Financial and that's heavily talked about.  There are other "low risk" positions that went to zero as well, only they went to zero a while after he had sold out.  Lear Corp and Pinnacle for example.  I guess it's hard for an individual to see and understand all the risks, so sometimes you think it's high uncertainty and low risk, but it turns out later the "low risk" assessment wasn't quite right.  Anyways... it's not possible for an individual to be right every single time.

[AzCactus]

Eric, I see you've been kinda busy on this board.  Do you have a position in zinc?

[BG2008]

ZINC is a classic case of high uncertainty and low risk. The memo Pabrai put out on uncertainty vs risk a while ago helps to understand his thought process behind ZINC. If the price of zinc does not go to0.50/lb and stay there for an year , ZINC has a very good chance of succeeding.

 

It's a good philosophy and mindset but sometimes the risks are not quite so low.  He was left holding the bag on Delta Financial and that's heavily talked about.  There are other "low risk" positions that went to zero as well, only they went to zero a while after he had sold out.  Lear Corp and Pinnacle for example.  I guess it's hard for an individual to see and understand all the risks, so sometimes you think it's high uncertainty and low risk, but it turns out later the "low risk" assessment wasn't quite right.  Anyways... it's not possible for an individual to be right every single time.

 

I agree with Eric's statement.  There are certain funds who make "career bets" on position sizes that are 20%+ and who has a better track record of not blowing up on their positions.  Pabrai is not one of those.  Delta financials, Pinnacle, are all great examples.  When Pabrai bought, I asked around to see how to interpret that signal.  The feedback is that "it's positive, but it's not Buffet like".  I think the next time that Buffet does a prefer deal with a bank, I will probably just buy a 3% based solely on that.   

 

I'm still monitoring this position very closely and will likely be back in the name.  But, it's important to note that the risk in ZINC is quite binary depending on whether the plant works or not.   

[undervalued]

ZINC is a classic case of high uncertainty and low risk. The memo Pabrai put out on uncertainty vs risk a while ago helps to understand his thought process behind ZINC. If the price of zinc does not go to0.50/lb and stay there for an year , ZINC has a very good chance of succeeding.

 

It's a good philosophy and mindset but sometimes the risks are not quite so low.  He was left holding the bag on Delta Financial and that's heavily talked about.  There are other "low risk" positions that went to zero as well, only they went to zero a while after he had sold out.  Lear Corp and Pinnacle for example.  I guess it's hard for an individual to see and understand all the risks, so sometimes you think it's high uncertainty and low risk, but it turns out later the "low risk" assessment wasn't quite right.  Anyways... it's not possible for an individual to be right every single time.

 

I agree with Eric's statement.  There are certain funds who make "career bets" on position sizes that are 20%+ and who has a better track record of not blowing up on their positions.  Pabrai is not one of those.  Delta financials, Pinnacle, are all great examples.  When Pabrai bought, I asked around to see how to interpret that signal.  The feedback is that "it's positive, but it's not Buffet like".  I think the next time that Buffet does a prefer deal with a bank, I will probably just buy a 3% based solely on that.   

 

I'm still monitoring this position very closely and will likely be back in the name.  But, it's important to note that the risk in ZINC is quite binary depending on whether the plant works or not. 

 

What do you think the percentage of the plant is going to work or not in time? If this is a binary bet, where the chance is 50/50. 50% chance where you loose your money and the other 50% chance you triple your money. It has better odds and payout than Vegas.

[BG2008]

Binary might not be the right word.  Step functions would be a better word.  Discrete outcomes. 

[cmakam]

Isn't it somewhat likely that given time and perhaps some capital the plant eventually ramps up ...

 

Isn't the biggest factor in the companys valuation by far where zinc prices settle,and the company's value going from some low number at 60 cents and rapidly increasing thereafter.

 

-cmakam

[MrB]

ZINC is a classic case of high uncertainty and low risk. The memo Pabrai put out on uncertainty vs risk a while ago helps to understand his thought process behind ZINC. If the price of zinc does not go to0.50/lb and stay there for an year , ZINC has a very good chance of succeeding.

 

It's a good philosophy and mindset but sometimes the risks are not quite so low.  He was left holding the bag on Delta Financial and that's heavily talked about.  There are other "low risk" positions that went to zero as well, only they went to zero a while after he had sold out.  Lear Corp and Pinnacle for example.  I guess it's hard for an individual to see and understand all the risks, so sometimes you think it's high uncertainty and low risk, but it turns out later the "low risk" assessment wasn't quite right.  Anyways... it's not possible for an individual to be right every single time.

 

I agree with Eric's statement.  There are certain funds who make "career bets" on position sizes that are 20%+ and who has a better track record of not blowing up on their positions.  Pabrai is not one of those.  Delta financials, Pinnacle, are all great examples.  When Pabrai bought, I asked around to see how to interpret that signal.  The feedback is that "it's positive, but it's not Buffet like".  I think the next time that Buffet does a prefer deal with a bank, I will probably just buy a 3% based solely on that.   

 

I'm still monitoring this position very closely and will likely be back in the name.  But, it's important to note that the risk in ZINC is quite binary depending on whether the plant works or not. 

 

BG you touch on a critical point. There is a direct link between position sizing and hit rate. If you don't have a high hit rate then you should not concentrate. I also don't understand the shift from 10x 10% positions to 20x 5% positions after 2008 to now back to a 20% position, 10% positions, etc.

Maybe its just me, but I don't get it.

 

P.S. Apparently Munger and Buffett have hit ratios in the high 90's

[ERICOPOLY]

Eric, I see you've been kinda busy on this board.  Do you have a position in zinc?

 

Yes, but I didn't buy it.  I have an investment in Dhandho.  So it's a bit like backseat driving -- I am however riding in the car.

 

I started to get the feeling that the car was headed into a bad neighborhood, so I started to get interested in the story at that point.

[RadMan24]

Isn't it somewhat likely that given time and perhaps some capital the plant eventually ramps up ...

 

Isn't the biggest factor in the companys valuation by far where zinc prices settle,and the company's value going from some low number at 60 cents and rapidly increasing thereafter.

 

-cmakam

 

Yes, but the overall theme thus far is judging Pabrai's investment track record to the likelihood of this investment paying off. The company's situation is quite simple, as you described. But the psychology and fear in the market are making people come up with these crazy "I told you so" and "comparison of track record" remarks that deviate from the underlying investment. You make an investment today, you are paying under $250 million for a pretty good solid moat businesses. Last friday it was $500 million. You mean to tell me in one week, after all that has been going on, the company is now 50 cents cheaper and people are afraid to buy? Well then...looks like I'm buying hands over fist Monday morning to establish a decent size position. BTW, I'm a minnow small time investor, so hands over fist means one buy order to the tune of how many more shares can I buy without drinking this weekend.

[aws]

I'm a glutton for punishment so I bought in for the first time today at 3.89.  It fits in nicely with the rest of my down > 50% YTD stocks in my portfolio.

[cayale]

Isn't it somewhat likely that given time and perhaps some capital the plant eventually ramps up ...

 

Isn't the biggest factor in the companys valuation by far where zinc prices settle,and the company's value going from some low number at 60 cents and rapidly increasing thereafter.

 

-cmakam

 

Yes, but the overall theme thus far is judging Pabrai's investment track record to the likelihood of this investment paying off. The company's situation is quite simple, as you described. But the psychology and fear in the market are making people come up with these crazy "I told you so" and "comparison of track record" remarks that deviate from the underlying investment. You make an investment today, you are paying under $250 million for a pretty good solid moat businesses. Last friday it was $500 million. You mean to tell me in one week, after all that has been going on, the company is now 50 cents cheaper and people are afraid to buy? Well then...looks like I'm buying hands over fist Monday morning to establish a decent size position. BTW, I'm a minnow small time investor, so hands over fist means one buy order to the tune of how many more shares can I buy without drinking this weekend.

 

No dog in this fight, but isn't this a question of liquidity, solvency and dilution over one of value?  The value may be there; it's simply that buyers today may have to hand pieces of it over to senior positions in the capital structure and/or buyers of new shares.  If that occurs, current common shareholders cannot count on having much leverage in those negotiations.

[RadMan24]

Quick answer, no. Things would have to go wrong, and worse for that to happen. For instance, the ramp up would have to virtually cease to occur by 2017, by which I'm sure creditors will be wanting some kind of assurance to refinance the debt. In 12-15 months if you don't see any meaningful improvement in plant operations then, I would expect some kind of hit to the capital structure, sure. Zinc prices....who cares, as long as they don't go to $0! Short-term, prices are being clobbered by people selling inventory to raise cash. That's also what helps create the upcycle volatility. It's not like its at $3.79 because there is no risk fundamentally..sure there is risk and those concerns are legitimate to an extent. But from an investment risk standpoint...it doesn't get much better in terms of risk/reward. Even POSCO is selling dirt cheap over in Korea, people won't invest there because of downbeat sentiment over the economy and global steel market.

 

How many fund managers would want to be seen holding this stock at the end of the quarter or at year end being down 50%+? They'll just wait till operations improve and everyone else starts buying back in and/or when zinc prices recover and analyst reports become bullish again. Ditto for all ETFs that are being forced to sell holdings related to the metal or commodities in general. Reversing this trend could take a while, but I'm not pressured in a similar manner. I do have have limited capital and believe this is a good investment idea. I've read everyone's objections, but they don't change the underlying thesis.

 

At today's prices, plant needs to be at 75% of capacity to be break even. That's a given. Getting there is step 1. Step 2 is making a profit at 76+% capacity. Step 3 refinance debt. Step 4 build out capacity. Completing these four steps would create a tremendous amount of value and I'm no genius, but that would be highly valued in five years from now.

[cmakam]

Right now whether Horsehead is a good investment comes down to level of comfort on where zinc prices will settle and likelihood off the ramp being pulled off.

 

I dont think the price reduction necessarily makes it more attractive given that the environment has changed,zn is no longer a dollar a pound.

 

If one can conclude zn is headed back to a dollar a pound buying zn maybe the better option given you don't have the ramp risk...

-cmakam

[tylerdurden]

Radman24, what probability do you assign to them not being able to make the new plant work at or above 75%?

 

Zinc prices could come back in the long run since it seems fundamentals can support the prices because of lack of investments in Zinc production overall but I am not sure about the plant risk.

 

Hard to trust a management who consistently could not deliver its premises I guess. That's reflected by the slump in stock price obviously.

[Guest notorious546]

Zinc prices have not escaped recent fund selling, declining from a high of US$1.04 per pound in May to US$0.82 in August and US$0.75 in late September, despite the imminent closure of two large mines (Century and Lisheen). LME inventories have increased recently with an end to some stock financing deals and the return of off-warrant stocks. However, the story of medium-term strength remains intact.

 

Today’s lower zinc prices remain just above average world break-even costs (including depreciation) in the low US$0.70 range, but 20% of world mine output is not covering cash costs. Should prices remain at these levels in coming months, potential new mine development — planned for late-decade start-up — will be delayed, setting the stage for quite tight market conditions and much higher prices within several years. Of the 24 mine projects which could be developed through 2018-19 (including 4 in Canada), only 2 have finance (Vedanta’s Dugald River and MMG’s Gamsberg). Zinc prices could shoot up to the US$1.60 mark by 2018-19.

 

Expectations for zinc consumption growth in China have recently been revised lower to 4.3% for 2015. The ‘Caixin Purchasing Manager Index for Manufacturing’ in China edged down further to 47.0 in September (a six-year low). However, infrastructure spending is the big driver of Chinese zinc demand and it has advanced by a robust 18.8% YTD and should continue strong in the second half of 2015. The NDRC announced three new railway projects in September (including a high-speed rail line between Zhengzhou in Henan and Wanzhou–Chongqing). (The auto sector is less important for zinc in China than in North America, because galvanized steel is still not widely used in the underbody of a car.)

 

It should also be recognized that a reduced pace of demand growth for zinc in China than ten years ago — linked to slower GDP expansion — comes off a much larger base and does NOT imply less tonnes of incremental demand. Refined zinc consumption in China is expected to grow by 4.8% per annum from 2015-20 — equivalent to annual demand growth of 350,000 tonnes — compared with 12% p.a. consumption growth from 2005-08, also requiring 350,000 tonnes per annum of additional zinc.

 

http://www.gbm.scotiabank.com/English/bns_econ/bnscomod.pdf

[Sunrider]

Quick one - does anyone know whether there's a black-out period for management trades before their monthly announcements? The reason I am asking is that one would expect them to be happy buyers now at 50% of their prior purchases a week and a bit ago, yet I've not seen any. Many reasons why they wouldn't but given that we're due for another operations update soon, I'd be buying if I was management and progress has been good on the operations front ...

 

... just reading the tea leaves.

 

C.

[merkhet]

I wouldn't expect a company that might face a liquidity crunch to be enthusiastic about spending cash on buying back their stock.

[abitofvalue]

I think he is referring to management buying shares for their own account. 

 

To be fair - it's been only a few weeks since they did buy shares.  More buying would be a good signal but could be in qtr-end blackout period.  Also they report plant progress close to the end of the month so probably need to be cognizant of that too.  if the price stays here through results, would expect them to have a much better explanation of the value of the subsidiaries and their various liquidity needs for the next 12-18 months.  Their last update saying they may need to raise funds if plant doesn't ramp and the CFO's comment at Pabrai's meeting seem to have set the cat among the pigeons.  How on earth was that not MNPI?